Circle, the issuer of the USD Coin (USDC) stablecoin, has released a white paper titled “Risk-based Capital for Stable Value Tokens”.The paper introduces a new model for managing risk-based capital specifically for stablecoins and other digital cash tokens.
The authors of the paper argue that stablecoins require capital reserve requirements that exceed the existing standards set by the Basel banking regulatory frameworks. This is necessary to address the unique risks associated with stablecoins, fiat-equivalent tokens and their issuers.
These unique risks include potential price shortfalls due to market trading, the presence of secondary markets, potential “runs” on digital tokens from excessive selling and operational and technological risks. These challenges distinguish stablecoin issuers and the digital assets they create from traditional banks. To address these challenges, the authors propose the Token Capital Adequacy Framework (TCAF).
Circle’s white paper states that current banking regulations rely on fixed-ratio risk standards and risk weightings, which may not accurately reflect the true level of risk. The authors highlight long-term Treasury bonds as an example, noting that despite their high interest rate risk, they carry a zero-weighted risk in current banking standards.
The TCAF model aims to address this issue by adopting a dynamic, risk-sensitive approach that begins with stress-testing reserves and gathering input from stakeholders. Technological risks, such as blockchain performance and cybersecurity, are also considered in the TCAF model.
According to the paper, the TCAF’s dynamic approach may lead to capital requirements that are either more or less stringent than current banking standards, depending on the risk environment.
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The framework has five key goals:
- Differentiate between emerging risks and risks that have been successfully mitigated or are no longer threats.
- Supplement existing methods to help regulators address operational risks while maintaining simplicity, avoiding the complexity and expense of traditional banking risk management.
- Provide a risk management standard applicable across jurisdictions and institutions.
- Offer incentives and accountability to mitigate negative risk externalities.
- Facilitate better handling of operational risks by supervisors.
Overall, Circle’s proposal aims to create a more adaptable and effective risk management model for stablecoins and digital cash tokens.
Cre: cointelegraph.
I’m Jessi Lee, currently living in Singapore. I am currently working as a trader for AZCoin company, with 5 years of experience in the cryptocurrency market, I hope to bring you useful information and knowledge about virtual currency investment.
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