Some Simple Economics of Stablecoins

Christian Catalini (), Alonso de Gortari and Nihar Shah
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Christian Catalini: Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts, USA
Nihar Shah: Novi Financial, Inc., Menlo Park, California, USA

Annual Review of Financial Economics, 2022, vol. 14, issue 1, 117-135

Abstract: Stablecoins have the potential to drastically increase competition and innovation in financial services by reducing our reliance on traditional intermediaries. But they also introduce new challenges, as regulators rely on intermediaries to ensure financial stability, market integrity, and consumer protection. Because they operate at the interface between traditional banking and cryptocurrencies, stablecoins also represent an ideal setting for understanding the key trade-offs cryptocurrencies involve, and insights from robust stablecoin design and regulation are highly relevant for related innovations in decentralized finance (DeFi), nonfungible tokens, and Web3 protocols. In this review, we describe the following: key stablecoin design choices, from reserve composition to stability mechanism; legal claim against the issuer; noninterference with macroeconomic stability; and interoperability with public sector payment rails and central bank digital currencies. Last, we cover the key benefits of stablecoins in the context of real-time, low-cost programmable payments, financial inclusion, and DeFi.

Keywords: Bitcoin; blockchain; CBDC; central bank digital currency; cryptocurrency; digital currency; stablecoins (search for similar items in EconPapers)
JEL-codes: E42 E50 E60 O30 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (10)

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DOI: 10.1146/annurev-financial-111621-101151

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