Stable Coins

Fiat pegged tokens have proliferated due to the inefficiencies in the current TradFi sector.

Stable coins provide liquidity and allow for easy swapping in and out of fiat. Central Governments are looking at their own centralized stablecoins called CBDC. Although the regulators are concerned about the systemic risks stable coins can have on the overall economic markets, the value of the USD stablecoins (Oct 2021) is less than $150bn. The total USD in circulation is in excess of $2 trillion. There are stable coins in other fiat currencies such as the EUR and there are others pegged, or collateralized, to fiat and non-fiat baskets. The collateral can be held by a commercial entity, and organization or other actor nn group. The collateral can be loaned, the way central banks provide lending to commercial banks. Some are interest bearing and others have elastic supply. Newer types include algo SCs, fractional basket reserves and protocal controlled value SCs (PCVs).

Stable coins should be considered "derivatives" or "synthetix" and risk managed in the same way the TradFi equivalents are.

Code risk (1)
Are the providers cash reserves audited independently on a monthly basis?
1.84 Unregulated stable coin issuers and controllers must show evidence of independent valuations and proof of existence of its cash reserves on a regular basis.
Does the operator provide in plain language the redemption process?
1.85 Some issuers are permitted under the terms of the arrangement to postpone redemption payments for seven days, or even to suspend redemptions at any time, giving rise to considerable uncertainty about the timing of redemptions.
Liquidity risk (7)
Does the provider have, for example, a policy on its Reserve Assets such that at least 20% have daily liquidity, the next 40% 7d liquidity and the rest 30d liquidity?
7.83 TradFi banks have usually assumed 10% of deposits will be redeemed on a daily basis and the rest are used to invest and create income to pay for expenses. In recent years this cash reserve in many countries is now zero with the assumption government controlled central banks will lend to them if there are Runs on the Bank. Defi stablecoins do not benefit from this.
Accounting risk (17)
Does the actor controlling the stable coins produce independent audited accounts?
17.72 Stable coins are usually backed 1 for 1 with a fiat currency. Operators have to incur running costs such as KYC and AML. Audited accounts show how they generate income to support this expenditure.
Legal risk (19)
Does the organization administering the stable coin disclose the risks?
19.94 Disclosure of the risks implies the organization takes its role as operator seriously.
Stable coin governance disclosures should include...
Money Laundering risk (20)
Does the actor controlling the stable coins have open Policies and Procedures regarding actor onboarding and money laundering monitoring?
20.79 Operators will take fiat currency and swap for a token. Reliance must be placed on the bank used by the operator who will be directly responsible for onboarding and money laundering monitoring.
Does the actor operator disclose who its fiat bankers are?
20.80 The fiat bankers should be regulated and in a sanction safe jurisdiction
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No financial advice

These global standards, best practice guidance and risk due diligence questions are an attempt to make DeFi a level playing field. They are not intended to provide any investment advice. Claims made in this website do not constitute investment advice and should not be taken as such. In the meantime, it would be very useful if the jurisdictional regulators would start working together and treating these new financial related projects as a different form of instrument. The Howey Test (1946) was designed in an era of deeds of title and paper bearer certificates. DeFi can be humanless and profit is not always the motive for using protocols. TradFi Derivatives for example are based on underlyings of real assets like the fair value of incorporated companies whose value is derived from fiat currencies which are themselves derivatives on an underlying like gold or a printing machine. Fiat is seen to be a real asset which it clearly is not. The new DeFi world matches actors with agendas. Most of the time the agenda is to do things better and faster. Defi enables everyone including the bankless and unserved members of the community to transact without having to understand how to use Excel or have an MBA from an elite university or be able to able to decipher the millions of pages of legal text opinions as to whether a bitcoin is a currency, a security, a commodity, a derivative, an underlying, a valueless number, type of gambling or something that will just go away. While we wait for a consensus by the old guard, the new guard will create their own computer based standards. Our aim is to turn these standards into bots or smart contracts that do all of this behind the scenes. Image a world where the community agree on how to transact and just do it without a parental overseer who is always a bit behind the curve...


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