Circle economists proposed a new capital management model for stable value tokens that takes a dynamic approach to risk management and incorporates technology risks.
Gordon Liao, Circle’s Chief Economist, co-authored with two colleagues, Dan Fishman and Jeremy Fox-Geenn, introduced the Token Capital Adequacy Framework (TCAF), a capital management model for stablecoins, deposit tokens, and tokenized cash.
The new capital management framework is based on the risks unique to digital tokens and the capital requirements for asset issuers under the Basel Accords for banks. The paper’s authors argue that stricter capital reserve requirements should be imposed to mitigate the risks inherent in stablecoins and other stable value assets. Among the most significant and unique risks, the authors highlight:
- market fluctuations in the value of the tokens;
- massive asset sell-offs;
- tech risks.
The TCAF model takes into account not only traditional banking risks, but also factors such as blockchain performance and cybersecurity. The model includes stress testing issuers’ reserves and analyzing their condition with stakeholder participation.
The authors also claim that the capital management model they developed can become the basis for the creation of universal risk management standards, which sooner or later should be adopted in different jurisdictions. According to the authors of the paper, only the development of the regulatory framework will ensure the sustainability of the financial ecosystem. Regulatory clarity will come only after mechanisms to mitigate the risks unique to stablecoins and digital assets have been established. The TCAF, in turn, is designed to encourage issuers of stable value tokens to be responsible for their actions and to minimize negative externalities for market participants.
The market for stablecoins in 2024 is actively growing, the volume of use of stablecoins in the middle of this year reached $1.68 trillion. Financial regulators began to express increasing concern about the impact of stablecoins on the global economy, and the Bank for International Settlements (BIS) developed a solution to monitor the supply of stablecoins.
