IUP Journal of Bank Management | Journals

The IUP Journal of Bank Management

Inner Workings of Collateral-Based Stablecoins and Its Implications

Article Details

Pub. Date	: May, 2021
Product Name	: The IUP Journal of Bank Management
Product Type	: Article
Product Code	: IJBM30521
Author Name	:Gongpil Choi
Availability	: YES
Subject/Domain	: Finance
Download Format	: PDF Format
No. of Pages	: 26

Price

Download

Abstract

While early cryptoassets such as Bitcoin have reputation for high price fluctuation and limited scalability, stablecoin, a new class of cryptographic token, emerged with the purpose of mitigating price volatility. What distinguishes stablecoin from preexisting cryptocurrency is its use of collateral and use of specific pegging mechanism to mitigate volatility risks. The paper sheds light on the inner workings of stablecoins by analyzing stabilizing property with various aspects of collateral mix as well as pegging mechanism. Specifically, it evaluates initiatives to effectively utilize gold and government bonds as combinatorial collateral.

Introduction

As technology continues to develop, there has been immense paradigm shift in the way financial services are delivered. For instance, countries worldwide are putting efforts in providing a highspeed payment system at a lower cost possible. However, existing legacy financial system cannot deal with expanding financial services to wider audiences due to its heavy regulatory burden and compliance costs. Despite continued rhetoric on financial inclusion, the basic setup for the legacy system simply cannot reach wider customer base because its operation requires a set of prerequisites that cannot be delivered by the periphery countries around the world. Moreover, low cross-border transfer fee is still in high demand despite globalization. These are evidences that overstretched intermediaries and heavy regulations have interfered with providing essential financial services to global citizens.