Stablecoins research contract won with Berkeley and Ripple

The Gillmore Centre for Financial Technology has secured a $25,000 grant to investigate the risks posed by stablecoin de-pegging to financial market stability.

Ganesh Viswanath Natraj, Assistant Professor of Finance at Warwick Business School, will lead the research into stablecoins, which, according to US financial analysis firm S&P Global, now have a global market capitalisation exceeding $200 billion and have become an integral component of the cryptocurrency ecosystem.

In May 2022, the de-pegging of TerraUSD and the subsequent collapse of its sister token Luna resulted in the loss of $0.5 trillion from the cryptocurrency market within a week, according to the Corporate Finance Institute. This event underscored the potential disruptions that can arise when a stablecoin fails to maintain its peg.

“Understanding the sustainability of stablecoin designs is crucial,” said Dr Viswanath Natraj. “It is essential to ensure that these digital assets remain stable to mitigate systemic risks.”

He added: “Stablecoins represent a fascinating and complex intersection of finance and technology. While they offer opportunities to enhance efficiency and accessibility in financial markets, they also introduce unique challenges related to stability and regulation. This research aims to examine these complexities and provide valuable insights for policymakers and market participants alike.”

The research is funded by the University of California, Berkeley’s Centre for Responsible Decentralized Intelligence and will involve collaboration between Dr Viswanath-Natraj, Ripple Research, and the University Blockchain Research Initiative (UBRI), the $50 million research division of blockchain technology and cryptocurrency firm Ripple.

Dr Viswanath Natraj’s research will examine several critical aspects of the stablecoin ecosystem, focusing on de-pegging risks, the cost-efficiency of decentralised foreign exchange (FX) platforms, and the role of stablecoins in digital dollarisation.

He said: “Given the increasing scrutiny of stablecoin reserve management practices by regulators worldwide, we will assess how real-time audits of reserves, facilitated by technologies such as Chainlink oracles, can enhance market confidence and reduce the likelihood of speculative attacks. This study will also explore how Proof of Reserve (PoR) systems improve transparency and mitigate the potential for de-pegging events.”

Related research will further analyse the cost-effectiveness of decentralised FX platforms, comparing protocols such as Uniswap V3 to traditional over-the-counter FX markets. This comparative analysis will evaluate whether decentralised platforms present a viable and cost-efficient alternative to the established FX infrastructure that currently underpins global currency trading.

“We will also investigate the role of stablecoins in digital dollarisation and their use in emerging economies such as Turkey and Argentina, where they serve as a means to circumvent capital controls and hedge against inflation,” said Dr Viswanath Natraj.

This study will assess the increasing reliance on stablecoins for digital dollarisation, particularly in economies where citizens turn to digital dollars to preserve their savings. It will examine the welfare implications of this trend, analysing the conditions under which stablecoins contribute to or undermine financial stability in emerging markets.

By addressing these key dimensions, the research aims to provide deeper insights into the evolving role of stablecoins and blockchain-based FX markets within the global financial system.

Further reading:

Can stablecoins take on the US card giants?

How do we keep stablecoins stable?

How stablecoins will impact foreign exchange markets

Learn more about stablecoins on the Gillmore Centre for Financial Technology's new MSc Financial Technology course.

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