March 28th, 2023

Discussion Points:
Potential Points of Failure of Stablecoins and DeFi
Decentralized Treasury Working Group

This study is a work product of the Decentralized Treasury Working Group of BGIN.
©2023 BGIN (Blockchain Governance Initiative Network) is registered as BN Association, a Japanesegeneral association with its principal place of business at Shiba Building, 704, 4-7-6, Shiba, Minato-ku,
Tokyo. All right reserved.
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１. Effect on Stablecoin and DeFi. Risks.
(What happened after the Silicon Valley Bank Collapse?)
1－1. What happened to stablecoins and DeFi after the Silicon Valley collapse?
➢ Understanding what happened and the root cause.
➢ Direct and spillover effect and risk through stablecoin.
■ Banking and stablecoin/DeFi interaction.
■ Depegging of stablecoins (USDC).
■ The domino effect on non-USDC stablecoins which werecollateralized on the USDC such as DAI.
■ Huge trading volume which stopped Central Exchange(Coinbase, Binance restricted redemption).
■ Other spillover channels.
➢ Market response and panic.
➢ Emergency measures.
➢ Outcome and ongoing situation.
1－2. What is classic and what is new about the incident from the perspective ofstablecoins and DeFi?
➢ Acknowledging that there is classical/historical context in the problem.
➢ The perfect “safe money” mechanism is difficult to build. Our past bitter
experience in the financial industry has led to the introduction of various
safeguards as regulations (including self-regulation), to ensure financial
stability and consumer protection. It is time to reflect on the initial
purpose and implementation of these measures. We should avoid the“re-inventing of the wheels”.
➢ Asset-backed financial products and bank deposits are exposed to risks
that are not novel. However, where was the risk, and were necessaryand effective steps taken to mitigate these risks?
➢ Discuss whether these measures built on experience are applicable or
how they are applied to stablecoins and DeFi.
➢ At the same time, we will identify new risks and vulnerabilities that wererevealed after the depegging of USDC.

２. Potential Point of Failure on Stablecoin and DeFi
➢ We will list the Trust Point (centralized elements that users and others areforced to trust unconditionally)/Chain of Trust (a chain of dependencies thatincludes a trust point) and its related risks/problems that were revealed in theincident.
➢ Some of the critical questions we hope to discover are as follows;○ Where and what is the Trust Point/Chain of Trust in stablecoins andDeFi?
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○ Why did the holders/users of stablecoins and DeFi products have tobear the counterparty risk?
○ What was lacking in consumer protection?
○ Were classical risks (market volatility risk, credit risk, maturity mismatchrisk, liquidity risk, counterparty risk, reputation risk, etc.) perceived fullyby the stakeholders, and were measures to prevent that implemented by
the stakeholders?
○ What was the interconnectedness that caused the spillover/dominoeffect? Is there any route that would have stopped these effects?
○ Does it have the possibility to cause a potential systemic risk?
➢ We will analyze using the framework recommended by the Financial Stability
Boards' “Assessment of Risks to Financial Stability from Crypto-assets”(February 2022).
○ Vulnerability: leverage, liquidity mismatch, interconnections with thetraditional financial system, technological and operational fragility○ Transmission Channel: wealth effects, confidence effects, use ofpayment and settlement, financial sector exposures to crypto

３. Implication➢ Rethink and acknowledge existing past instruments and experience. At thesame time, does technology provide a different way to avoid risk transmitted tousers and economies? If so, in what way?
➢ Fundamentally question whether stablecoins and DeFi replicate the sameproblems and risks that Satoshi Nakamoto tried to address.
➢ Explore the potential for more decentralized and robust stablecoin designs tominimize reliance on trust points and centralized elements.

４. The role of BGIN
➢ BGIN is a multi-stakeholder think tank. Its mission, role, and approach are tocontribute to ongoing efforts to promote stability, security, and innovation in theblockchain ecosystem.
➢ BGIN also explores potential future developments and various initiatives toaddress emerging risks and promote stability in the DeFi ecosystem.
➢ This BGIN paper aims to analyze the instability event in question and to identify
possible recommendations to mitigate such events in the future.
➢ Ultimately, humanity dictates how technology is used. There is a need for open
discussion. It is also necessary to learn from different stakeholders and theirpast experiences.

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Appendix – Acknowledgement(Informative)(Note) The views expressed in this report are based on the personal views of theauthors and not the views of the organizations to which they belong.

A.1 Editors and Co-editors● Michi Kakebayashi (University of California, Berkeley)

A.2 Contributors● Ali Nejadmalayeri (University of Wyoming)● Gary Weinstein (Electric Coin Co.)
● Leon Molchanovsky (Galaxy Innovation Ltd.)
Blockchain Governance Initiative Network (BGIN) aims at providing an open and neutral
discussion platform for all stakeholders to deepen common understanding and tocollaborate to address issues they face in order to attain sustainable development of
the wider blockchain community. As an open network, we are now actively and widely
seeking interested parties to join this initiative, so as to accommodate diverse opinionsfrom a wider range of blockchain stakeholders.

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