【 Webinar Series - Innovation, Productivity, and Challenges in the Digital Era: Asia and Beyond 】

Money Creation in Decentralized Finance: A Dynamic Model of Stablecoin and Crypto Shadow Banking

Date: 2 Mar 2022 (Wed)

Time: 10am – 11:10am (Hong Kong Time, UTC+8)

Abstract: Stablecoins are at the center of debate surrounding decentralized finance. The authors develop a dynamic model to analyze the instability mechanism of stablecoins, the complex incentives of stablecoin issuers, and regulatory proposals. The model rationalizes a variety of stablecoin management strategies commonly observed in practice and characterizes an instability trap: Stability can last for a long time, but once debasement happens following negative shocks to the issuer’s reserves, price volatility persists. Capital requirement improves price stability but still fails to eliminate debasement. Restricting the riskiness of reserve assets can surprisingly destabilize price. Finally, the authors show that data privacy regulation has an unintended benefit of reducing the price volatility of stablecoins issued by data-driven platforms (e.g., Facebook).

Speaker:

Ye LI
Assistant Professor, Department of Finance, Fisher College of Business, The Ohio State University

Co-authors:
Simon MAYER, Postdoctoral Research Fellow, Fama-Miller Center, Booth School of Business, University of Chicago

Discussant:

Yubo CHEN
Senior Associate Dean, Professor, and Director of Center for Internet Development and Governance at School of Economics and Management, Tsinghua University

About the Webinar

Artificial Intelligence (AI), Big Data, multilevel neural nets, the Internet of Things (IoT) and other digital technologies are transforming the world. They are strengthening innovation and productivity and innovation by rendering the future more predictable and reshaping individual, business, social, and government behavior. Asia leads the world in some of these endeavors, e.g., digital platforms. The OECD lists 40% of big new digital technologies as Asian. Almost half of global digital platform business-to-consumer revenues are Asian, versus only 22% from the U.S. and 12% from the Eurozone. Profound new policy challenges arising, in consequence, include: shifting skills demanded in labor markets and “digital divide” inequality, (ii) AI expanding financial inclusion or encoding inequality, expanding or obscuring accountability, increasing transparency or obscuring amoral decision-making, and (iii) digital privacy, unsanctionable on-line libel, misinformation, manipulation, and propaganda. The ABFER, therefore, plans a monthly e-seminar series spotlighting important new research, particularly the Asia-pacific related, into these issues and providing “state-of-the-art” overviews by prominent scholars. We hope policy makers and practitioners will find the e-seminars helpful and will alert researchers to issues needing attention.

Collaborating Organizers

ABFER, CUHK-Zhejiang University Joint Research Center for Digital Economy, The Chinese University of Hong Kong (CUHK) Department of Economics, Center for Internet Development and Governance, Tsinghua University School of Economics and Management (Tsinghua SEM)