A grant of $25,000 has been awarded to the Gillmore Centre for Financial Technology at Warwick Business School to investigate the risks associated with stablecoin de-pegging and its implications for financial market stability.
Stablecoin de-pegging refers to the situation where the value of a stablecoin diverges significantly from the asset it is meant to track, such as a fiat currency. This situation often arises due to fluctuating market conditions or other influencing factors. A notable case is the de-pegging of Terra USD in May 2022, when its sister token, Luna, collapsed shortly thereafter, leading to a staggering loss of $0.5 trillion in the cryptocurrency market within a single week, as reported by the Corporate Finance Institute. This incident exemplifies the potential consequences when a stablecoin fails to maintain its intended peg.
Dr. Ganesh Viswanath-Natraj, an Assistant Professor of Finance at the Gillmore Centre, will lead the research, focusing on key elements of the stablecoin ecosystem. His study will analyze the cost-effectiveness of decentralized foreign exchange (FX) platforms and the role that stablecoins play in the context of digital dollarisation.
The research team will conduct a comparative analysis of protocols like Uniswap V3 against traditional over-the-counter FX markets to determine if decentralized platforms can offer a viable alternative to the existing framework of global currency trading.
Additionally, the study will assess the impacts on retail consumers using digital dollars for savings and explore the circumstances under which stablecoins may either strengthen or destabilize financial systems in emerging markets.
Dr. Viswanath-Natraj emphasizes the importance of understanding stablecoin design sustainability in order to address systemic risks effectively. “Stablecoins present a unique confluence of financial and technological elements. While they hold the potential to improve efficiency and accessibility within financial markets, they also pose distinct challenges in terms of stability and regulatory oversight. This research seeks to shed light on these complexities and provide actionable insights for both policymakers and market participants,” he states.
He further notes, “In light of growing regulatory scrutiny surrounding stablecoin reserve management practices, our study will explore how real-time audits of reserves, enabled by technologies like Chainlink oracles, can bolster market confidence and mitigate the risk of speculative attacks. We will also examine how Proof of Reserve (PoR) systems can enhance transparency and lessen the likelihood of de-pegging incidents.”
The investigation will also delve into the significance of stablecoins in the process of digital dollarisation, particularly in emerging economies such as Turkey and Argentina, where they are utilized to navigate capital restrictions and protect against inflation.