Rich by Coin

The systemic risks posed by stablecoins on public blockchains go further than deposit flight and market dislocation, but these should be incorporated into guardrails rather than used to stop progress. Key insight: The risks posed by stablecoins — including the less-understood risks of technology — should not be used to stop progress. What’s at stake: Risk that is not studied and hedged can do the most damage. Forward look: Regulators and market participants should come up with guardrails that protect users while supporting the creation of a new architecture for tomorrow’s financial system.

First up has to be the decentralized governance of public blockchains, on which most stablecoins move. Their distributed, open nature is a key advantage in that it ensures accessibility and embeds resilience, which fuse into a solid reassurance of continuity. These blockchains are maintained by a global community of developers who rely on consensus for any updates to the underlying code; they don’t answer to financial institutions or stablecoin issuers and, while unlikely, it’s not inconceivable that they could decide on an upgrade that key users don’t agree with. Stablecoin issuers have both influence — given the transaction volume their products account for — and choice, as they can switch blockchains with little upheaval (the main ones already work on several).

But the lack of control of the design on which stablecoins run is a radical departure from the established governance of traditional finance rails. What if there is momentum but no consensus on a key public blockchain feature proposal? There have been occasions in the past when ambitions diverge and factions emerge, leading to an upgrade followed by only some of the community. This is known as a fork as one chain splits into two, the new and the old running side by side, with the scary possibility of double spending — assets issued on one chain also appear on the other.