Circle proposes a new capital-risk framework for stablecoins
Circle, the USD Coin (USDC) stablecoin issuer, recently published a white paper entitled “Risk-based Capital for Stable Value Tokens”, presenting a new risk-based capital management model for stablecoins and other digital currency tokens.
The paper's authors argue that stablecoins require adequate capital reserve requirements beyond the capital levels set out in Basel's banking regulatory frameworks, to mitigate risks unique to stablecoins, other fiat-equivalent tokens, and their issuers.
According to the authors, these specific risks are not limited to shortfalls in the value of tokens due to the expansion of market trading and secondary markets, which include over-selling, operational risks and technological risks that “run” on digital tokens.
Adequate structure of token capital
These unique challenges separate stablecoin issuers and the digital assets they issue from traditional banks. The paper's editors argue that the solution to this is to adopt what they call the Token Capital Adequacy Framework (TCAF).
The circular paper explains that current banking regulations use fixed ratio risk ratings and risk weight metrics which do not necessarily reflect the true level of risk. The authors cite long-term Treasury bonds, which have high interest rate risk but have a Z-weight in current banking standards.
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TCAF addresses this by adopting a dynamic risk-adjusted model that starts with stress-testing stocks and takes input from stakeholders. Technological risks such as blockchain network performance and cyber security are also considered in the TCAF model.
The TCAF's flexible approach may result in more or less intensive capital requirements than current bank standards, which will vary depending on the risk environment, the paper said.
The five goals of the framework
The club's newly proposed model has five goals in mind. First, it seeks to distinguish emerging “gone” threats from “gone” threats that have been successfully mitigated or no longer pose a threat.
The model also wants to be more about helping regulators adequately address operational risks, but “as simple as possible,” avoiding the bloated and expensive risk management components that characterize the traditional banking sector.
TCAF's fourth major goal is to provide a functional risk management standard across states and institutions. Last, but certainly not least, the model seeks to provide incentives and accountability to reduce negative risk externalities.
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