BGIN SR 011

Potential Points of Failure for Stablecoins
Did the Silicon Valley Bank collapse lead to DeFi instability?
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 rights reserved.

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Executive Summary
This paper analyzes the impact of the collapse of Silicon Valley Bank on stablecoins and thebroader decentralized finance (DeFi) ecosystem in March 2023. Understanding the unfolding of
events and identifying commonalities between classic and emerging financial systems will help
harmonize balance between innovation and stability.
The depegging of the stablecoin USDC, following the collapse of Silicon Valley Bank,
caused instability in the DeFi ecosystem. Concerns arose about whether Circle could redeem
customers 1:1 USDC for USD having parts of its fund in Silicon Valley Bank.
During a period of confusion in the crypto-asset ecosystem, USDC experienced a notabledepegging, with its value dropping to $0.87 at one point. However, after Circle announced its
commitment to cover any deficit resulting from Silicon Valley Bank's closure, the price of USDC
rebounded to $0.97 on the same day. Additionally, following the U.S. Department of Treasury,
Federal Reserve, and Federal Deposit Insurance Corporation (FDIC) announcement ofbackstopping the collapse of Silicon Valley Bank on March 12, the value of USDC on secondary
markets recovered to $0.99.
The depegging of USDC also affected another notable stablecoin called DAI, which isgoverned by MakerDAO. DAI is partly backed by USDC, and the instability of USDC caused
instability for DAI as well. MakerDAO implemented emergency measures to address thedepegging of DAI. The incident also had an impact on centralized exchanges (CEXs) anddecentralized exchanges (DEXs). Coinbase and Binance suspended USDC conversions due tohigh inflows of USDC, leading to a significant migration of USDC from CEXs to DEXs.
Overall, the incident highlighted the risks and challenges associated with stablecoins.
Stablecoins aim to maintain their value stability through three main structures: collateralbacking, algorithm-based, and/or the credibility of the stablecoin’s issuer or governing body;which is also crucial in establishing and enforcing rules to maintain the stablecoin’s value.
However, the challenge of maintaining stability is not unique to stablecoins; it is a classic
problem which can be seen prominently in cases of fiat currency such as the Hong Kong Dollar
and Swiss Franc. Additionally, the concentration of economic power and anti-competitive effects
are also seen in traditional financial markets. At the same time, while the HKD’s mechanism
provides stability, it does not generate yield. Stablecoins have the potential to earn yields but facerisks due to the backing assets and issuer credibility. Consequently, the “safe money” model,
which aims to generate profits, can be difficult to achieve in this context.
The depegging of stablecoins revealed various risks, including systemic risk, market
volatility, reputation risk, liquidity risk, counterparty risk, and regulatory risk. It also revealed therisks in traditional finance have extended to stablecoins and the DeFi ecosystem through theirinterconnected nature. It is essential to carefully manage the risks associated with stablecoins,ensure transparency and credibility of issuers, and take appropriate measures to address potential
risks while considering the potential benefits they offer.
2© 2023 BGIN. All Rights Reserved.

Evaluating the tier level of custodians and addressing potential bank insolvency is
crucial. Stablecoins face interconnectedness risks and can create contagion effects in the DeFi
ecosystem. Diversifying interactions, implementing circuit breakers, and swift responses areimportant. Furthermore, the global 24/7 nature of stablecoin transactions introduces newchallenges compared to traditional finance, necessitating swift and timely responses.
To effectively respond to emergency situations and maintain stability in a decentralized
financial system, it is crucial to consider lessons from traditional finance while also adapting to
the unique characteristics of stablecoin transactions.
Stablecoins’ impact on financial stability raises concerns, especially in the event of arun-on or failure. Managing credit risk, diversifying banking partners, and addressing
interconnectedness are vital, along with effective crisis response and regulatory oversight. To
improve stablecoin value stability, potential solutions include diversifying banking partners andbacking assets, implementing sophisticated risk management strategies, enhancing issuer
credibility through transparent governance and audits, and drawing insights from traditional
finance models. While stablecoins face risks associated with credit, liquidity, and maturity
mismatch, backing them with central bank reserves can mitigate these risks. The relationshipbetween stablecoins backed by central bank reserves and Central Bank Digital Currencies(CBDCs) can be complementary, with stablecoins serving as a bridge between the traditional
financial system, the emerging CBDC ecosystem and decentralised finance.
By taking a multi-stakeholder approach, the DeFi ecosystem can become more resilientand sustainable. BGIN is dedicated to developing initiatives and protocols for stability andinnovation. Open discussions and learning from stakeholders' experiences are vital for
responsible technology use.

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Introduction
In March 2023, the failure of Silicon Valley Bank resulted in growing concerns about thestability of USDC and ultimately led to a depegging of the stablecoin. This, in turn, triggered adepegging of other stablecoins including DAI. The purpose of this paper is to gain acomprehensive understanding of the events that transpired, identify potential points of failure,
and the risks that were revealed. The interconnectivity of the crypto-asset ecosystem caused acascade effect, with each event leading to another. Hence, it is crucial to examine this incident,
learn from it, and understand its potential implications for the future. The paper will analyze
what occurred, the associated risks that were revealed, and the future implications of thisincident.
While there has been talk about the impact of crypto market volatility on traditional
finance, this paper aims to examine a specific incident in traditional finance that made an impact
on the crypto market and directly or indirectly resulted in stablecoin volatility.
The structure of this paper is as follows. Sections 1-4 set the stage for the paper. Section 5
provides an explanation of stablecoins. Section 6 examines the observed effects and risks ofstablecoins following the collapse of Silicon Valley Bank. Section 7 highlights a new risk thatwas revealed compared to classic problems. Section 8 discusses the potential point of failure that
led to stablecoin depegging. Section 9 explores the potential future implications of this incident
and present recommendation. Section 10 delves into the role of BGIN given the risks and issues
that surfaced. Section 11 concludes.

Disclaimer: The views expressed in this document are personal views of the participating
members of the BGIN community and should not be seen as the official views orrecommendations of the institutions with which they are affiliated. The information provided
in this document is intended for informational and educational purposes only. It should not be
construed as legal or financial advice. The content presented is based on general knowledge
and should not be relied upon for specific financial or legal decisions.
The know-how described in this document was made available from contributions fromvarious sources, including members of the BGIN and others. Although the BGIN has taken
steps to help ensure that the know how is available for distribution, it takes no position
regarding the validity or scope of any intellectual property or other rights that might beclaimed to pertain to the implementation or use of the know how described in this document or
the extent to which any license under such rights might or might not be available; neither does
it represent that it has made any independent effort to identify any such rights. BGIN and thecontributors to this document make no (and hereby expressly disclaim any) warranties(express, implied, or otherwise), including implied warranties of merchantability,4© 2023 BGIN. All Rights Reserved.

non-infringement, fitness for a particular purpose, or title, related to this document, and theentire risk as to implementing this document is assumed by the implementer. The BGINIntellectual Property Rights policy requires contributors to offer a patent promise not to assert
certain patent claims against other contributors and against implementers. BGIN invites any
interested party to bring to its attention any copyrights, patents, patent applications, or otherproprietary rights that may cover technology that may be required to practice this document.

5© 2023 BGIN. All Rights Reserved.

Table of contents
Executive Summary
Introduction
Table of contents
1. Scope
2. Normative Reference
3. Terms and Definitions
4. Abbreviations and Symbols
5. What is a stablecoin?
6. Effects and Risks of Stablecoin and DeFi
(What happened after the Silicon Valley Bank Collapse?)
6-1 Depegging of USDC following the Silicon Valley Bank Collapse
6-2 Contagion Effects on DAI and Reactions from MakerDAO
6-3 Other Stablecoins
6-4 Centralized Exchanges (CEX) and Decentralized Exchanges (DEX)
6-5 Other Possible Impacts
7. What is classic and what is new about the incident from the perspective of stablecoins andDeFi?
7-1 Value Stability of the Stablecoin
7-2 Stabilizing Currency Value is a Classic Problem
7-3 Asset-backed is exposed to risk
7-4 Concentration of Economic Power and Anti-Competitive Effects
7-5 What did the depegging cause or reveal?
8. Potential Point of Failure on Stablecoin
8-1 Why did the users bear the credit risk?
8-2 Interconnectedness and Spillover Effects
8-3 Governance Body
8-4 Risks to Financial Stability
9. Implications and Recommendations
10. The role of BGIN
11. Conclusion
Appendix A – Acknowledgement
A.1 Editor
A.2 Contributors
Appendix B – Informative reference

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1. ScopeThis paper discusses the stability of stablecoins in the broader context of decentralized finance(DeFi). It analyzes recent instability events in the DeFi ecosystem, which were triggered by thecollapse of a traditional financial institution, and how they impacted stablecoins. The aim of thispaper is to explore potential risks and challenges associated with stablecoins and DeFi more
broadly and to provide solutions and frameworks for promoting stability and mitigating risks.
Additionally, the paper evaluates the role of industry players, including BGIN, in promoting
stability and innovation within the DeFi ecosystem. The analysis presented in this paper is basedon publicly available data, industry reports, and interviews with key stakeholders in the DeFi
ecosystem.

2. Normative ReferenceThis document has no normative reference.

3. Terms and Definitions
This document uses the following terms as the shortcut for more complete wording provided as
the definition. When the term appears within this document, it should be read as being replacedby the definition.
3.1
algorithm-based stablecoinsstablecoin that purports to maintain a stable value via protocols that provide for the increase or
decrease of the supply of the stablecoins in response to changes in demand[Source: FSB (2020) modified]
3.2
asset-linked stablecoinstablecoin that purports to maintain a stable value by referencing real or financial assets or othercrypto-assets[Source: Cohan(2017)]
3.3
centralized exchange
a crypto-asset trading platform that facilitates the buying and selling of crypto-assets, either for
fiat currencies, or for another digital asset. The platform functions as an intermediary andsometimes provides custody and other services.

7© 2023 BGIN. All Rights Reserved.

[Source: FSB (2023)]
3.4
decentralized application (dapp)
application built on a decentralized network that combines a smart contract and a frontend userinterface[Source: Ethereum.org (2022)]
3.5
decentralized autonomous organization (DAO)a blockchain-based system that enables people to coordinate and govern themselves mediated bya set of self-executing rules deployed on a public blockchain, and whose governance isdecentralised[Source: Hassen and Filippi(2017)]
3.6
decentralized finance (DeFi)
a set of alternative financial markets, products and systems that operate using crypto-assets and“smart contracts” (software) built using distributed ledger or similar technology. [Source: FSB(2023)]
3.7
decentralized financial systemfinancial system that could be the result of decentralized financial technology [Source: Based on
FSB (2019)]
3.8
decentralized financial technologies
technologies that may reduce or eliminate the need for one or more intermediaries or centralised
processes in the provision of financial services[Source: FSB (2019)]
3.9
decentralized exchange
arketplaces built using distributed ledger or similar technology where transactions can occur
directly between crypto-asset traders[Source: FSB (2023)]

8© 2023 BGIN. All Rights Reserved.

3.10
governance body
body responsible for establishing and monitoring the rules governing the stablecoin arrangement,
which would cover, among other issues, the types of entities that could be involved in thearrangement, the protocol for validating transactions, and the manner in which the value of thestablecoin is “stabilised”[Source: FSB (2020)]
3.11
smart contract
collection of code and data (sometimes referred to as functions and state) that is deployed using
cryptographically signed transactions on the blockchain network. The smart contract is executedby nodes within the blockchain network; all nodes must derive the same results for the execution,and the results of execution are recorded on the blockchain[Source: NIST (NISTIR 8202)]
3.12
stablecoin
crypto-asset that aims to maintain a stable value relative to a specified asset, or a pool or basket
of assets[Source: FSB (2020)]

4. Abbreviations and Symbols
In this document, the following abbreviations and symbols are used.
BCP - Business Continuity Planning
BGIN - Blockchain Governance Initiative Network
CBDC - Central Bank Digital Currency
CEX - Centralized Exchanges
dapp - Decentralized Application
DAO - Decentralized Autonomous Organization
DeFi - Decentralized Finance
DEX - Decentralized Exchanges
FDIC - the Federal Deposit Insurance Corporation
FSB - Financial Stability Board
HKMA - Hong Kong Monetary Authority
MMF - Money Market Fund
OCC - the Office of the Comptroller of the Currency
OEF - Open-End Fund9© 2023 BGIN. All Rights Reserved.

PSM - Peg Stability Module
PWG - President’s Working Group on Financial Markets
RWA - Real World Asset10© 2023 BGIN. All Rights Reserved.

5. What is a stablecoin?
A stablecoin is a type of digital asset designed to keep its value steady in relation to a particularasset or a combination of assets. The term “stablecoins” encompasses a wide range of
methodologies to maintain value stability. Stablecoins use algorithms or other methods tomaintain a stable market value, such as adjusting their supply based on changes in demand (FSB,
2020). The market value of a stablecoin is usually influenced by the value of chosen underlying
assets. Additionally, various definitions of the term “stablecoin” are currently discussed, and theterm does not always have a clearly defined legal or regulatory classification. Table 1 presents
one way to classify different stablecoins.
Table 1 Types of stablecoins
Type

Description

ExamplesTokenized cash

Tokens fully-reserved withcash & cash equivalent
instruments (e.g. T-bills andother level 1 HQLA with lessthan 90 days of maturity)

USD Coin (USDC), Binance
USD (BUSD), Paxos Dollar(USDP).

Other fiat-asset backed

Tokens reserved with fiat
assets of varying credit
qualities and liquidity.

Tether (USDT)Crypto-(over)collateralized

Reserves are overcollateralized with crypto
asset and/or tokenized fiat
assets that do not
self-reference to thestablecoin in supply
determination.

Dai, Fei

Algorithmic/ endogenously
collateralized

Stablecoins that are fully or
partially backed by a second
more volatile reference coin.
The supply of the referencecoin is pragmaticallydetermined based on the
primary coin.

FRAX(Source: Excerpt from Liao (2022) and edited by the author)
Some jurisdictions have defined specific methods for stablecoins, such as the “e-money
token” and “asset-referenced token” in the EU and the “electronic payment instrument” in11© 2023 BGIN. All Rights Reserved.

Japan.1 These definitions are meant to provide clarity and regulatory oversight for stablecoins
operating within their respective jurisdictions.
Determining whether stablecoins are considered means of payment or securities is
crucial, as different regulatory measures apply to each category. It is important to avoid a middle
ground where stablecoins do not fall under any regulatory clarity.2 Clear regulatory guidelines
will help ensure that stablecoins operate within a transparent and secure framework and thatusers can trust their stability and reliability.
This paper aims to analyze stablecoins that are asset-linked and backed by tangible orintangible assets, such as financial instruments or other crypto-assets. Specifically, this study
delves into the impact of the March 2023 bank run on the price stability of USDC, a stablecoin
which is fully-backed by USD, and Circle, the issuer company, that claims to redeem USDC one
for one to USD. A stablecoin value is maintained through its pegging to a specific fiat currency
using a reserve of the fiat currency itself and of low-risk liquid financial instruments, typicallydescribed as “high quality liquid assets”, denominated in the same fiat currency. Additionally,
this study explores the ripple effect of this bank run on other ecosystems that were indirectly
impacted.

6. Effects and Risks of Stablecoin and DeFi
(What happened after the Silicon Valley Bank Collapse?)<Key Points>● Understanding what happened and the root cause.
● Market response and panic.
● Emergency measures.
● 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 were backed with USDC,
such as DAI.
■ Huge trading volume the volume stopped central exchanges (Coinbase, Binancerestricted redemption).
■ Other spillover channels.
● Outcome and ongoing situation.

1

In Japan, the term "e-money token" refers to a specific type of electronic money that is issued by certain
companies, whereas "prepaid payment instruments" encompass a broader range of prepaid payment products
available from various providers.
2
There was a comment during BGIN’s discussion that a new category with regularity clarity could be created.

12© 2023 BGIN. All Rights Reserved.

6-1 Depegging of USDC following the Silicon Valley Bank Collapse
Silicon Valley Bank faced a bank run in March 2023. A bank run is a situation where a large
number of depositors of a bank attempt to withdraw their funds simultaneously due to concerns
about the bank’s solvency or stability. It can quickly lead to a liquidity crisis for the bank, as it
may not have sufficient cash reserves to meet all withdrawal requests.
Causing overall fear of Silicon Valley Bank not being able to honor bank deposits. Circle
the issuer of USDC, had part of its funds held in Silicon Valley Bank and the bank run raised
concerns about whether Circle could redeem customers 1:1 USDC for USD.3 It is important tonote that Circle has maintained transparency by consistently disclosing the location of thereserve backing USDC and by announcing its exposure to Silicon Valley Bank. These concerns
seemingly led to a loss of confidence in USDC and potentially triggered a flight from thestablecoin to alternatives. As a result theshort term confusion and panic in the crypto-assets
ecosystem, most notably the depegging of the stablecoin USDC falling to $0.87 cents on thesecondary market was observed (Figure 1).
Following Circle’s announcement of backing any deficit resulting from Silicon Valley
Bank’s closure, the price of USDC rebounded to $0.97 on the same day. Additionally, after the
U.S. Department of the Treasury, Federal Reserve and Federal Deposit Insurance Corporation(FDIC) announced their backstop of Silicon Valley Bank Collapse on March 12, the value of
USDC on secondary markets further increased to $0.99. These details highlight the short-term
depegging of USDC during that period.

Figure 1 USDC (December 15th to March 15th)3

Circle does not do anything to “maintain the value of USD”; USDC has price parity to the dollar because all USDC
in circulation is backed by the equivalent value of U.S. dollar denominated assets held as reserves for the benefit of
USDC holders.

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As of 13th March, USDC was fully backed by a combination of cash (23% ($9.7 billion))and U.S. Treasuries (short term Treasuries with maturation periods of 90 days or less) (77%($32.4 billion)) (Team Circle, 2023). Furthermore, as of 11th March 2023, $3.3 billion of
USDC’s cash reserves (8% of the total reserve, 34% of the total cash reserve) remained in the
Silicon Valley Bank (Team Circle, 2023) (Figure 2).

Figure 2 Announcement by Circle (March 10th)
Polk (2023) reported that “[b]etween 10-15 March, net $4.46 billion USDC was
redeemed. Daily redemptions were at yearly highs, with Coinbase the largest redeemer by far”.
To stop the panic spreading, Circle announced on March 11th that they have “initiated transfersof these funds to other banking partners” and that they will “cover any shortfall using corporate
resources, involving external capital if necessary” should the Silicon Valley Bank not return
100% of the deposit and that any return might take some time (Team Circle, 2023). On March
13th, Circle announced that the cash reserves at Silicon Valley Bank were available and othercash reserves were held primarily at BNY Mellon. This announcement followed the FDIC’s
announcement that bank deposits at Silicon Valley Bank were guaranteed up to USD250K. As
previously stated, these announcements corresponded with USDC fully regaining its peg to thedollar on the secondary market.
Garratt and Shin (2023) point out that the “[d]epartures from par value are common in thestablecoin world, despite market interventions by the issuers to prevent them” and that “[w]hile
such departures can be small during normal times, even a small departure runs counter to thenorm of singleness and introduces a wedge that can be magnified greatly during periods ofstress.” They examine what had happened to the stablecoin following the incident of the FTX
and the Silicon Valley Bank collapse, stating that “[d]epartures from singleness are often
triggered by events in the crypto market” (Figure 3).

14© 2023 BGIN. All Rights Reserved.

Figure 3 FTX and Silicon Valley Bank collapses coincide with volatility in stablecoin prices (USDollar)(Source: Garratt and Shin (2023))

6-2 Contagion Effects on DAI and Reactions from MakerDAO
The depegging of USDC led to instability for another USD soft-pegged stablecoin, DAI, whichis governed by MakerDAO (Figure 4).4 DAI is reserved fully on-chain and is partly backed by
USDC, which accounted for $2.6B (51.7%) of the total backing as of 12th April 2023, according
to Makerburn.com (Figure 5).

4MakerDAO is the governing body of DAI. For a definition on “governing body” see Section 3.

15© 2023 BGIN. All Rights Reserved.

Figure 4. Price of DAI (15th December 2022 to 15th March 2023)

Figure 5 List of DAI Collateral (12th April 2023)(Source: Makerburn.com)
To address the DAI depegging, an emergency Executive Vote was held and approved byMakerDAO, to adjust the relevant smart contract parameters on Ethereum. Smart contracts are
self-executing agreements that power decentralized tokens, decentralized applications (dapps),
and protocols. In this particular case, the most significant changes were approved to the Peg
Stability Module (PSM), which helps DAI to maintain dollar parity, and to DAI’s vaults and fees.
As a part of the emergency measures that were implemented, four USDC-exposed vaults
with a collective Maximum Debt Ceiling of $350 million had their minting limits reduced tozero. Simultaneously, the PSM was amended to increase the minting limit for Paxos (USDP),
another stablecoin. Specifically, the Paxos debt ceiling was raised from 450 million DAI to 1
billion DAI. MakerDAO also acted to mitigate risks arising from GUSD, Gemini’s USD
16© 2023 BGIN. All Rights Reserved.

stablecoin product, citing potential contagion risks that could impact Gemini owing to their“large uninsured bank deposit exposure” (MakerDAO forum, 11th March 2023).5 Ultimately,
MakerDAO deployed this set of parameter changes “with the purpose of limiting Maker’s
exposure to volatile centralized stablecoins and reinforcing the DAI peg” (MakerDAO, 2023).6
The DAO published a succinct summary of their actions, and forward-looking measures, on 15th
March 2023 (Box 1).
Box 1: Reaction of MakerDAO to the DAI depeg event (March 15th, 2023)(1) A summary of the recent events:
On 10th March 2023, regulators took over Silicon Valley Bank due to a liquidity crisis. Circle
disclosed that $3.3 billion of USDC reserves were deposited in the bank and could not be
accessed due to weekend closure. Maker’s Peg Stability Module (PSM) enables DAI-USDC
swaps at a 1:1 fixed ratio and backs minted DAI with deposited USDC. As a result, thestablecoin market experienced a USDC sell-off over the weekend, leading to a slight depeg of
USDC, affecting DAI’s price.
Silicon Valley Bank exposure led to increased USDC inflows to the PSM, causing
MakerDAO's USDC exposure to double to $4 billion over the weekend, which also affected
DAI's price due to the PSM's 1:1 fixed exchange rate.
(2) Immediate actions:
An emergency vote proposed by the Risk Core Unit on Saturday, March 11, and executed on
Monday, March 13, deployed a set of parameters to limit Maker’s exposure to USDC andencourage diversification of PSM’s stablecoin assets.
Additionally, this emergency vote reduced the Governance execution delay from the usual 48
to 16 hours, enabling Maker Governance to implement future changes faster.
The Risk Core Unit proposed a second executive vote, which is currently being voted on by
Maker Governance and, if approved, is expected to execute the following change 16 hours
from the time of approval:
Implement a circuit breaker to deactivate all PSMs with an instant governance actionthat will be able to be executed immediately after governance approval. By employing
the circuit breaker, Maker Governance will instantly set a specific PSM debt ceiling tozero if market conditions increase the risk of holding a specific stablecoin, thus
preserving the DAI price.

5

https://forum.makerdao.com/t/emergency-proposal-risk-and-governance-parameter-changes-11-march-2023/20125(last accesed on May 16, 2023)
6
https://twitter.com/MakerDAO/status/1635329593384083477?s=20 (last accesed on May 16, 2023)

17© 2023 BGIN. All Rights Reserved.

(3) Future measures to reinforce the DAI stability:
Going forward, MakerDAO Core Units are considering multiple proposals to limit
MakerDAO’s exposure to centralized stablecoins, such as:• Introducing PSM market-price swaps and redemption curves that will slow down the 1:1
swaps during times of emergency.
• Switching a considerable portion of stablecoin reserves towards money market assets like US
Treasury bonds, which are highly liquid assets and would be ready to protect DAI’s price incase of a sell-off event. By further diversifying its reserves towards real-world assets andbonds, MakerDAO will increment its control over DAI’s liquid backing. This diversification
approach will expand MakerDAO's revenue channels and create opportunities to increase the
Dai Savings Rate (DSR) and distribute those earnings to DAI holders.
(Source: MakerDAO (2023))
An interesting feature of MakerDAO’s reaction was the decision to increase its exposure
to Paxos. In the emergency proposal, MakerDAO justified the decision to increase USDP debt
limits to 1 billion, saying that “Paxos has relatively stronger reserve assets versus other available
centralized stablecoins, consisting primarily of US treasury bills, reverse repurchase agreements
backed by US treasury bonds, insured bank deposits (placed through deposit broker networks toremain under FDIC limits), and privately insured bank deposits, with a relatively small portion ofuninsured bank deposits per their latest reserves reports. They face the relatively lower potential
for impairment versus other available stablecoins, but can still provide important backstop
liquidity to prevent DAI from trading over the $1 target price and impacting liquidation safety inthe event of a crypto market crash” (MakerDAO forum, March 11th, 2023).7
These decisions suggest that the DAO was more concerned with the risks arising fromcounterparty balance sheets (namely Circle and Gemini) than any regulatory or reputational risks
that could be associated with USDP’s issuer, Paxos. Notably, in the month prior to the depegging
event, mainstream media reported that Paxos had been issued a Wells notice by the SEC,
regarding another one of its products, the BUSD stablecoin, which is related to Binance but
owned and issued by Paxos. In a statement, Paxos said that “[e]ffective February 21, Paxos willcease issuance of new BUSD tokens as directed by and working in close coordination with the
New York Department of Financial Services,” adding that it would “end its relationship with
Binance for the branded stablecoin.” 8
In the past, DAI was often depegging to the upside (trading above $1), and increasing thestability fees as high as 5% in an attempt to fix this, which caused DAI to lose market share. The
PSM kept interest rates low (and low volatility of interest rate spikes) and competitive with otherplayers in the market. This was the solution to the stability fees issue. Between late 2019 and78https://forum.makerdao.com/t/emergency-proposal-risk-and-governance-parameter-changes-11-march-2023/20125
https://www.cnbc.com/2023/02/13/paxos-ordered-to-cease-minting-binance-stablecoin-by-new-york-regulator.html

18© 2023 BGIN. All Rights Reserved.

early 2020, there were numerous fluctuations in the interest rate, with rates hovering around
1.05% to 1.10%. However, with the introduction of the PSM, the interest rates stabilized andbecame more predictable. As time passed, the PSM was no longer viewed as a short-term debt
instrument but rather as an onboarding facility and cash-equivalent. Consequently, USDC, acommon currency used in the PSM, at one point, constituted as much as 85-86% of thecollateral.

6-3 Other Stablecoins
When compared to USDC and DAI, Tether was being traded for more than its stated value of $1(Figure 6). Tether is inversely correlated with US regulatory risk. However, given Tether’s
opacity surrounding USDT’s reserves and their location, it is difficult to determine whether they
were also exposed to the collapse of Silicon Valley Bank. While the market seemed to haverushed towards Tether during the incident, it may not have been rational to do so, as the lack oftransparency regarding their reserves and exposure to risk raises significant concerns.

Figure 6 Tether (December 15th to March 15th)

6-4 Centralized Exchanges (CEX) and Decentralized Exchanges (DEX)This section will delve into the growing volume and distinguish the key distinctions between
centralized exchanges (CEX) and decentralized exchanges (DEX).
Coinbase and Binance suspended USDC conversions from March 10th to 12th due to thehigh inflow of USDC (Figure 7).

19© 2023 BGIN. All Rights Reserved.

Figure 7 Announcement from Binance and Coinbase (March 10th)(Source: Binance and Coinbase)
The trading options for USDC-USD pairs on CEX are restricted, and the liquidity isrelatively low. According to data from Kaiko, the daily average trade volume during that period
was approximately $20-$40 million. As shown in Figure 8, the trading volume of USDC and
USD hit all time record of $600 million (Aubert et al., 2023).

Figure 8 USDC-USD Trade Valume(Source: Aubert et al. (2023))
20© 2023 BGIN. All Rights Reserved.

Figure 9 shows the flows from CEX to personal wallets and Figure 10 shows the value
sent from CEX to DEX. During this period, there was a significant migration of USDC to DEX.
Many users likely chose to transfer their USDC holdings to self-custody to sell them in exchange
for other cryptocurrencies via DEX, as trading of USDC was temporarily suspended on CEX.
This shift in activity was driven by the desire to liquidate USDC holdings and explore alternative
investment options while trading on CEX was halted (Chainalysis, 2023). As Figure 11
illustrates, the flow mainly consisted of USDC and wETH (Wrapped Ether).9 Remarkably, it canbe implied that the halt in the CEX caused panic and promoted the flow from CEX to DEX.

Figure 9 Flows from CEX to personal wallets(Source: Chainalysis (2023))

9

Chainalysis (2023) assumes that Wrapped Ether (wETH) transfer to DEXes is likely to have reflected an influx offunds from traders looking to take advantage of the volatility in the market.

21© 2023 BGIN. All Rights Reserved.

Figure 10 Value sent from CEX to DEX(Source: Chainalysis (2023))

Figure 11 Value received by DEX by asset type
(Source: Chainalysis (2023))
Based on Figure 12 and Figure 13, it is evident that there was a significant surge in
trading volume on DEXs, particularly on March 11th, reaching a total of $26 billion. Notably,
Uniswap and Curve were the two DEX platforms that experienced the most substantial trading
volume during this period, with Uniswap accounting for $12.6 billion and Curve accounting for22© 2023 BGIN. All Rights Reserved.

$8.0 billion of the total trading volume. These figures indicate a significant flow of trading
activity and liquidity into these decentralized platforms on that specific day.

Figure 12 Daily aggregated trading volume for the top 20 projects in the DEX(Source: Token Terminal)

Figure 13 Daily trading volume for Uniswap, dYdX, Curve, GMX, PancakeSwap(Source: Token Terminal)
23© 2023 BGIN. All Rights Reserved.

The observation of increased acquisitions of USDT, DAI, and USDC on Curve andUniswap during the weekend, coincided with the depegging of USDC (Chainalysis, 2023).
Chainalysis (2023) assess that the spike in USDC acquisitions, despite its depegging, could
indeed suggest that some traders anticipated USDC’s ability to regain its peg in the future. These
traders may have taken advantage of the discounted price of USDC during its depegged state,anticipating that it would eventually return to its intended value. At the same time, during theweekend, several derivatives emerged on offering leverage options ranging from 10x on
BitMEX, 20x on OKEx, and up to 30x on Binance (Aubert et al., 2023).
The mechanism of how the market panicked during the USDC deppeging incident is an
important consideration. The key factor was the decrease in the reserve rate resulting in the lackof access to the cash reserves while the bank was being evaluated by the FDIC. Even if the lackof reserves was a constant number, redeeming USD from USDC at a CEX such as Coinbase
would decrease the reserve rate of USDC. This would result in a drop in the accounting value of
USDC if redemptions were made at a 1:1 rate.10 While the hole in the accounting resulting from
Silicon Valley Bank’s collapse was not large enough to make USDC worth $0.87, the logicalexpectation of continued redemptions at a 1:1 rate was a factor contributing to the market
panic.11 This highlights the importance of considering on- and off-ramps as a significant factor instablecoin value stability.
It is also interesting to note that DEX was commonly utilized by spot “panic sellers” whofelt the need to quickly dispose of their currency due to concerns about depegging. On the other
hand, CEX that offer derivatives were predominantly used by individuals speculating on the
USDC’s ability to repeg.

6-5 Other Possible Impacts
Indeed, the impact of stablecoin volatility following the Silicon Valley Bank collapse may extend
beyond the stablecoin ecosystem itself. As Ge Huang, Miao, and Ostroff (2023) note, the use of
stablecoins extends beyond crypto trading to include their use as a means for companies to store
capital and profits. Therefore, any disruption in the stability of stablecoins could have ripple
effects throughout the broader financial system. While there have not been apparent cases as of
the current moment, the possibility of such incidents occurring underscores the importance ofcomprehending the potential risks and implications associated with stablecoin volatility.
It is possible that if the stablecoin took a longer time to repeg, it could have had asignificant impact on various aspects of the ecosystem. Digital markets could experience higher
volatility and increased trading costs. Peer-to-peer and cross-border payments may be delayed or
become more expensive, affecting businesses and individuals who rely on these transactions.

1011

During the incident, Circle was still honoring 1:1 redemptions.
There were comments that stablecoins should lower the redemption rate in case they lose part of their reserves.

24© 2023 BGIN. All Rights Reserved.

Internal transfers and liquidity management could also be affected, as stablecoins are often used
for these purposes. Further research on the transmission effect needs to be explored.

7. What is classic and what is new about the incident fromthe perspective of stablecoins and DeFi?
<Key Points>● Acknowledging that there is classical/historical context in the problem.
● The perfect “safe money" mechanism is difficult to build. Our past bitter experience
has led to the introduction of various safeguards as regulations (including
self-regulation) to ensure financial stability and consumer protection. It is time toreflect on the initial purpose and implementation of these measures. We should avoid“reinventing the wheel.”● Asset-backed financial products and bank deposits are exposed to risks that are notnovel. However, where was the risk, and were necessary and effective steps taken to
mitigate these risks?
● Discuss whether these measures built on experience are applicable or how they areapplied to stablecoins and DeFi.
● At the same time, we will identify new risks and vulnerabilities that were revealed after
the depegging of USDC.

7-1 Value Stability of the Stablecoin
Roughly speaking, there are two types of structures to support the “value stability” ofstablecoins: asset-linked and algorithm-based.12 The asset-linked stablecoins includes bothoff-chain collateralized stablecoins (linked to bank deposits or other cash-like assets traded in the
traditional financial system) and on-chain collateralized stablecoins (linked to assets represented
by tokens on a blockchain) (Baughman et al., 2022).
In addition, the creditworthiness of the stablecoin issuer or governing body’s asset is a
crucial element, as they are responsible for establishing and enforcing the rules governing thestablecoin arrangement that aims to maintain its value.13

12

Algorithmic trading can contribute to stablecoin value stability by automatically buying or selling stablecoins on
exchanges in response to price changes. This can help to maintain the stablecoin's peg to the underlying asset or
currency by increasing or decreasing the supply of stablecoins in circulation as needed. One example of a stablecointhat uses algorithmic trading to maintain its peg is DAI, which is pegged to the value of the US dollar.
13
In the traditional world there are all sorts of ratings. In the DeFi ecosystem where transparency is often limited,
how to measure creditworthiness is a question that needs to be further explored.

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1) Backing14:
The issuance of coins is typically backed by safe assets that have a low risk of default or
market value fluctuation. These assets are used as backing to issue the coins, and thebacking can take various forms, such as creating a special purpose vehicle where the soleliability is the coin, while the sole assets are the safe assets, or using entrustment/backing
schemes that are allowed by applicable laws and regulations. Safe assets usuallycomprise financial products that are short-dated, close-to-cash, or have government(sovereign) risk, such as bank deposits with high-credit rating banks and short-dated
government bonds.
2) Algorithmic trading:Stablecoins are typically stabilized through the use of algorithms that automatically
execute buy or sell transactions to maintain the value of the coin at the target value (e.g.,
USD). For instance, in the case of a USD-pegged stablecoin, when the value of the coinprice falls below a certain threshold against USD, the issuer of the coin buys the coin in
the market to increase the price of the coin. Another approach involves raising thepremium, which can be considered as a quasi-interest rate, for holding the coin toencourage holders to purchase more coins. By increasing the premium, stablecoin issuers
can incentivize holders to keep their funds in the coin, rather than withdrawing them andto potentially purchase more coins to earn even higher premiums. This can help tomaintain the stability of the stablecoin by increasing demand for it and ensuring that its
value remains closely pegged to the underlying asset or currency.15
3) Credibility of the issuer’s assets:
Stablecoin issuers may guarantee the exchange of the coin to legal tender or other typesof assets upon request by the holders, either explicitly or implicitly. In such cases, thecredibility and the quality of the issuer’s assets becomes crucial. To ensure stability andreliability, stablecoin issuers must establish a reputation for trustworthiness andtransparency as well as ability to access those assets. This is particularly importantbecause stablecoins are often used as a store of value or medium of exchange, and users
may be less likely to hold or transact with a stablecoin if they have doubts about its
stability or credibility. The issuer's credibility also supports the trust of coin holders in themeasures of backing and algorithmic trading.
The collapse of Silicon Valley Bank directly affected the backing and raised concerns
about the stablecoin issuer’s ability to access the deposits.
14“Backing” incorporates two meanings: 1) the coin holders have the right to redeem the coins for the backing
reserve assets, 2) an operating entity can use the backing reserves to buy the coins at its own discretion (and not at
the coin holder's discretion). It needs to be distinguished from “collateral” which means something pledged as
security for repayment of a loan, to be forfeited in the event of a default.
15
An unsustainable 20% premium was also a significant factor in Terra's collapse.

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Upon information and belief, the announcement by Circle, the governance body of
USDC, of a cash deposit with Silicon Valley Bank triggered fears of declining reserve value
and/or liquidity of Circle. Silicon Valley Bank’s collapse was partially caused by panicky
withdrawals of deposits, and the sell-off of USDC can also be characterized as a panic among
holders. This incident underscores the importance of the quality of the issuer’s assets and theneed for trust and transparency in stablecoin issuers.16 However, it is important to acknowledge
that even with transparency and audit mechanisms in place there may be value instability. In fact,
in part the issuer’s transparency here played a role in the temporary decline of USDC’s
secondary market trading price. By announcing on March 10 that $3.3 billion in cash reserves
were held at Silicon Valley Bank, the issuer Circle displayed transparency. In contrast, stablecoinissuers who are less transparent with their reserves may not experience the same market
response, potentially highlighting concerns about their credibility.

7-2 Stabilizing Currency Value is a Classic Problem
The earlier provides a framework for understanding stablecoin value, which can be supported by
1) backing, 2) algorithmic trading, and 3) the credibility of the issuer. According to Baughman etal. (2022), stablecoin issuers can be likened to currency boards. Similar to a currency board,stablecoin issuers are mandated to uphold a fixed exchange rate with a foreign currency andmaintain reserves consisting of that foreign currency. By examining existing financial models
that have been used to stabilize the value of certain currencies in history, it is possible to gain
insights into the potential risks and benefits of stablecoins.
It is essential to acknowledge that having a reserve and a good credibility mean nothingif, at the time of market pressures, the issuer doesn't use them to perform or encourage buy/sell
stabilization operations, directly or indirectly.
1) Backing:The backing structure of a currency has traditionally been a crucial factor in maintaining
its stability, as seen in the case of the Hong Kong Dollar (HKD). While gold-backed
currencies were prevalent in the past, most countries have since abandoned the gold
standard in favor of greater monetary control.
The USD deposit is held at the Hong Kong Monetary Authority (HKMA), which
is a government agency that acts as the central bank of Hong Kong. This means that the
HKD is backed by a relatively safe and stable asset, the USD. The HKMA is also
responsible for maintaining the exchange rate of the HKD against the USD within anarrow band, which means it needs to intervene in the foreign exchange market bybuying HKD and selling USD to maintain the peg. Nonetheless, even with such backing,16

There were comments in the discussion that cash deposits are rehypothecated by financial institutions, and safer
cash could be held at the Federal Reserve.

27© 2023 BGIN. All Rights Reserved.

the HKD is still susceptible to speculative attacks by traders who seek to break the target
exchange rate.
In order to maintain the stability of the HKD’s peg, the HKMA engages in foreignexchange market interventions by purchasing HKD and selling USD. This has been a
successful strategy, but it does come with a cost. These interventions require the use of
substantial foreign reserves, which can limit their availability for other uses.
The example of HKD highlights the difficulty of maintaining stability even with astrong backing structure and very little credit risk or maturity risk. It also demonstrates
the importance of active intervention by the authority to defend the peg and the potential
cost associated with such intervention.
In the case of stablecoins, the backing assets used are not as strictly risk-free as in
the case of HKD. These assets are exposed to credit risk from the banks receiving thedeposits, interest rate risks for medium/long-dated government bonds, and liquidity risk
for many assets. Thus, we need to address the issue of the “backing scheme” in two ways:
first, by addressing the risk of fluctuations in the reserve value, and second, by addressing
the challenge of establishing and maintaining holders’ trust in the reserve value, which
can be more difficult to tackle.
Different types of reserve can have different implications for stablecoin value
stability.17● Fiat currency: Using a fiat currency as backing, such as the USD or the Euro, canprovide a high level of stability and liquidity to a stablecoin. However, it issubject to the credit risk of the bank holding the fiat currency, as well as thepotential risk of inflation and other economic factors that can affect the value ofthe backing.
● Cryptocurrency: Using a cryptocurrency as backing can indeed bring transparency
and decentralization to a stablecoin, eliminating the need for reliance on acentralized institution. However, it is important to note that cryptocurrencies canbe highly volatile, and their value can experience rapid fluctuations and therefore
the stablecoin will likely not remain consistent.
● Precious metals: Using precious metals like gold or silver as backing forstablecoins can offer stability due to their historical value and relative stability.
However, these metals can be challenging to store and transport physically, andtheir value can still be subject to fluctuations in the market. Additionally, one canalso face challenges in terms of verifying the authenticity of the metal andensuring its security.
17

How the backing of a stable instrument by a volatile instrument will inevitably lead to greater potential forfluctuation of the “stable” token needs to be discussed further.

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● Real estate: Using real estate as backing can provide stability, as the value of thereal estate as the value of property generally appreciates over time. However, realestate may not be easily liquidated, and its value can be influenced by local
economic conditions.
● Other financial assets: Using other financial assets, such as bonds or stocks, asbacking can provide diversification and potentially higher returns for a stablecoin.
However, these assets are subject to credit and market risks, and their value canfluctuate based on economic conditions and other factors beyond their control.
2) Stabilization mechanism:
Many central banks and ministries of finance have attempted to stabilize the exchange
rates of their home currencies by intervening in the foreign exchange (FX) market. Someof these efforts have not been effective in traditional settings for instance the Swiss Francpeg, which was abandoned after serious attempts by the Swiss National Bank's market
intervention operations. Ultimately, the Swiss National Bank gave up selling Swiss
Francs as it could not devalue the currency. As a result, the Swiss National Bank wasforced to buy a massive amount of foreign currencies, which are now invested in foreign
assets that still remain on the balance sheet.
It is challenging for central banks, even with good liquidity and public support, tomaintain currency stability solely through buy-sell operations or crude algorithmic
trading. They face several obstacles when attempting to stabilize currency values throughmarket interventions. One of the main challenges is the limited impact of theseinterventions, especially when faced with significant market pressures. These
interventions can be expensive and may not always produce the desired outcome.
Furthermore, central banks must deal with the unpredictability of market sentiment,
which can change quickly and undermine their efforts to stabilize currency values.
Additionally, interventions can have unintended consequences, such as inflation or capitalflight. Finally, there is a concern that repeated interventions may erode confidence in thecentral bank's ability to maintain stability, exacerbating volatility and reducing theeffectiveness of interventions.
3) Credibility of the issuer (issuer’s assets)
The credibility of the issuer’s asset is a critical factor in maintaining the stability of astablecoin and shares many similarities with the importance of collateral. The value of
assets held by the issuer is essential for maintaining the trust of the coin holders. If theissuer’s credibility is in doubt, holders may sell or liquidate their coins, causing the coin’s
price to decline and the peg to break. This vulnerability to bank-run-type risks highlights29© 2023 BGIN. All Rights Reserved.

the importance of maintaining the issuer’s credibility through transparency andaccountability measures.

7-3 Asset-backed is exposed to risk
When comparing pegged legal tender, such as the USD-pegged HKD, with USDC-likestablecoins, it is important to note that the HKD is backed by two mechanisms with sovereigncounterparty risk: the value of USD deposits with the Hong Kong government and theintervention by the HKMA, which is part of the Hong Kong government.18 However, even withthese two mechanisms, HKD is not immune to value fluctuation.
In the case of the HKD, the issuer, a private-sector bank, does not make money and may
actually lose money, as they do not earn interest from the backing asset, which is the sovereignrisk USD deposit. On the other hand, stablecoins like USDC are backed by a combination of
cash and cash equivalents; other stablecoins like USDT are also backed with other assets such as
government securities or corporate bonds. Some of the assets in USDT’s reserve are subject tohigher credit risk, interest rate risk, and liquidity risk, which can affect the value of thestablecoin. Moreover, the issuer of USDC and other stablecoins may not have the same level ofcredibility as a government-backed institution like the HKMA, which could undermine the trustof users in the stablecoin.
The differences in backing mechanisms between the HKD and stablecoins present
challenges in maintaining value stability and earning yields. While the HKD’s backing
mechanism provides a high degree of stability, it does not generate a yield. In contrast,
stablecoins can potentially earn yields by investing their reserves in higher-yielding assets, but
this carries the risk of losses if these assets experience price fluctuations or default.19
Additionally, stablecoins may struggle to maintain their value stability in the long term due to theassociated risks of their backing assets and the credibility of their issuers.
As a result, generating profits through the “safe money” model (i.e. mitigating the risk ofdefault, and ensuring that your wealth retains its nominal value over time) can be difficult.

7-4 Concentration of Economic Power and Anti-Competitive Effects
The concentration of economic power and anti-competitive effects, which are identified as policy
concerns by the President’s Working Group on Financial Markets (PWG), the Federal Deposit
Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), aresimilarly observed in traditional finance. This reaction primarily pertained to Libra/Diem andwas not directly observed in the incidents that followed Silicon Valley Bank's collapse. However,18

HKMA intervention purchases of HKD use the USD deposits and therefore, it is one mechanism enabled by the
HKMA’s USD reserve.
19
A user of a stablecoin is not earning yield from the stablecoin itself which is a clear differentiator between

stablecoins and Money Marlet Funds (MMFs).

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it is important to acknowledge this risk as it remains a significant concern. These risks are statedas follows.
Box 2: Risk of Concentration of Economic Power and Anti-Competitive Effects“… the combination of a stablecoin issuer or wallet provider and a commercial firm could leadto an excessive concentration of economic power. These policy concerns are analogous tothose traditionally associated with the mixing of banking and commerce, such as advantages inaccessing credit or using data to market or restrict access to products. This combination could
have detrimental effects on competition and lead to market concentration in sectors of the real
economy.”“… a stablecoin that becomes widely adopted as a means of payment could present concerns
about anti-competitive effects, for example, if users of that stablecoin face undue frictions or
costs in the event they choose to switch to other payment products or services. Concerns aboutanti-competitive effects are thus likely to be greater absent interoperability standards forstablecoins and stablecoin arrangements.”(Source: President’s Working Group on Financial Markets et al. (2021))

7-5 What did the depegging cause or reveal?
Stablecoins have been gaining popularity in the financial industry due to their potential to offer areliable and flexible payment system. However, there are concerns about their role in the broader
financial system and the potential risks they pose. Simple disclosure is not enough, and there is aneed to examine the stability and risks associated with stablecoins.
One of the major concerns with stablecoins is the potential for systemic risk in the eventof significant market volatility or liquidity shock. The relationship between stablecoins andtraditional financial institutions also raises potential risks and benefits, including the risk ofmarket disruption and the potential for increased financial inclusion.
Market volatility is another potential risk associated with stablecoins, particularly thosebacked by cryptocurrencies. These stablecoins can be subject to significant price fluctuations,which could impact their stability and usability as a payment system.
Reputation risk is another challenge for stablecoins, particularly those less transparent
about their backing assets or issuer credibility. This can lead to a lack of trust among users,
which could impact their adoption and usage.
Liquidity risk and counterparty risk are also concerns associated with stablecoins,particularly in the event of issuer insolvency or a bank run on the backing assets. Regulatory risk
is also a consideration, particularly as regulators seek to address the potential risks associatedwith stablecoins and their impact on the broader financial system.

31© 2023 BGIN. All Rights Reserved.

There is also a potential risk associated with interest rate fluctuations for stablecoinsbacked by financial assets. When interest rates decrease, stablecoin issuers may lose theirprimary source of profit. Although short-term government bonds are typically less affected byrising interest rates due to their shorter durations, they were not immune to falling prices whenshort-term interest rates experienced a significant increase in 2022. Consequently, if redemption
requests coincide with these risk events, stablecoin operators could face the possibility of default.
Despite these risks, countries that use stablecoins as a means of domestic andinternational payment can experience positive effects on the real economy, including increased
financial inclusion and reduced transaction costs. At the same time, it is important to carefully
consider the potential risks and benefits associated with their usage.
Potential solutions or preventative measures for future instability events in the DeFi
ecosystem include increased transparency and disclosure around backing assets, enhanced
regulatory oversight, and alternative stability mechanisms such as access to central bank reserves
which is explained in Section 9. Overall, it is essential to carefully manage the impact ofstablecoins on the broader financial system and take appropriate steps to address potential risks.

8. Potential Points of Failure for Stablecoins<Key Points>● We will list the Trust Point (centralized elements that users and others are forced totrust unconditionally)/Chain of Trust (a chain of dependencies that includes a trust
point) and its related risks/problems that were revealed in the incident.
● Some of the critical questions we hope to discover are as follows;■ Where and what is the Trust Point/Chain of Trust in stablecoins and DeFi?
■ Why did the holders/users of stablecoins and DeFi products have to bear thecounterparty risk?
■ What was lacking in consumer protection?
■ Were classical risks (market volatility risk, credit risk, maturity mismatch risk,
liquidity risk, counterparty risk, reputation risk, etc.) perceived fully by the
stakeholders, and were measures to prevent that implemented by the
stakeholders?
■ What was the interconnectedness that caused the spillover/domino effect? 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 proposed by the Financial Stability Boards'“Assessment of Risks to Financial Stability from Crypto-assets” (FSB (2022)).

32© 2023 BGIN. All Rights Reserved.

8-1 Why did the users bear the credit risk?
The recent incident with USDC highlights the credit risk faced by its users. There is transparency
on the Treasury side of Circle’s balance sheet and the cash side is attested through a third party,
in this case by Deloitte. In the event of the stablecoin issuer’s bankruptcy, there is a question of
deciding the priority of repayment, bonds issued by the stablecoin issuer if any, or the
stablecoins. A similar question is always raised when dealing with bank insolvencies. There wasa comment that there should be clarification on the priority in the case of insolvencies as thecredit risk borne by the user is significantly dependent on it. This suggests the need for real-timeand ongoing monitoring of their balance sheet as a regulatory requirement.20
Additionally, the tier level of their custodians should be considered. Are they top-tierbanks or lower-tier regional banks? Even with a Moody's rating, as in the case of Sllicon Valley
Bank, it may not be sufficient, as seen during the global financial crisis.21 Thus, it is crucial toassess the credit risk associated with stablecoins and ensure appropriate measures are in place tomanage this risk.
Tether Inc., which also issues a stablecoin USDT, acknowledges potential issues
regarding the security of its dollar deposits in its white paper. These concerns are outlined asfollows (Figure 14).
1.
2.
3.
4.
5.

We (Tether Inc.) could go bankrupt
Our bank could go insolvent
Our bank could freeze or confiscate the funds
We could abscond with the reserve assets
Re­centralization of risk to a single point of failure
Figure 14 Implementation Weaknesses(Source: Tether Inc. (2016))

In the case of USDC, the potential problem of bank insolvency and the single point of
failure on the redemption of tokens materialized leading to deppeging.
Tether Inc. acknowledges the potential risk of bank insolvency in the white paper andoutlines their approach to address this concern by establishing additional banking partners inother jurisdictions to further mitigate the risk (Tether Inc., 2016).
20

In the event of a Circle bankruptcy, segregated USDC reserves should remain redeemable at face value, shieldedfrom Circle creditors, and separated from a bankruptcy estate per the protections afforded under state moneytransmission laws and applicable federal bankruptcy laws.
21
There were comments that the mechanism of how the market panicked logically must be considered. One
commenter stated that the key factor was the decrease of the reserve rate by the redemption/claim from the USDC
holders for USD on the bank. Even if the lack of reserve were a constant number, redeeming USD from USDC at the
CEX, like Coinbase, would decrease the reserve rate of USDC. That meant the accounting value of USDC would
drop if the redemption were 1:1. There was no way to avoid stopping redemption at CEXs. The hole of theaccounting, which Silicon Valley Bank collapse made, was not big enough to make USDC $0.91. The logicalexpectation of the redemption to continue at 1:1 was the main factor of the market panic.

33© 2023 BGIN. All Rights Reserved.

To mitigate the risk of re-centralization, Tether Inc. has stated that they reduced thecentralization risk to a singular responsibility - the creation and redemption of tokens. They havedecentralized all other aspects of the system to prevent a single point of failure (Tether Inc.,
2016).
Lyons and Viswanath-Natra (2023) present the backing systems used by the six largest
stablecoins based on market capitalization. Although all stablecoins are asset-backed, they use
different mechanisms to maintain stability. However, despite the differences in the backing
systems, all stablecoins are vulnerable to the risks of bank insolvency and the re-centralization ofrisk to a single point of failure, which could lead to the deppeging of stablecoins, such as in thecase of USDC.
Indeed, finding banking partners that are willing to work with stablecoin issuers can bechallenging, especially given the lack of regulatory clarity in this area. Banks may be hesitant toonboard stablecoin issuers due to concerns about regulatory scrutiny, reputational risk, and thepotential for money laundering or other illegal activities.
Moreover, stablecoin issuers may face difficulty finding banking partners that provide
24/7 settlement. Banks typically have set hours of operation and may not be equipped to handle
the constant settlement required for stablecoin transactions.
In addition, even if stablecoin issuers are able to diversify their banking partners, they
may still face the risk of re-centralization if the majority of their reserves are held by a single
banking partner. This highlights the importance of considering alternative stability mechanisms
to mitigate the risk of a single point of failure.

8-2 Interconnectedness and Spillover Effects
The interconnectedness of stablecoins refers to the complex relationships and dependencies thatexist between stablecoins and other components of the DeFi ecosystem. As discussed in Section
6, the interconnected nature of the DeFi ecosystem can lead to contagion effects. Łęt et al. (2023)
found that shocks in the volatile cryptocurrency market can increase the popularity ofstablecoins, although any spillover effects on stablecoin popularity are typically short-lived.
Investors tend to use stablecoins as safe haven assets during times of market uncertainty.
However, in the case under consideration, there was a spillover effect from the stablecoin to the
DeFi ecosystem.
Figure 15 illustrates the interconnectedness within the DeFi ecosystem, highlighting thefrequent use of stablecoins as a bridge between traditional fiat currencies and various digitalassets, as well as their role as collateral in crypto-asset derivative transactions and DeFi trading,lending, and borrowing. Any sudden drop in the value of the fiat currency pegged to a stablecoin
or failure of the bank providing backing could trigger a significant decline in the stablecoin'svalue and potentially cause a ripple effect on other cryptocurrencies, as shown in the diagram.
The later section of this paper discusses the potential impact on the broader financial system.

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Figure 15 Interconnectedness of stablecoin(Source: Gorton et al. (2022))
There is no guaranteed way to completely prevent the domino effect of instability fromstablecoins. However, diversifying each interaction can help reduce the likelihood oftransmission of insolvency or credit risk. This includes diversifying interactions between thereserve-stablecoin issuer, stablecoin issuer-stablecoin investors, stablecoin investors-crypto
currency traders, and cryptocurrency traders-speculative cryptocurrency.
It is important to consider potential loopholes in redemption prevention mechanisms
similar to those found in Money Market Funds (MMFs) and Open-End Funds (OEFs). Funds
offering pass-through-risk products like U.S. institutional prime MMFs and OEFs are vulnerable
to run risk due to the strategic complementarities of exiting the market first, facilitated by(near)-same-day redemption. This first-mover advantage creates an environment where stressedmarkets can amplify the potential for runs on these funds (Pascual et al., 2021).
These loopholes could allow investors to redeem their stablecoins in a way that
undermines the stability and liquidity of the stablecoin issuer, potentially leading to a contagion
effect throughout the cryptocurrency ecosystem. Therefore, it is crucial for stablecoin issuers to
implement robust redemption prevention mechanisms and continuously monitor and adjust themto ensure their effectiveness. This can help reduce the likelihood of instability and contagion riskin the DeFi market.
Furthermore, asset segregation for stablecoins can help to reduce the risk of contagion
effects. This practice involves keeping the assets that back a stablecoin completely separate fromthe issuer's own assets. By doing so, it can increase transparency and build trust and confidence
in the stablecoin. This, in turn, can make it less vulnerable to runs or loss of confidence.
However, asset segregation requires clear rules and procedures for implementation, as well as
effective enforcement by the regulatory body. Without proper implementation and enforcement,
asset segregation may not effectively reduce the risk of contagion effects.

35© 2023 BGIN. All Rights Reserved.

8-3 Governance Body
As discussed in Section 6, the response by the governance body of a stablecoin is critical in theevent of a depegging. Specifically, let us reflect on the response from MakerDAO and theobservations made.
● How slow MakerDAO was to act
The response from MakerDAO to the stablecoin depegging was slow, as observed in
Section 6. This is due to the fact that smart contract updates are handled by a relatively
small team, which had remained the same since the foundational days. Meanwhile,
regional core developers have recently left the team to retire or create other protocols,
resulting in a bottleneck in the release process. Furthermore, the incident occurred in the
middle of the weekend, and the team is distributed across geographical locations, further
complicating the response. It is noteworthy that there are no formal Business Continuity
Plan (BCP) or crisis response plans in place for MakerDAO as a whole, although selectsub-teams, such as the Real World Assets team, have developed their own plans.
● PSMs falling out of vogue?
Anecdotal evidence from conversations with industry experts suggest that the use of
PSMs may be declining in popularity, as teams shift towards vaults for crypto-native
assets such as Ether. However, it may be premature to fully embrace this shift, as highly
liquid tokenized Real World Assets (RWAs) are still in the early stages of development,
and are expected to compete with crypto-native collateral as acceptable security. PSMs
provide a solution to the liquidity problem by utilizing cash or cash-equivalents as a tier 1
asset. However, the USDC depeg event and contagion to DeFi stablecoins revealed that
PSM contracts have the characteristic of acting similarly to a credit default swap in thetime of a crisis, causing the stablecoin to fall to the value of its lowest-quality PSM
collateral, as happened in the case of DAI and other similar stablecoins.
During times of emergency or crisis, the decision-making process is typically centralized
and controlled by a central authority or entity. To prevent panic selling or rapid market
downturns, a circuit breaker mechanism should be implemented. This mechanism aims tomaintain stability and prevent fire sales that can lead to market instability.
Indeed, it is not necessary to implement an abrupt on/off mechanism to address runs on
stablecoins. A gradual approach can be effective, and liquidity pools are well-suited for suchmechanisms.
One alternative approach to mitigating runs is to establish a system where redemption of
stablecoins is limited to a specific amount, such as x dollars per stablecoin, provided that thereserve ratio is x and x is less than 1.

36© 2023 BGIN. All Rights Reserved.

It is important to acknowledge that in emergency situations, the behavior and panic
exhibited by individuals are similar, regardless of whether it is in the context of traditional
finance or decentralized finance. Therefore, it is valuable to learn from the approaches employedby traditional finance in handling such emergent situations.
In addition, the 24/7 nature of stablecoin transactions introduces new challenges
compared to traditional finance. Unlike in traditional finance, where there may be a few days toreact and respond to market events, the continuous nature of stablecoin transactions requires
swift and timely responses. Therefore, it is necessary to consider how to effectively respond to
emergency situations and maintain stability in a decentralized financial system, taking into
account the lessons learned from traditional finance while also adapting to the uniquecharacteristics of stablecoin transactions.

8-4 Risks to Financial Stability
Born and Vendrell Simón (2022) have highlighted that the rapid growth of new crypto assets has
led to an increasingly complex and interconnected ecosystem. They have expressed concern
about the contagion effects on the financial system through a run on stablecoin (Figure 16).
“The critical function that some stablecoins serve in the wider crypto-asset ecosystem and for
unbacked crypto-assets could have contagion effects for the financial system if at some pointin the future, unbacked crypto-assets pose a risk to financial stability. Given that the largest
stablecoins serve a critical function for crypto-asset markets’ liquidity, this could havewide-ranging implications for crypto-asset markets if there is a run-on or failure of one of thelargest stablecoins. In turn, this could have contagion effects for the financial system if at somepoint in the future crypto-asset markets pose a risk to financial stability. A run on a stablecoin
could also have contagion effects for the financial system through large-scale redemptions ofreserve assets, which usually comprise traditional assets such as government bonds orcommercial paper.”Figure 16 Implementation Weaknesses(Source: Born and Vendrell Simón (2022))
Stablecoins have the potential to create risks for financial stability through various
contagion channels. These channels include (1) financial sector exposures; (2) wealth effects,
meaning the impact of changes in the value of crypto-assets on their investors, which can haveknock-on effects on the financial system; (3) confidence effects, which refer to the potential
impact of developments related to crypto-assets on investor confidence in crypto-asset markets
and potentially the broader financial system; and (4) the extent to which crypto-assets are used
for payments and settlements (FSB, 2022).

37© 2023 BGIN. All Rights Reserved.

When losses occur in crypto-assets with the presence of leverage, liquidity mismatch, andconnections with the traditional financial system, it can escalate systemic risk that emerges fromwealth effects. Moreover, a loss of trust in stablecoins may trigger the liquidation of their reserve
assets, which can disrupt the operations of short-term funding markets (Financial Stability
Board, 2022).

9. Implications and Recommendations<Key Points>● Rethink and acknowledge existing past instruments and experience. At the same time,
does technology provide a different way to avoid risk transmitted to users andeconomies? If so, in what way?
● Provide recommendations to avoid such problems in the future
Fundamentally, the question is whether stablecoins and DeFi are replicating the same problems
and risks that Satoshi Nakamoto tried to address. Nakamoto (2008) aimed to address bankfailures and bailouts by establishing an autonomous and immutable system through Bitcoin.
While certain stablecoins and DeFi projects rely on human governance, it is important to notethat this deviation does not apply to the entire ecosystem. It is possible to create fullyautonomous, immutable, zero-governance stablecoins and DeFi protocols that are aligned to
Satoshi Nakamoto’s original vision.
The value stability of stablecoins in particular is at risk due to its exposure to credit risk
and maturity mismatch risk in the underlying assets, which are common risks in the traditional
finance industry.22 While backing a stablecoin with 100% U.S. Treasuries can minimise credit
and maturity risks, liquidity risk still exists due to the settlement cycle of securities. Conversely,
backing a stablecoin with a commercial bank deposit exposes it to the risk of a classic bank run.
An interesting solution is to back stablecoins with 100% central bank reserves, which would
eliminate credit and liquidity risks, but this poses the challenge of how the issuer can earn yieldwithin the narrow banking model (i.e. a financial system where banks are restricted to holding
only safe and liquid assets, such as government bonds, to minimize risk and enhance financial
stability).23 Overall, the choice of backing for stablecoins requires careful consideration ofvarious risks and trade-offs.
Using central bank reserves to back stablecoins has the potential to mitigate some of therisks associated with other forms of backing, such as credit and liquidity risks.24 Central bank
22

This statement is not for certain stablecoins but for general stablecoins backed by assets. Treasury Bills less than
90 days are one of the most liquid asset class that exists and is backing USDC which reduces the liquidity risk.
23
There was a comment in the discussion that 100% or partial central bank reserves, which would have thediversification aims could be considered.
24
The majority of Circle's stablecoin reserves are already invested in an MMF called the Circle Reserve Fund, which
is a single-beneficiary fund managed by BlackRock. This fund applied to use Federal Reserve reverse repos (RRPs)

38© 2023 BGIN. All Rights Reserved.

reserves are widely regarded as very safe and low-risk assets, which could enhance thecredibility of stablecoins and promote confidence in their value stability. Simultaneously, it isimportant to recognize that this approach entails implementing essential measures aimed at
safeguarding the system. Strong regulations concerning risks such as consumer protection,
stability, and compliance will be beneficial in this regard. This implies that for stablecoins to be a
viable choice, they must adhere to rigorous regulatory standards and oversight, similar to
traditional institutions like banks that rely on central bank reserves.
Another question that arises is the potential relationship between a stablecoin backed bycentral bank reserves and a respective Central Bank Digital Currency (CBDC). A CBDC is adigital version of a country's fiat currency that is issued and backed by the central bank, unlike
stablecoins that are issued by private companies. CBDCs are typically backed by the full faithand credit of the government, which can increase their credibility and trustworthiness. If astablecoin were backed by 100% central bank reserves, it could be viewed as a complement to a
CBDC. The stablecoin would be issued by a private company and could be used in the market,
while the CBDC would be issued by the central bank and used for official transactions. In thisway, the stablecoin could serve as a bridge between the traditional financial system and theemerging CBDC ecosystem.
DeFi industry actors will also benefit from best practices in business continuity planningto be prepared for events that can endanger business operations regardless of what the cause
might be, internal or external. New approaches have to be developed for decentralizedorganizations where control is distributed or decentralized. Learning from historical examples
and traditional finance models, such as the use of reserve requirements and other regulatory
frameworks, can also provide valuable insights for improving stablecoin stability. Further
research into risks related to digital assets can also create new insights.
To address the limitations of backing, stabilization trading, and issuer credibility inmaintaining stablecoin value stability, there are several recommendations that the stablecoin andbroader financial industry can consider. One important aspect to consider when discussing
stablecoins and their interaction with traditional finance (TradFi) is the fragility risk that arises atthe point of minting. It is crucial not to underestimate the risks associated with TradFi when
dealing with stablecoins. Given what the recent incident has uncovered, this paper recommends
the following.
Recommendation 1 - Awareness about the risk:
It is important for stablecoin issuers to be fully aware of the risks involved in engaging withtraditional finance. This includes understanding the regulatory and compliance requirements, aswell as the potential challenges that may arise from interacting with banks and other financial
in November 2022 but was denied in April 2023. It can be understood that this was the only way for a non-bankentity to deposit money with the Federal Reserve.
https://www.ledgerinsights.com/usdc-stablecoin-backdoor-cbdc-blackrock-help/
https://www.newyorkfed.org/markets/opolicy/operating_policy_230425

39© 2023 BGIN. All Rights Reserved.

institutions. Implementing more transparent governance structures and regular third-party audits
can help increase trust and confidence in stablecoin issuers as well as promoting awareness ofthe potential risks. Simultaneously, to ensure the effectiveness of third-party audits, it is crucial
to carefully and comprehensively establish the parameters of the audit.
Recommendation 2 - Diversification of sources, banking partners and risks:
To manage the risks effectively, stablecoin issuers should diversify their sources, banking
partners, and risk exposures. Relying on a single banking partner may increase vulnerability, soestablishing relationships with multiple institutions can help mitigate this risk. Another solution
is to diversify the backing beyond a single asset class or entity and include a mix of highly liquidand low-risk assets such as cash, government securities, and highly rated corporate bonds. It isalso important to ensure that each asset has a low credit correlation. The optimized diversified
portfolio depends on the nature of each asset. A credit crisis in any of several diversified assets
could cause a panic credit crisis for the entire stablecoin. Therefore sometimes, increasing
diversification unnecessarily may increase the likelihood of credit instability. For example,
concentrating all collaterals in the repo market may result in lower risk. In fact, Tether isconsidering it instead of using multiple banks.25 Additionally, incorporating more sophisticatedrisk management strategies, such as dynamic collateralization, can help mitigate the risk ofreserve value fluctuations. For algorithmic trading, implementing more robust risk management
tools and incorporating external market data can help reduce the risk of sudden market
movements.
Recommendation 3 - Banking partners to facilitate stablecoin issuers:
Stablecoin issuers and regulators could motivate financial institutions to support stablecoin
operations. This can be achieved by clear regulation and guidance from the regulators,
establishing strong risk management practices, and providing transparency and accountability inissuer operations. Conversely, by encouraging banking partners to develop cooperative
relationships and embrace the DeFi industry in accordance with regulatory guidance, it ispossible to mitigate risks while fostering innovation. By cultivating a cooperative relationshipwith banks, stablecoin issuers can help facilitate smoother operations and gain the necessary
support from the traditional financial system.
Recommendation 4 - Response Mechanism:
Given the interconnected nature of the ecosystem, it is crucial to acknowledge the contagion
effect discussed in Section 6. As a result, every stakeholder within the chain must be prepared torespond to emergent incidents, either individually or collectively. This is particularly vital in the25

https://tether.to/en/tethers-latest-q1-2023-assurance-report-shows-reserves-surplus-at-all-time-high-of-244b-up-148b-in-net-profit-new-categories-for-additional-transparency-reveals-bitcoin-and-gold-allocations/40© 2023 BGIN. All Rights Reserved.

context of 24/7 settlement, where the ability to establish robust and rapid mechanisms within andbetween stakeholders becomes paramount in addressing fast-paced incidents.
To begin, it is essential to define the roles and responsibilities of each stakeholder andidentify individual or collective responses/actions. This will lay the foundation for effective
incident response. Furthermore, fostering collaboration among different stakeholders is a crucial
initial step towards building a unified approach.
Drawing upon the best incident response practices and Business Continuity Plans (BCPs)
from other industries can serve as a valuable resource. Leveraging the knowledge andexperiences of industries that have successfully dealt with similar challenges can provide insights
and strategies for enhancing incident response capabilities.
Additionally, organizing a stability forum can be explored as a means to facilitate
constructive debates and discussions among stakeholders regarding incident response practices.
Such a forum provides a platform for knowledge-sharing, exchanging insights, and collectively
addressing the challenges faced within the ecosystem.
A general recommendation is to foster and enhance multi-stakeholder discussions
involving all relevant parties. The digital assets industry has grown significantly and has thepotential to impact the traditional financial system, while also being influenced by it. By
objectively analyzing this emerging phenomenon, all stakeholders can derive benefits and gain adeeper understanding of the implications involved.26 27

10. The role of BGIN
<Key Points>● BGIN's mission, role, and approach to responding to the instability event discussed in thepaper, and its ongoing efforts to promote stability and innovation in the DeFi ecosystem● Ultimately, humanity dictates how technology is used. There is a necessity for open
discussion. It is also necessary to learn from different stakeholders and pastexperiences.
● Exploration of potential future developments and initiatives from BGIN to address emerging
26

There was a comment during BGIN’s discussion that the stablecoin business should be conducted by a bank orother entity with sufficient equity capital in the first place. If the entity has sufficient equity capital, when stablecoin
is gone under-per for some reason, they can purchase it themselves and earn arbitrage income while maintaining
price stability. In addition, the reason why stablecoin operators have to keep some of their collateral in bank deposits
is to respond to immediate redemption requests. But if they have sufficient own capital, they can make short-term
funds available within the bank itself. This may increase the efficiency of short-term fund management for the entity
as a whole, which also increases the credibility of the stablecoin itself.
27
There was a comment during BGIN’s discussion that recommended issuing AT1 bonds or subordinated bonds withthe same characteristics by stablecoin operators. Issuing a bond with a lower repayment ranking than the stablecoin
could result in a more secure stablecoin. The fair value of the bonds will also be a good indicator of thecreditworthiness of the stablecoin operator.

41© 2023 BGIN. All Rights Reserved.

risks and promote stability in the DeFi ecosystem

BGIN is a multi-stakeholder network with an open discussion platform. Its mission, role, andapproach are to contribute to ongoing efforts to promote stability, security, and innovation in theblockchain ecosystem.28 BGIN also explores potential future developments and various
initiatives to address 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.
The stability of stablecoins is crucial for the broader financial stability of the DeFi
ecosystem. The recent instability event discussed in this paper highlights the potential risks andchallenges associated with stablecoins, particularly in the context of their use in the financial
system. This incident has highlighted the need for greater collaboration and coordination among
stakeholders. As the ecosystem is interconnected, it is essential to involve a wide range of actors
from both traditional finance and DeFi, including developers, issuers, auditors, regulators, andusers, in efforts to mitigate risks and promote stability in the ecosystem. Multi-stakeholder
engagement can help ensure that risks are identified and managed effectively, that best practices
are shared and disseminated, and that innovative solutions are developed to address emerging
challenges. By taking a multi-stakeholder approach, the DeFi ecosystem can be more resilient,innovative, and sustainable, ensuring that it continues to provide value to users and the broader
financial system.
Ultimately, humanity dictates how technology is used and it is crucial to consider thefundamental credit risks associated with new financial innovations. There is a need for open
discussion. It is also necessary to learn from different stakeholders and their past experiences.
Looking ahead, BGIN is focused on promoting multi-stakeholer discussion thereby
fostering initiatives that will further promote stability and innovation in the DeFi ecosystem.

11. Conclusion
The use of technology in finance has the potential to offer innovative solutions to traditional
problems, but it is important to be aware of what the technology is supposed to do and to use it ina responsible manner. While existing past instruments and experiences can provide guidance,technology may also offer different ways to address risks without compromising the safety ofusers and the economy. It is important to be cautious and start small when experimenting withnew tools.
The potential impact of stablecoin instability on broader economic stability and financial
regulation should be considered, as well as the implications for investors and the broader
financial market, including the impact on traditional financial institutions and regulatory bodies.

28

For BGIN details, sse BGIN website (https://bgin-global.org/)

42© 2023 BGIN. All Rights Reserved.

Tokenized deposits and banking regulations must also be carefully considered to ensure thesafety and soundness of the financial system.
Thus, it is important to consider the lessons learned from traditional financial instruments
and experiences when analyzing the risks and potential solutions in the stablecoin and DeFi
ecosystem. However, it is also necessary to recognize that technology offers new ways to addresssome of these risks and protect users and economies from harm. For example, smart contracttechnology can provide increased transparency and security, allowing for more efficient andtrustworthy financial transactions.
It is worth questioning whether stablecoins and DeFi are actually addressing the sameproblems and risks that “Satoshi Nakamoto” intended to solve with the creation of Bitcoin(Nakamoto, 2018). It is important to consider whether the potential risks and systemic impact ofthese new technologies are similar to those of traditional financial systems or if they are creating
entirely new risks and challenges such as 24/7 settlement, oracle-related risks, and blockchain
congestion during runs. This requires a thorough examination of the ecosystem and its potential
effects on the wider financial system and real economy.
While this study provides valuable insights into the potential transmission effects ofstablecoin volatility, further research is needed to fully understand the extent and implications ofthese effects. Specifically, future studies could explore how stablecoin volatility affects different
sectors of the economy, such as digital markets, payment systems, and liquidity management.
Additionally, additional research could investigate how stablecoin volatility interacts with otherfactors, such as macroeconomic conditions or regulatory changes, to amplify or mitigatetransmission effects. Analyzing the price movements of BTC, ETH, and other cryptocurrencies
during instances of depegging of stablecoins like USDC and DAI, as well as the price dynamics
of other stablecoins besides USDT, and the number of transactions on the Ethereum would be
important for future studies.

43© 2023 BGIN. All Rights Reserved.

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

A.1 Editor● Michi Kakebayashi (University of California, Berkeley)

A.2 Contributors
●
●
●
●
●
●
●
●
●
●
●
●

Ali Nejadmalayeri (University of Wyoming)
Andrea Bracciali (University of Stirling)
Bruno Woltzenlogel Paleo (Djed Alliance)
Chloe White (Genesis Block Pty Ltd)
Gary Weinstein (Strategic Blockchain Advisor)
Jarek Nabrzyski (University of Notre Dame)
Ken Katayama (Nomura Research Institute, Ltd.)
Leon Molchanovsky (Galaxy Innovation Ltd.)
Masato Yamanaka (Georgetown University)
Mitchell Travers (Soulbis Pty Ltd)Tomonori Yuyama (Georgetown University)
Yuko Kawai (Japan Digital Design, Inc.)

Blockchain Governance Initiative Network (BGIN) aims at providing an open and neutral
discussion platform for all stakeholders to deepen common understanding and to collaborate toaddress issues they face in order to attain sustainable development of the wider blockchaincommunity. As an open network, we are actively and widely seeking interested parties to join
this initiative, so as to accommodate diverse opinions from a wider range of blockchain
stakeholders.

44© 2023 BGIN. All Rights Reserved.

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