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[Audio] With a thorough grasp of blockchain technology and its impact on the global monetary system, Part 3 of the course will pivot our attention toward the defining components of stablecoins and the implications they bear on the financial system..

[Audio] Let's start with the question: Can you remember what the Libra or Diem Project was about? Libra, originally known as Libra and later rebranded as Diem, was a proposed digital currency project initiated by Facebook (now Meta Platforms, Inc.) in June 2019. It aimed to create a stablecoin that could serve as a global digital currency for online transactions. Here are some key points about the design and development of Libra/Diem: Libra was designed as a stablecoin, which means it was intended to have a stable value by being backed by a reserve of real-world assets like fiat currencies and government securities. This design was meant to mitigate the price volatility commonly associated with cryptocurrencies like Bitcoin. Initially, Libra was proposed to be backed by a basket of major fiat currencies, including the US Dollar, Euro, British Pound, Japanese Yen, and Singapore Dollar, along with government securities. This diverse backing was intended to maintain its stability. Libra was intended to operate on a permissioned blockchain network initially controlled by the Libra Association, a consortium of major companies including Facebook, PayPal, Visa, and others. The project planned to transition towards a more decentralized model over time. Libra was designed to be accessible to users around the world through digital wallets and apps. It aimed to provide financial services to unbanked and underbanked populations, enabling them to make low-cost digital transactions..

[Audio] The project faced significant regulatory challenges and concerns from governments and central banks around the world. Many regulators were worried about issues related to money laundering, financial stability, and user privacy. Due to the regulatory challenges and concerns, Libra underwent a significant rebranding in December 2020 and changed its name to Diem. The project also scaled back its ambitions and focused on compliance with regulatory requirements. In January 2022, it was reported that the Diem Association was winding down due to regulatory challenges..

[Audio] So what are stablecoins? So-called "stablecoins" are a type of crypto-asset or, more broadly, digital asset. Stablecoins may be used for different purposes. Some stablecoin projects have the stated ambition to facilitate payments, especially cross-border retail payments, which have remained relatively slow and expensive. A stablecoin, particularly if linked to a fiat currency or a basket of currencies, may become a widely used store of value. The use of stablecoins can evolve over time, particularly so that a stablecoin initially intended to be used as means of payment could also be increasingly used as a store of value. Generally, stablecoins are created and distributed on trading platforms in exchange for fiat currency. The issuer of a stablecoin typically uses the proceeds from fiat currency investments to build reserves or acquire other assets. The term "stablecoin" typically refers to a cryptocurrency that seeks to maintain a stable value in relation to a specific asset, a pool of assets, or a basket of assets. The market value of a stablecoin is usually influenced by the value of these underlying assets. Some stablecoins may also utilize algorithms or other methods to stabilize or influence their market value, such as adjusting their supply automatically in response to changes in demand. It's important to note that there is no universally accepted Decentralised Finance of stablecoin, and the term "stablecoin" does not represent a distinct legal or regulatory category. In this report, we use the term "stablecoin" because it is commonly used by market participants and regulatory authorities. However, this usage does not imply that the value of stablecoins is inherently stable..

[Audio] What varieties of stablecoins exist? The standard cryptocurrency landscape has undergone significant evolution over time, with one of the most notable developments being the emergence of stablecoins—cryptocurrencies designed to maintain price stability through special cryptographic mechanisms. These stablecoins come in three primary forms: First there are the Fiat-Backed stablecoins: These stablecoins are backed by traditional fiat currencies like the US Dollar or the Euro. They aim to maintain a 1:1 value parity with the fiat currency they are backed by. The second category are the Crypto-Backed stablecoins: These stablecoins rely on a reserve of other cryptocurrencies, like Ethereum or Bitcoin, to maintain their stability. Smart contracts and algorithms manage this collateral to ensure price stability. And finally there are Algorithm-Based stablecoins which use algorithms to regulate their supply, aiming to control their price by expanding or contracting the token supply based on demand. In essence, stablecoins serve as a vital link between the fiat and cryptocurrency realms, facilitating increased acceptance of blockchain technology and presenting pragmatic remedies for the issues tied to price fluctuations in the cryptocurrency market..

[Audio] When we refer to a "global stablecoin", we are describing a stablecoin with the potential for widespread adoption across multiple countries and the capacity to achieve substantial trading volume. This distinction is based on its potential reach and impact on financial stability, rather than any specific legal or regulatory classification. In this course, we outline three characteristics that may set GLOBAL STABLECOINs apart from other cryptocurrencies and stablecoins, emphasizing their significance. The first two characteristics—the presence of a stabilizing mechanism and a specific combination of functions and activities—distinguish stablecoins from other cryptocurrencies. The third characteristic, the potential for widespread adoption across multiple countries, sets GLOBAL STABLECOINs apart from other stablecoins. The Financial Stability Board's 2020 report, titled "Regulation, Supervision, and Oversight of 'Global Stablecoin' Arrangements," identifies three key characteristics that distinguish a Global Stablecoin from other crypto-assets and stablecoins: Existence of a Stabilization Mechanism: GLOBAL STABLECOINs have a built-in mechanism to maintain price stability. Usability as a Means of Payment and/or Store of Value: GLOBAL STABLECOINs are designed to serve as both a medium of exchange and a store of value. Potential Reach and Adoption Across Multiple Countries: GLOBAL STABLECOINs have the potential to be used and adopted in various countries globally. The first two characteristics—stabilization mechanisms and usability as a means of payment and store of value—set stablecoins apart from other crypto-assets due to the unique risks associated with them. The third characteristic—potential global adoption—distinguishes GLOBAL STABLECOINs from other stablecoins, indicating their broader international reach..

[Audio] A stablecoin system aims to achieve stability in the value of the stablecoin by employing a stabilizing mechanism. Stablecoins can be categorized based on the various types of stabilization mechanisms they utilize. Presently, stablecoin designs predominantly fall into two broad categories: asset-linked and algorithmic, with some variations combining elements of both: The first category include Asset-linked stablecoins which seek to anchor the value of the stablecoins to tangible or financial assets, which may include cryptocurrencies. This linkage is established to maintain a stable value relative to the referenced asset(s). Asset-linked stablecoins can be further categorized into various subtypes, including: Currency-based: These stablecoins are backed by specific currencies and aim to maintain a stable value in relation to those currencies. Financial instrument-based: Stablecoins of this type are linked to financial instruments, such as bonds or stocks, to ensure price stability. Commodity-based: Commodity-linked stablecoins are tied to the value of real-world commodities, like gold or oil. Crypto asset-based: These stablecoins are linked to cryptocurrencies and maintain stability through mechanisms like collateralization. The methods used to uphold the stablecoin's value concerning the referenced asset(s) can vary significantly. They may involve structures for creating and redeeming stablecoins, arbitrage opportunities, and direct entitlements to underlying reserve assets. Depending on the stablecoin's structure, holders may or may not have the right to redeem their stablecoins directly with the issuer or lay claim to the reserve assets. The availability of reserve assets for redemptions and the presence of consumer and investor protection mechanisms or other safeguards can also differ. In some cases, a stablecoin may merely reference another asset as a peg, without holding any assets in reserve. The second category includes Algorithm-based stablecoins which endeavor to maintain a stable value through protocols that regulate the supply of stablecoins in response to shifts in demand. These stablecoins rely on algorithms to determine the extent of supply expansion or contraction required. However, the actual issuance or destruction of stablecoins may not necessarily be automatic, even though it is guided by algorithmic principles..

[Audio] To be deemed suitable for use as a medium of exchange and/or a store of value, a stablecoin arrangement typically encompasses three fundamental functions: Issuance, Redemption, and Value Stabilization of the Coins: This function involves activities such as the creation and destruction of stablecoins, management of the associated reserve assets, and the provision of custody or trust services for these assets. Its primary aim is to ensure the stability of the stablecoin's value. Transfer of Coins: Facilitating the transfer of stablecoins necessitates the operation of an appropriate infrastructure and the implementation of a transaction validation mechanism. This function enables the seamless movement of stablecoins between users. User Interaction for Storing and Exchanging Coins: Interaction with users typically occurs through devices or applications known as "wallets." These wallets serve as repositories for the private keys necessary to access stablecoins. Additionally, they include applications that facilitate the exchange of stablecoins for fiat currencies or other cryptocurrencies. It is important to note that when considering these functions, stablecoins may exhibit functional resemblances to payment systems or financial services and products, such as deposit liabilities or securities, including collective investment schemes. Consequently, they could be subject to similar risks as these established financial entities. However, the specific design of the stablecoin arrangement may also introduce novel risks into the equation..

[Audio] Just like many internet-based financial services, the technological framework supporting stablecoin arrangements knows no geographical boundaries. When a stablecoin arrangement combines this technology with features that appeal to a wide range of users across various countries, it has the potential to experience rapid user adoption, potentially earning it the label of a "Global Stablecoin". What sets a GLOBAL STABLECOIN apart from other stablecoins is its capability to achieve substantial adoption and usage across multiple countries. To identify a stablecoin as a GLOBAL STABLECOIN, a framework should aim to assess the global systemic significance of the arrangement. This assessment must consider the extent to which the stablecoin can function as a medium of exchange or store of value in multiple countries. The likelihood of a stablecoin evolving into a GLOBAL STABLECOIN is contingent on several factors, including competition dynamics, network effects, data accessibility, the openness of the GLOBAL STABLECOIN system, and its integration with other digital services or platforms..

[Audio] Stablecoins hold the potential to enhance payment efficiency and advance financial inclusion. Nonetheless, a widely adopted stablecoin, known as a "global stablecoin" with the capacity to be used across various countries, may acquire systemic importance within and across those countries, particularly as a payment method. Stablecoins have gained immense popularity for a few important reasons: The Perfect Blend: They give us the best of both worlds – the stability of regular money and the innovation of cryptocurrencies. Unlike many cryptocurrencies that can wildly change in value, stablecoins stay, well, stable. But they still use cool blockchain technology that makes transactions super secure and unchangeable. Decentralised Finance's Buddy: Stablecoins are like the sidekick in the world of Decentralized Finance (Decentralised Finance). Decentralised Finance is all about changing how we do money stuff using blockchain. Stablecoins fit right in because they can easily team up with different Decentralised Finance apps. They can be used for buying stuff inside these apps and even create their mini-economies. Speedy Global Payments: Sending money across borders can be slow and expensive, especially using traditional methods. Stablecoins, on the other hand, make it super quick and cheap to send money internationally. Their steady value and user-friendliness make them a top choice for speedy global transactions In a nutshell, stablecoins bring together the reliability of regular money and the coolness of cryptocurrencies. They're helping more people get into blockchain tech and are solving the problem of crazy cryptocurrency price swings..

[Audio] While global stablecoins have the potential to create new worldwide payment systems, they also bring a set of challenges for regulatory, supervisory, and enforcement authorities. These challenges arise because these instruments could introduce systemic risks to the financial system and significant risks to the real economy. Some of these risks include:.

[Audio] The primary vulnerability in Global Stablecoin arrangements pertains to traditional financial risks such as market, liquidity, and credit risks. Key considerations include the selection and management of GLOBAL STABLECOIN reserve assets to ensure they can be easily liquidated at market prices. Failure to do so may lead to "fire sales" of these assets during large-scale GLOBAL STABLECOIN redemptions, potentially reducing the GLOBAL STABLECOIN's stable value and eroding user confidence. This loss of confidence could impact the GLOBAL STABLECOIN's reliability as a payment method and affect the financial institutions and markets involved. Large GLOBAL STABLECOIN redemptions may also trigger significant sales of other assets, causing stress in broader financial markets. Furthermore, changes in the composition of reserve assets, without corresponding GLOBAL STABLECOIN redemptions, can have spillover effects on the wider financial system. The ability to sell reserve assets in high volumes at or near market prices depends on factors like asset duration, quality, liquidity, and concentration. Transparency regarding the reserve assets' nature, sufficiency, and liquidity is essential for maintaining user confidence in the GLOBAL STABLECOIN. Additionally, certain design features within GLOBAL STABLECOIN arrangements, such as the withdrawal of liquidity provision by resellers or market makers, can disrupt GLOBAL STABLECOIN liquidity and pricing, further undermining user confidence and potentially leading to more redemptions. Notably, users may have greater confidence in GLOBAL STABLECOINs fully backed by reserve assets compared to those with partial backing. Overall, these vulnerabilities underscore the need for careful management and risk mitigation strategies within GLOBAL STABLECOIN arrangements to maintain financial stability and user trust..

[Audio] Another vulnerability pertains to potential weaknesses in the governance and operation of the GLOBAL STABLECOIN infrastructure, including its ledger and methods for validating user ownership and coin transfers. This vulnerability may arise from operational issues with custodians, compromised ledgers due to design flaws or cyberattacks, or failures in validator nodes. Limited network capacity for transaction validation, leading to processing delays, could exacerbate user confidence issues and prompt additional redemption requests. In the event of a disruption within the GLOBAL STABLECOIN arrangement, uncertainties surrounding user rights and protection could amplify confidence-related problems. Specifically, if users lack redemption rights or direct claims on the underlying assets, it could undermine confidence. The extent of this vulnerability depends on the effectiveness of governance and controls within the GLOBAL STABLECOIN arrangement. The clarity of roles and responsibilities within the governance body, particularly in setting and enforcing rules related to GLOBAL STABLECOIN value and infrastructure operation, can impact user confidence..

[Audio] The third vulnerability in Global Stablecoin arrangements concerns the applications and components that users use to store private keys and conduct coin exchanges. These vulnerabilities could become significant if there's an operational incident at a wallet or exchange service. The extent of the impact on users depends on the market share of the affected provider and its reach across different jurisdictions. The level of vulnerability for a GLOBAL STABLECOIN also hinges on the operational resilience measures in place for wallets and exchanges. This includes backup plans and arrangements to ensure uninterrupted service for users and the ongoing liquidity of the secondary market for coins. The robustness of a Global Stablecoin system relies on the effective operation of various activities and processes. Weaknesses in the connections between these different functions and processes within a GLOBAL STABLECOIN system can introduce vulnerabilities. For example, if there's a flaw in the validation process for coin transfers, it can not only undermine confidence in the payment mechanism but also affect the performance of GLOBAL STABLECOINs as a store of value and, eventually, the entire GLOBAL STABLECOIN system. Furthermore, some functions within a particular GLOBAL STABLECOIN system might be shared with other GLOBAL STABLECOINs or crypto-assets, such as the infrastructures used for coin transfers or user interactions. This sharing of functions can create vulnerabilities that have the potential to trigger spillover effects to or from other GLOBAL STABLECOINs or crypto-assets..

[Audio] In conclusion, stablecoins can revolutionize the global economy, although they bring challenges for regulatory, supervisory, and enforcement authorities. These challenges arise because these instruments could introduce systemic risks to the financial system and significant risks to the real economy..

[Audio] As we conclude Part 3 of our course, we hope that you have found it both enjoyable and enlightening. If you have any further questions or need additional clarification on cryptocurrency or any other topic, please feel free to contact us via email. We are readily available to provide assistance and address your inquiries as needed..