Search Results
Journal Article
Policy Update: Stability for Stablecoins?
Cryptocurrencies have come a long way: From an academic idea in the 1980s to the birth of bitcoin in 2009 to their current state as a multi-trillion-dollar tradable asset class, they have become a major part of the financial system and, increasingly, an important policy issue. State and federal governments have sought to understand the risks and benefits of these often volatile assets, resulting in a patchwork of regulatory structures. One important type of cryptocurrency for which regulation has been contentious is stablecoins, whose value is pegged to an existing asset, often the dollar.
Briefing
Why Stablecoins Fail: An Economist’s Post-Mortem on Terra
Why do some stablecoins, such as Terra's UST, fail but others do not? Was Terra just an unlucky victim of a classic bank run or speculative attack? Or was its high-yield deposit offering doomed to fail like a Ponzi scheme? What is the limit of the stablecoin's algorithm? What makes payment stable? In this article, we'll dive into potential answers to these questions about the failed stablecoin.
Journal Article
When Banking Was 'Free'
From 1837 until the Civil War, currency issuance and banking were left to the states. Can this era offer lessons for today's cryptocurrency boom?
Speech
The Song Remains the Same
Remarks at the New York Fed and Columbia SIPA Monetary Policy Implementation Workshop, New York City.
Journal Article
Bitcoin’s Decentralized Decision Structure
With the introduction of bitcoin, the world got not just a new currency, it also got evidence that a decentralized control structure could work in practice for institutional governance. This Commentary discusses the advantages and disadvantages of centralized and decentralized control structures by examining the features of the bitcoin payment system. We show that while the decentralized nature of the Bitcoin network "democratizes" payments, it is not obvious that the approach increases the equity or efficiency of markets or that the costs of the decentralized control structure won?t ...
Discussion Paper
Runs on Stablecoins
Stablecoins are digital assets whose value is pegged to that of fiat currencies, usually the U.S. dollar, with a typical exchange rate of one dollar per unit. Their market capitalization has grown exponentially over the last couple of years, from $5 billion in 2019 to around $180 billion in 2022. Notwithstanding their name, however, stablecoins can be very unstable: between May 1 and May 16, 2022, there was a run on stablecoins, with their circulation decreasing by 15.58 billion and their market capitalization dropping by $25.63 billion (see charts below.) In this post, we describe the ...
Discussion Paper
Stimulus, Savings, and Inflation: The Top Five Liberty Street Economics Posts of 2021
New York Fed researchers tackled a wide array of topics on Liberty Street Economics (LSE) over the past year, with the myriad effects of the pandemic—on supply chains, the banking system, and inequality, for example—remaining a major area of focus. Judging by the list below, LSE readers were particularly interested in understanding what comes next: the most-viewed posts of the year analyze households’ use of stimulus payments, the implications of lockdown-period savings, the risk of a new housing bubble, the compression of the breakeven inflation curve, and the potential roles that ...
Discussion Paper
Token- or Account-Based? A Digital Currency Can Be Both
Digital currencies, including potential central bank digital currencies (CBDC), have generated a lot of interest over the past decade, since the emergence of Bitcoin. The interest has only grown in recent months because of a desire for contactless payment methods, stemming from the coronavirus pandemic. In this post, we discuss a common distinction made between “token-based” and “account-based” digital currencies. We show that this distinction is problematic because Bitcoin and many other digital currencies satisfy both definitions.
Working Paper
Financial Literacy, Risk Tolerance, and Cryptocurrency Ownership in the United States
Cryptocurrency owners without sufficient financial literacy and risk tolerance may be financially vulnerable, as the cryptocurrency market is highly volatile and lacks consumer protections. Our study divides cryptocurrency owners into three groups based on their purpose for holding cryptocurrencies—for investment only (investors), for transactions only (transactors), and for a mix of investment and transactions (mix users)—and examines how each group correlates with financial literacy and risk tolerance compared to consumers who do not own cryptocurrencies (nonowners). Using the 2022 ...
Journal Article
Decentralized Finance (DeFi): Transformative Potential and Associated Risks
Financial services in the crypto finance world are provided by a combination of centralized finance (CeFi) organizations and decentralized finance (DeFi). CeFi's are roughly similar to traditional financial intermediaries, but DeFi seeks to provide services using smart contracts (computer code) rather than an intermediary. DeFi's unusual structure creates some interesting potential but also raises new risks in addition to those already inherent in blockchains and crypto finance. This paper reviews some of the opportunities and risks.