Working Papers

This paper analyzes the fragility of stablecoin issuers in an economy where they coexist with traditional financial institutions, such as banks. We fully characterize a self-enforcing mechanism aimed at improving the resiliency of stablecoin issuers and banks. Such mechanism relies on two essential components: (i) a voluntary loss mutualization fund, and (ii) costly participation to the fund in the form of one-period titles. We compare this mechanism with the regulatory proposals advanced by policy makers and academics alike, uncovering direct and indirect effects of stablecoin regulation on the fragility of traditional financial institutions.

Presented at: Bundesbank Research Center, Frankfurt (Germany), at the Leibniz Institute for Financial Research SAFE, Frankfurt (Germany), at the Workshop on Money, Banking and Payments, Gerzensee Study Center (Switzerland), at the Conference on the Financial Stability Implications of Stablecoins, Boston and New York Fed (USA), at the FGV, Rio de Janeiro (Brazil), at the Bank of Canada workshop on the Future of Monetary Systems, Ottawa (Canada). 


This paper combines the idea that securities should be information insensitive in order to be liquid, with the idea that an infrastructure which performs clearing of trades, and offers additional services to the counterparties, facilitates securities to be liquid. In a recent paper, Gorton et al. argue that securities that serve as a transaction medium should be the least information-sensitive, and derive sufficient conditions for such security to be debt. Also, a few recent papers (Acharya and Bisin, Duffie and Zhu and Koeppl and Monnet among others) emphasize the role of a Central Counterparty (CCP) in internalizing externalities that stem from the opacity of over-the-counter (OTC) transactions, therefore achieving the efficient level of trade, and the role of a CCP in providing the participants with insurance and cost effective clearing services. This paper develops a framework very similar to Gorton et al., modified to analyze some of the functions that a CCP performs. It shows that for any type of security, regardless of whether it is debt or equity, clearing transactions through a CCP reduces the extent to which securities are information-sensitive. Two functions of a CCP are key: multilateral netting and the existence of a default fund. By reducing the exposure of each counterparty to one another (or to the CCP), both netting and the default fund reduce the incentives of traders to acquire information about the payoffs of the security they are trading.  A role of CCPs that has been identified by policy makers as fostering liquidity and stability of OTC transactions, is to perform margin calls to adjust the available collateral posted for each participant's net position, following the marking to market of securities. In this framework, however, the perception that margin calls foster liquidity is incorrect: traders have even more incentives to acquire information about the securities' payoff so that fewer transactions, which would be welfare improving, are carried out.


This paper develops a framework to study the interaction between banking, price dynamics, and monetary policy. Deposit contracts are written in nominal terms: if prices unexpectedly fall, the real value of banks' existing obligations increases. Banks default, a panic precipitates and economic activity declines. If banks default, aggregate demand for cash increases because financial intermediation provided by banks disappears. With the stock of money supply unchanged, the price level drops, thereby providing incentives for banks to default. Active monetary policy prevents banks from failing and output from falling. Deposit insurance can achieve the same goal but amplifies business cycle fluctuations by inducing moral hazard.