Public information and stablecoin runs
BISWorkingPapers No1164 Publicinformationandstablecoinruns byRashadAhmed,IñakiAldasoro,ChanelleDuley MonetaryandEconomicDepartment January2024 JELclassification:C70,D83,D84,E42,G01,G20Keywords:stablecoins,crypto,globalgames,bankruns BISWorkingPapersarewrittenbymembersoftheMonetaryandEconomicDepartmentoftheBankforInternationalSettlements,andfromtimetotimebyothereconomists,andarepublishedbytheBank.Thepapersareonsubjectsoftopicalinterestandaretechnicalincharacter.TheviewsexpressedinthemarethoseoftheirauthorsandnotnecessarilytheviewsoftheBIS. ThispublicationisavailableontheBISwebsite(www.bis.org). ©BankforInternationalSettlements2024.Allrightsreserved.Briefexcerptsmaybereproducedortranslatedprovidedthesourceisstated. ISSN1020-0959(print) ISSN1682-7678(online) Publicinformationandstablecoinruns RashadAhmed OCC In˜akiAldasoro BIS ChanelleDuley UniversityofAuckland January12,2024 Abstract Weprovideaglobalgamesframeworktostudyhowthepromiseofparconvertibilitybyvarioustypesofstablecoinsbreaksdown.Publicinformationdisclosurehasanambiguouseffectonrunrisk:greatertransparencycanleadtoincreased(reduced)runriskforsuf-ficientlylow(high)stablecoinholders’priorsaboutreservequalityortransactioncostsofconversiontofiat.Ifthedistributionofreserveassetsisfat-tailed(i.e.reservesarevolatile),parconvertibilityisresilienttosmallshocksbutfailswithlargenegativepublicshocks,evenforhighinitialreservevalues.Wefindempiricalsupportforthetestableimplicationsofthemodel. JELCodes:C70,D83,D84,E42,G01,G20. Keywords:Stablecoins,crypto,globalgames,bankruns. WethankToniAhnert,KartikAnand,ChristophBertsch,GiulioCornelli,SebastienDerivaux,SebastianDoerr,PrasannaGai,MattiaLandoni,KebinMa,CyrilMonnet,NicoOefele,AlexandrosVardoulakis,PriscillaKooWilkens,andseminarparticipantsattheEconomicsofPaymentsXIIConference,BankofCanada/Riks-bank2ndConferenceontheEconomicsofCBDC,theOfficeoftheComptrolleroftheCurrency,theBankforInternationalSettlements,DeutscheBundesbank,theUniversityofAucklandandtheUniversityofCapeTownforhelpfulcommentsandsuggestions,andJoseMariaVidalPastorforhelpwithdata.RashadAhmed(rashad.ahmed@occ.treas.gov)isattheU.S.DepartmentoftheTreasury,OfficeoftheComptrolleroftheCur-rency,4007thStSW,Washington,DC.In˜akiAldasoro(inaki.aldasoro@bis.org)isattheBankforInternationalSettlements,MonetaryandEconomicDepartment,Centralbahnplatz2,CH-4002Basel,Switzerland(correspond-ingauthor).ChanelleDuley(chanelle.duley@auckland.ac.nz)isattheUniversityofAuckland,EconomicsDe-partment,12GraftonRoad,1010Auckland,NewZealand.Theviewsexpressedherearethoseoftheauthorsonly,andnotnecessarilythoseoftheBankforInternationalSettlements,theOfficeoftheComptrolleroftheCurrency,ortheU.S.DepartmentoftheTreasury. 1Introduction Stablecoins(SCs)arecryptotokensthatliveondistributedledgersandpromisetobealwaysworthadollar.1Variouslylikenedtobanks(GortonandZhang,2023),exchangeratepegs(LevyYeyatiandKatz,2022)andacombinationofmoneymarketandexchangetradedfunds(Maetal.,2023),thekeydefiningfeatureofstablecoinsistheirpromisetodeliverparconvertibilitytothesovereignunitofaccount(Aldasoroetal.,2023).Tomakethatpromisecredible,stablecoinissuersholdavarietyofreserve(collateral)assets,includingfiat-denominatedmoneymarketinstruments,Treasuries,bankdepositsandothercryptoassets(includingotherstablecoins). Publicinformationandperceptionsregardingthequality,transparencyandvolatilityofreservesarethuskeyforstablecoinpegstability.ThiswasevidentduringtheMarch2023USbankingturmoil.AsstressinSiliconValleyBank(SVB)mounted,thestablecoinUSDCoin(USDC,knowntohaveayet-undisclosedamountofdepositsatSVB)brokepar(seeFigure1,redline).ThesituationdeterioratedwhenCircle,theissuerofUSDC,discloseditheld$3.3billionofitscashreserveatSVB(firstverticaldashedline).Thisepisodeillustrateshowanegativeshockarisingfromincreasedtransparencyofreservesledtoashiftintheaggregatebehaviorofcoinholders.USDChadservedasastablereserveassetforotherstablecoinssuchasDai,whichshortlythereafterlostitspegaswell(solidblackline):anegativeshocktotheperceivedvolatilityofreservesthatdidnotaffectother(dollar-backed)stablecoins.2ThesituationonlyimprovedwhentheUSgovernmentannouncedabackstopforSVB(thirdverticaldashedline). Thispaperanalyzestheeffectsofcollateraldisclosureandtransparencyaswellastheperceivedqualityandvolatilityofreserveassetsonstablecoins’pegstability.Wedevelopaglobalgamemodeltoshowthatwhentheportfolioofcollateralassetsfeatureslowvolatility,greatertransparencycanincreaserunriskifstablecoinholders’priorsaboutcollateralqualityortransactioncostsofconversiontofiataresufficientlyweak.Conversely,whenpriorsabout 1Stablecoinsarosefromtheneedforasafeandstableunitofaccountwithinthenotoriouslyvolatilecryptouniverse.Theywitnessedameteoricrisefrom$5billionmarketcapitalizationinearlyJanuary2020toarecord $190billioninearlyMay2022,andstoodataround$129billionasofJune2023.Stablecoinsfirmlyestablishedthemselvesasthemediumofexchangeof,andgatewayinto,crypto.WefocusonstablecoinspeggedtotheUSdollar,astheymakethelion’sshareofthemarket. 2StablecoinssuchasDaiprovideconstantpu
