Thomas Murray Digital Newsletter
Following the recent failure of the TerraUSD algorithmic stablecoin, the fallout affecting the cryptocurrency markets and the policy questions that the incident raises have continued to dominate discussions. At issue are what – if any – role privately-operated stablecoins may have in the future of wholesale and cross-border settlements, the parameters and priority of stablecoin regulation, and the degree to which Central Bank Digital Currencies (CBDCs) – previously viewed by some major economies as more relevant to retail applications – could assume wholesale roles. We summarise those discussions and evaluate some of the other winners and losers in the stablecoin market.
Digital Asset Developments
 | Following the publication of the US Securities and Exchange Commission Staff Accounting Bulletin (SAB) 121 – which prompted Coinbase to present client assets as a liability on its balance sheet – the US government will reportedly urge Congress to legislate that crypto service providers segregate client and corporate funds. Coinbase’s disclosure that customers’ assets may potentially form part of any bankruptcy estate, and that the customers may be treated as general unsecured creditors, caused a stir within the crypto industry as the implication was that if Coinbase were to go bankrupt, many of the assets it holds for customers may go with it. Despite this move to mandate segregation of client funds from proprietary funds, the government still believes providers should be able to pool customers’ assets, allowing them to internally manage trades instead of processing each individual trade on the blockchain. |
| The European Central Bank (ECB) says that the increasing interconnectedness between cryptoassets and traditional markets means that contagion from cryptoassets pose a considerable risk to financial stability. The report, published as part of the central bank’s biannual financial stability review, warned that “cryptoasset markets currently show all the signs of an emerging financial stability risk.” Although such contagion has so far remained sufficiently small to prevent any financial stability risks being incurred, the ECB is eager to highlight that a point will soon be reached where this is no longer the case. The central bank advocates for regulators to monitor developments, stating that “any further steps that allow the traditional financial sector to increase its interconnectedness with the crypto-asset market space should be carefully weighed up, and priority should be given to avoiding financial stability risks.” The report consequently argues that to prevent such risks it is paramount for regulatory measures to be globally coordinated: “The challenges faced in monitoring financial stability risks from cryptoasset developments and interconnectedness with the traditional financial sector will persist as long as there are no standardised reporting or disclosure requirements.” |
 | JP Morgan has reportedly been trialling the use of its own private blockchain for collateral settlement, conducting a pilot transaction involving the transfer of tokenised BlackRock money market fund shares. The investment bank, which founded Onyx Digital Assets (ODA) in 2020, has long been an advocate for the use of blockchain technology, despite its more recent Damascene conversion on the value of cryptocurrencies. ODA is described as a “blockchain-based network that enables the processing, recording and Delivery-versus-Payment (DVP) exchange of digital assets across asset classes.” BNP Paribas recently completed its first trade on the ODA platform, becoming the first European bank to join the network. JP Morgan is also involved in the Monetary Authority of Singapore’s Project Guardian, a tokenisation pilot for DeFi transactions involving borrowing and lending on a public blockchain, while the investment bank participated in the USD 60 million Series C fundraising round for blockchain analytics firm Elliptic, and recently evaluated bitcoin’s fair price at USD 38,000 while declaring crypto to be its preferred alternative asset in a note issued to clients. |
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