On The Brink with Castle Island - Ganesh Viswanath-Natraj (Warwick) – What Keeps Stablecoins Stable? (EP.76)

Episode Date: May 6, 2020

The question of Tether's influence on crypto markets has long vexed practitioners and academics. In a widely-publicized 2018 paper, academics Griffin and Shams allege that Tether was being issued collusively, effectively increasing the price of Bitcoin beyond its natural level.  To learn how Tether behaves like a currency board, and to assess the veracity of the Griffin & Shams hypothesis in light of new data, we brought Ganesh Viswanath-Natraj on to the show. Ganesh is an Assistant Professor of Finance at Warwick Business School, covering international finance and macroeconomics, with a focus on foreign exchange derivatives, market microstructure and cryptocurrencies. Find the full text of the paper here, and follow Ganesh's work on his personal website.

What's up, everyone. Welcome back to On the Brink with Castle Island. This is Nick Carter. We're here for another episode of the Crypto-Dolarization miniseries. Thank you to all of you that have listened, given us nice feedback about it so far. It's been a blast to make it. We're going to keep the miniseries going. So if you look at what the main instruments of crypto-dollarization are, there's one that is the standout. I'm referring, of course, to Tether. Tether has been mired and controversy and suspicion for a long time now. There are many popular hypotheses about tether being somehow a driver of Bitcoin price actions over the years.

Infamously, there's this paper by Griffin and Shams called Is Bitcoin Really Untethered, initially published in 2018, which claimed that the price of Bitcoin was directly influenced by the issuance of tether. So recently I came across a new paper called What Keeps Stable Coins Stable by Richard Lyons of University of California and Ganesh Vizwanath Natraj from the University of Warwick in the UK. And this paper was pretty interesting. So it takes a conventional approach from monetary economics to explain stable coins in particular tether and analyze how they stay stable, how they retain the.

peg over time and what those market dynamics really are, which tend to be pretty poorly understood. They also assess this old hypothesis that Tether might have some influence on the prices of cryptocurrency. Spoiler alert, they find that it does not. So I invited Ganesh on the show. He's an assistant professor of finance. His background is in foreign exchange markets, conventional macroeconomics. It was really interesting to me that he turned his attention to cryptocurrency and stable coins. Turns out there's a lot you can learn from these sort of standard macroeconomic models as they relate to stable coins. Now, for the trader's perspective, we have an earlier episode with Dan Madyshevsky, who previously ran the Circle ODC desk. He explains his experience creating tether in the markets.

But now we have a bit of an alternative take. We have an academic who has deeply analyzed the market structure here to explain how exactly tether price. formation occurs, how the arbitrage cycle actually drives the price action here. This was a very elucidating episode, and I learned a lot about how these markets work and how maybe we actually have a bit to learn from macroeconomics after all. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis.

The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. So today we have Ganesh Vizwanath Netraj. He is an assistant professor of finance at work business school. He covers international finance and macroeconomics with a focus on Forex derivatives, market microstructure, and cryptocurrencies. And Ganesh has written a really fascinating paper with Richard Lyons called What Keeps Stable Coins

Stable. It's actually one of my favorite papers I've read on Stable Coins in recent years. It's very thorough. and to me it maps very closely to reality. So I'm very glad it came across my desk. So Ganesh, welcome to the show. Thank you for having me. So how did you, because my understanding is that you are, you know,

more focused on conventional macroeconomics, how did you come to pursue cryptocurrency or to either specifically as a research topic? Yes. So I, my background is. in exchange rates. And so obviously, like many others, cryptocurrency was not initially on my radar. And I came across stable coins, thanks to my co-author, Rich, who introduced it to me a year ago and since then we thought a good a good idea is to apply sort of

knowledge we know about fixed exchange rate regimes so this there's a really large literature on fixed exchange rates and we think of these regimes as sort of sort of the Hong Kong currency board is a nice example as a fixed exchange rate machine that has a very similar structure to these stable coins. So we already have sort of precedence for these sorts of arrangements. So it's not entirely new what we are doing, but we have a new context where we can apply some of the sort of tools that we know about fixed exchange rates to this new setting. And so that's kind of how I transitioned from from just being a pure exchange rate economist to thinking about cryptocurrencies.

And when you began this project, were you aware that this is a very hot button issue within the crypto community, like extremely controversial in many respects? Yes, so that did come to surface. And this is a paper that we will touch on during the podcast. But yeah, there was a seminal paper by Griffin and Shams on the influence of Tether, which is the largest stable coin on Bitcoin and other cryptocurrency prices. So this was definitely a paper that we sort of saw as kind of one of the major papers. And there's also a lot of controversy with stable coins in terms of collusion with crypto exchanges to inflate crypto asset prices. And so we did know that we were going into a field with some controversy, but we thought that we could give a different angle to the whole debate on why. what's happening or what's driving issuance of these stable coins.

And we shifted to thinking more about why, what drives issuance if you're trying to maintain the peg. So we shifted the focus to thinking about, well, we know the stable coins, cryptocurrencies that are peg to the US dollar. And so issuance should be driven by. investors arbitraging deviations from the peg. So that was kind of a sort of something borrowed from the fixed exchange rates literature. And that was essentially our new take on kind of what what's driving tether issuance as opposed to the collusion hypothesis that they're trying to pump up Bitcoin prices. And did you envision this? this research objective as, you know, a response to the Griffin and Shams theory, or was it just, you know, you look at the problem for a while and this is what you found?

Well, we had these hypotheses to begin with. I think one very interesting thing about these regimes is that they're very different to central banks, right? So a central bank essentially is a centralized government institution that controls the money supply. In this case, the stable coin issuers are passive, so they're not intervening in the markets as a central bank would. And so here you have a very decentralized setting where you have investors sort of coming in and transacting with the tether treasury. And so that was kind of one crucial departure from what we think about central banks. But so we already had these hypotheses that these investors were coming in and depositing dollars with the tethered treasury. and then selling tether in the secondary market when tether trades at a premium.

So that was one of our first hypothesis was that all of these flows we are seeing from the tethered treasury to the secondary market are actually being driven by simple arbitrage where they are responding to periods when tether trades at a premium. Okay, so in the sense, these ones flows you could think of are stabilizing flows.

Right. So that as opposed to being used to pump up Bitcoin prices. So it is an alternative hypothesis to Griffin and Shams. And we do find evidence that these flows are arbitrage flows. So what you hypothesized and then what you subsequently found is that the creation of tether is primarily or mostly motivated by this profit-seeking motive by arbitrages to create tether at par and sell it at a premium when tether is exceeding the peg for whatever reason exactly and conversely they they can withdraw uh so they can they can they

can buy tether at the secondary market and then sell it to the treasury if it trades at a discount. So you have these arbitrage motives that can explain an endogenous issuance of tether. Although I guess one further question would be, you know, why those premium exists in the first place, which is something you also actually cover a little bit in the article. Yes, so the first question that was thinking about the arbitrage mechanisms. The second question is thinking about why these deviations exist. And so in conventional fixed exchange rate regimes, if we think about like the Mexican Paster, for example, either they maintain their peg or they trade at a discount due to

fears of a speculative attack or essentially a lack of credibility. So then we expect deviations to be one-sided. Either tether trades at one-for-one or they trade at a discount if you think with some probability tether will collapse because they're not credible. But interestingly, stable coins have a two-sided distribution. So they do trade at premiums as well as discounts. And so there are a few reasons why, but the main reason that we focus on is its usefulness as a vehicle currency.

And what we mean by vehicle currency is that the point of tether is to facilitate the exchange of cryptocurrencies. And so because it uses the blockchain, it cuts down on intermediation costs relative to dollars where you typically need to use a bank wire or some other form of intermediation. And so because of this reduction into mediation costs, it has a relative advantage to dollars as a store of value and that's easy to rebalance in times of markets. stress. So for example, in the most recent panic on March 12th, there was a huge collapse in Bitcoin, and this was like spiral due to sort of equity markets collapsing in the COVID panic. And so as Bitcoin collapsed, investors wanted to liquidate to store of value. And because Tether and other stable coins are in the blockchain, it's much.

much lower transaction costs to liquidate to a stable coin as opposed to liquidating to the dollar. And so then you had a flight to safety that was reflected in the higher premiums of stable coins during this period. So the premiums in general are above 100 basis points. And this essentially, we denote this as a type of safety premium. So the tether is a safe asset and it appreciates in times when Bitcoin and other cryptocurrencies collapse. And investors were okay paying this premium, even though tether is sort of intended to trade at par because they were, you know, keen to liquidate their risk on crypto assets. Exactly.

So this is also like you can think of this as a latency time premium where they want to sell Bitcoin now because they expect it to decline in the future. And so there's a lot longer latency time for transactions if you liquidate to dollars because you need to because of all the extra intermediation cost, whereas you can liquidate immediately into Tether. And so the fact that you can cut down your latency time essentially means you're willing to pay a premium to liquidate Bitcoin into Tether.

So I know this is slightly outside the scope of your paper, but what do you make of the fact that Tether, has increased its monetary base or market cap or whatever you want to call it by, you know, several billion dollars since that risk off event in March. And that has been an issuance, which has been sustained. Yes. So I did note that significant issuance. I think it went from about four to like six billion within a couple of weeks. It's over seven. Okay. So yeah, so it's shot up even more. So part of that is due to tether premiums.

So I believe that as tether traded at a premium in March, part of that increased issuance is to arbitrage those deviations from the peg. Another hypothesis is that investors are anticipating a big. a boom in Bitcoin prices and they're using Tether as a way to facilitate that boom. So that could be some sort of long-term horizon of investors where they think, say, the Bitcoin halving is happening later this year and they expect the Bitcoin price to increase. And so they're increasing issuance of tether now to enable them to buy Bitcoin. over the next few months. So that is perfectly acceptable as a,

so that's not necessarily, that doesn't involve collusioning anything. They're just using tether as a vehicle currency to facilitate their transactional demand for Bitcoin. So this is, so what I mean is that imagine a world where stable coins didn't exist, you would have, the Bitcoin market would have a very similar trajectory.

It just would be people going from dollars to Bitcoin as opposed to tether to Bitcoin. Yeah, so that's essentially the reason why tether issuance has increased a lot because we are at Bitcoin reached a trough and so people anticipate Bitcoin prices to go up in the future. and so they are increasing their holdings of tether and anticipation of a boom in Bitcoin. You also found a relationship between the premium or discount and tether and the issuance or redemption. So there is a regularity there, like a mathematical relationship, right?

Yes. So the tether flows are endogenous. So they, tether flows tend to be positive when tether trades at a premium and negative when tether trades at a discount. And they also have a stabilizing effect. So we find that a one standard deviation change in tether flows stabilizes the tether price by about 10 basis points. So there is an impact where these arbitrage flows do stabilize the price so that So the idea is that by depositing dollars with the tether treasury and selling tether in the secondary market, it drives the tether price back toward one.

So it's interesting that you note that typically currency boards only deviate from the peg in one direction. I actually wasn't aware of that. Whereas obviously the vast majority of stable coins, you know, are sort of all over the place, having both premium discounts. Tether very infamously had effectively run on the bank or a crisis of confidence or speculative attack, call it what you will, in late 2018. Do you want to explain what you believe happened there? Yes.

So there was a speculative. of attack on tether and this is very similar to peso crises and and other fixed exchange rate crises. So here, BidFinnix at the time was, had a lot of dollar deposits linked to tether. So they, they were the main sort of investor transacting with the tether treasury at that point. And in October 2018, there was was a suspension of dollar deposits on the BitFinnix exchange. And so investors thought that the suspension of dollar deposits meant that tether was under collateralized. So essentially they're preventing investors from from withdrawing their dollar deposits because there simply wasn't enough

to back all the tether and circulation. And so because of that, investors, expected the peg to be unsustainable. And so the peg collapsed to about 95 cents, so like a 500 basis point discount. And a few days later, BitFinnix resumed convertibility of dollar deposits. And the moment that happened, that restored confidence in the market, and Tether went back up to the one-for-one rate. So that was a nice example of a speculative attack.

where investors were speculating that the peg was under collateralized. But more generally, this is a sort of a problem with stable coins is that they, tether claims that every tether in circulation is backed by a dollar deposit. So they're 100% dollar collateralized. But there are concerns that they may be under collateralized. And one of the reasons might be is that they might not have all of their dollar assets as liquid reserves. So they might have interest-bearing assets. And that's something that is part of a current litigation, whether they are indeed 100% collateralized.

But for the purposes of our paper, we take their balance sheet statements and their audit reports. as suggesting that they are 100% collateralized. But this is, in my view, one of the issues with the tether as a stable coin. And I think one way they can kind of sort of improve their governance is to have more regular audit reports, which a couple of the other stable coins, like USDC and true USD do. So that would be my only critique of Tether is that they do sufficient auditing to let investors know that they're 100% collateralized.

Yeah. Yeah, I think that's a very fair critique. And I believe the number thrown around in 2019 in response to that NYAG litigation, was that, you know, BitFinex or that Tether was partially backing the peg with, um, uh, effectively a loan facility to BitFinex. Um, and that the liquid instruments backing Tether only amounted to, you know, 74 cents on the dollar. Yeah. And so like cash a cash. Yeah, cash and cash equivalence. So they change the language. I, it's hard to know exactly. I, it's hard to know exactly what happened because there's not a lot of transparency, but, you know, one thing that

people wonder about is how can something like tether a pegged asset trade at par if it's not fully collateralized with perfectly liquid instruments? So how would you answer that? Is it just a function of people still having confidence in the issuer? Is it the presence of convertibility? does an instrument need to be fully collateralized for it to trade apart? Yes. So the structure of tether is similar to a currency board. So every tether circulation should in principle be backed by a dollar deposit. So the idea of being fully backed is to essentially avoid the situation of bank runs, right?

So if you have a bank run and all of the depositors want their dollars back, then under a 100% collateralized system, you would be able to give the dollars back to all of the depositors. So you won't run into sort of a bankruptcy situation where you don't have enough dollar deposits. So that's kind of a credibility issue that by being 100% dollar collateral. They're saying that all depositors are guaranteed their dollars back in the event of a collapse of the regime. But in theory, even if you are like 75% backed, you will still be able to have depositors getting their dollars back in a bank run as long as not everyone does it. So they would still have enough liquid reserves to maintain a big sort of outflow of dollars from the tethered treasury.

So that is essentially why you can still operate if you're not 100% collateralized, but it's more of a credibility issue. And so it's signaling to investors that there's a zero, probability of a bankruptcy. And so knowing what you know about currency boards, would you say it's possible for a stable coin issuer, let's just say a generic stablecoin issue to be transparently

partially reserved and have the stable coin trade at par sustainably? It is possible. but the current systems of all of the stable coins are to be 100% collateralized. Right. And so they've generally deferred in the way they mitigate against counterparty risks. So for example, USDC tried to decentralize the issuer by enabling multiple agencies to issue tokens as opposed to just one centralized issuer. TrueUSD use S-Crow accounts as a way to reduce counterparty risk.

So there are lots of different methods that stable coins can use to reduce counterparty risk and to guarantee sort of dollar deposits for all the depositors. But I do think that, while it is possible for partially collateralized system to function, the current consensus is to still be $100,000 collateralized. So I think there is room to invest in interest-bearing assets from a sort of profitability point of view. But if they are going to do that, they need to be clear that they are going to invest some fraction in sort of safe assets. So they can be sort of government bonds or like sufficiently short term government bonds so

that they're liquid. But then that should be made clear in the sort of white paper of the stable coin. Yeah. And I don't know too much about currency boards, but my understanding is that that for instance, all the reserves that Hong Kong uses to back their peg, not all those instruments are strictly speaking, highly liquid. And they may have varying maturities. Is that correct? Yes. So I don't know the exact allocation of Hong Kong's dollar reserves. But if we think about reserve management of central banks, so China, for

example of historically had very large reserves and they typically held in the form of US treasury bills and so that still considered liquid reserves because they're generally short-term securities and they have the backing of the US government so so that is definitely a system um that can emerge and that is currently the framework that Libra, which is Facebook's stable coin, are currently pursuing, so that's still in a white paper stage at this point, but they are envisioning that the Libra reserves will be invested in short-term government securities. But right now, the current stable coins in the crypto space are not, according to their white papers, are not investing in these non-cash assets. So essentially they are meant to be liquid reserves.

One of the maybe the most interesting findings in your paper was looking at this natural experiment where Tether effectively transported itself from Omni on Bitcoin to the ERC20 standard on Ethereum. Yes. What was the significance of this move? Yes. So this was initially we did not look at this in our first draft, but then thanks to just kind of, you know, the revision process and sort of getting thoughts. from others, we decided to look at the number of unique addresses that transacted with the tethered treasury.

And we see this big spike in April of 2019. And this coincided with the move from the Omni to the Ethereum blockchain. So this was really nice because prior to this, BitFinnix essentially was the only wallet address that was directly transacting with the tethered treasury. But now there were many other wallets. So these include mainly crypto exchanges, but can include other investors as well. And so we expect that as the number of investors

transacting with the tethered treasury increases, we expect arbitrage to function more smoothly. And so we do see big declines in sort of the average deviations from the peg and the average half-life of the peg. So the half-life is essentially a measure of how long it takes for deviations to dissipate. And we found that this half-life essentially reduces by 50% following the introduction to the Ethereum blockchain. And so this was a nice experiment in the sense that the reason for the migration to the Ethereum blockchain was to mainly cut down on transaction costs. And so by cutting down on transaction costs that enabled more investors to access the tethered treasury, and that's what led to this increase. stability of the peg.

So it's kind of interesting that something which may have seemed just like infrastructural change, you know, moving from one blockchain to the next, actually appears to have had an effect on the quality of the, of the peg itself. Yes. So that definitely increased ability to arbitrage deviations from the peg. And so in general, we find a lot more evidence of investors depositing dollars with the Treasury. The average size of these deposits fell. But the average arbitrage spreads fell as well.

And this makes, this is very intuitive that if you have a market that gets crowded by more arbitrage investors, that the average spreads that they make will go down. So essentially it's an erosion of profits. And this regime change is obviously good from the stability of the regime, but it's also important when we think about the collusion hypothesis of Griffin and Shams, because a lot of their work, which dates up to March 2018, so it's very time specific. And that was in a time period where BitFinnix essentially had a monopoly on transacting with the Tether Treasury. And so that is kind of the main reason why in that particular period there were allegations about BitFinnix potentially trying to manipulate cryptocurrencies through their. their channel of directly depositing dollars with the tether treasury and creating tether tokens. You also did an interesting sort of event study, I guess, in terms of looking at with a broader

data set, you know, than the Griffin and Shams paper, the effect of tether issuance on both Bitcoin and the price of Bitcoin and price of Ethereum. And you didn't find much of an effect, right? Yes, so based on the aggregate issuance for tether flows from the treasury to the secondary market, there's no relationship between tether flows and Bitcoin prices. So there's no statistically significant relationship. So based on our evidence, there's no effect of tether issuance on, on, uh, there's no effect of tether issuance on crypto asset prices.

And just to be clear that we're using aggregate issuance, so we are not trying to trace flows to individual wallets like the Griffin and Champs paper does. But I also think that the Griffin and Champs argument is very time specific. So it happened, the period went up to my March 2018 when and since then as we know the the introduction to the Ethereum blockchain happened in 2019 there are a lot more investors now directly

transacting with the Tether Treasury so there has been a regime change since then however we do find that if we restrict our sample to the Griffin and Shams period we also find no evidence that there is manipulation And so here, going back to our previous discussions, if tether issuance is not driving Bitcoin prices, then our alternative hypothesis is that tether issuance is being driven by deviations from the peg, so it's an arbitrage mechanism. And tether flows can also be driven in sort of periods of safe. haven sort of periods of market stress as well. So those are the two kind of alternative

hypotheses that we find evidence for. So what explains? That's really interesting. You tested the purported effect of tether issuance on Bitcoin and Ethereum for the same sample as Griffin and Jams and found no statistical relationship. So what in your view explains the difference there? Is it just a methodological difference? So it's it's methodological. So we use aggregate flows. And we also use daily data. So there is a frequency mismatchen that the Griffin and Champs paper go it into, they look at, say, hours from the event of their flows.

But the construction of flows, I believe, is another critical different. So we are aggregating flows from the tether treasury to the secondary market, whereas they look at flows that are being channeled from a series of exchanges and that are being used from tethered to Bitcoin. But I think that aggregation is important because if you condition your flows on the subset of flows to the secondary market that are being used to buy up Bitcoin, Bitcoin, then that in a sense you're assuming your result, right? Because if there are alternative hypotheses for tether issuance, and so if a lot of these

tether flows are going to the tether dollar market, that should have absolutely no impact in the tether Bitcoin market. And so if, and so I think one kind of departure from our methods is that we look at aggregate tether flows, whereas they are looking at a subset of tether flows that are being channeled to Bitcoin. And that's essentially explaining our differences in results. Right. One critique, I guess, I probably had of the Griffin and James paper was that they're selecting for periods with high volatility, of course, which tends to naturally coincide

coincide with periods of high flow on chain because you could look at the causality the other way. You know, volatility is what induces traders to move money around on chain, whether it's for arbitrage, for posting margin, for getting funds on exchanges. And so it's no surprise to me that volatility coincides with high flow on chain. Yes. So volatility and volume tend to go in the same direction. And yeah, so I mean, I think that a lot of the results are essentially conditional on a lot of assumptions. And so here we're trying to look at the unconditional effect of tether flows on Bitcoin prices and there is none.

but if you start conditioning on, as you say, high volatility events, then there is definitely a reverse causality issue. But I also think conditioning on the set of flows specifically from tether to Bitcoin is also going to naturally lead to this result that tether drives up Bitcoin because increased tether assurance is not all. always entirely going from tether to Bitcoin. So it could go, so tether issuance under the arbitrage mechanism is going to the tether dollar market for trading.

So that's why aggregate flows have no effect on Bitcoin. But if you do condition flows on all of these extra factors like volatility and just looking at the tether Bitcoin flows, then you could have a different result. But to call it market manipulation again is a very, it's a bit delicate because you can think of numerous examples in history where you have like a whale in a market, say like George Soros and the Bank of England, right?

And they could effectively manipulate the pound, but that's just one investor just using their, in some sense, their leverage to just affect the market. But here, the point that they make is that there are these flows from BitFenix to a particular wallet that's channeling a lot of the movements in the Bitcoin price. And then it becomes like a very technical, sort of legal story of whether who's liable in this case. If the investor is doing it independently, then they have a right to see some profit-making opportunity. If they were colluding with BitFinnix, then there's obviously a litigation

going on that speaks to that. But this idea that tether is manipulating Bitcoin, it doesn't really hold water at least from an aggregate perspective. Right. It's refreshing to hear that. Especially given that just from a, you know, zooming even further out, you know, I guess part of the intuition here for this hypothesis was that Bitcoin prices and Tether issuance, you know, co-moved for a while in 2017, as, you know, effectively you know, Bifnex's balance sheet was increasing. Tether effectively was a claim on that balance sheet as the Bitcoin market grew and exchange volumes grew. But then in the sort of the two,

three years since then, Tether has continued to be issued and Bitcoin has traded sideways. So it kind of fails the sniff test just from that perspective too. Yes, exactly. And I mean, I think It's most telling when we see this large increase in tether issuance in the last month, but we don't see a corresponding increase in the Bitcoin price. So here, a lot of that increase in tether holdings is investors rebalancing portfolios, but also waiting for a long-term event in Bitcoin. So that's perfectly reasonable and they're using tether as the vehicle currency to do so. But that transactional demand for Bitcoin, that's essentially what drives issuance of tether as a vehicle currency.

But as far as we can tell based on the evidence, Tether is not, Tether issuance is not driving crypto markets. It's more investors in crypto markets are using tether for transactional demand purposes. So more generally, having looked into this and having, you know, being familiar with currency boards, are you confident that stable coins, these kind of private stable coins, can be sustainable in the future, even if they don't have the clout of, you know, for instance, central bank or government, which would normally be backing these pegs? Yes, so they do have a future. It's hard to say what the architecture will look like in five years or ten years' time.

But the stable coins have achieved a clear objective, and that is to reduce the volatility problem of cryptocurrencies. And they have these additional features of being on the blockchain, so they lower intermediation cost. And there are a lot of these privately issued stable coins, but they are relegated to the crypto space. So tether can be used to buy Bitcoin and Ethereum, but it cannot be used to buy goods and services. So retailers don't have the capacity to enable payments and tether. But Libra is obviously a privately issued currency that could be the stable coin for that enters the mainstream. And on the other side, we have similar digital currencies that are being considered by central bank. so central bank digital currencies.

And so I think that the next few years we will see essentially these two potential rivals trying to enter the mainstream. And the kind of which way or which coin will dominate, I guess depends a lot. on a lot of factors. But if we think about sort of arguments about free banking versus central banking, it's not unlike the arguments for Libra versus a central bank digital currency.

And my personal view is that central bank digital currencies are favorable simply because they have a lender of last resort function. So that means that in times of market stress, the central bank always has an ability to increase its money base to be able to act as a lender of last resort, whereas the privately issued currency is limited by whatever capital buffer it has. And if that becomes depleted, the privately issued currency doesn't really have the capacity to negate digital currency runs. So that's one sort of major reason in favor of central bank digital currencies. But I think that the crypto-stable coins will continue to be an increasing. sort of part of the crypto market.

Whether crypto stable coins, stable coins can also enter mainstream markets is interesting. I mean, there's already talk of these stable coins being used as a store of value for non-crypto investors. So there's already this idea that they can be used at least as a way to store wealth, but whether it can be, if they enter mainstream

sort of goods, goods and services markets and being able to use it for day-to-day transactions, I guess Libra is probably the stable coin that is trying to attempt to bridge that gap. And these central bank digital currencies are also, would fill that role.

There's been talk around something like Libra, impairing the monetary discretion of central banks in states with potentially weaker currencies where users or citizens may not want to hold an inflationary currency, may prefer to hold something that's mostly dollar-backed. And so, you know, we might encounter this phenomenon of Libra, or dollarization through Libra, for instance. Yes, so that is, it can be a blessing or a curse. So the idea is that for small countries with governments and central banks that are not credible,

they might prefer to hold an alternative currency. And so you could have forced adoption of a Libra dollar. or something like that. And so here, it can potentially be beneficial for some countries, which have significant issues with preserving the value of their currency due to corrupt governments. But there might be countries that are also having, central banks be sort of made redundant because of

of Libra currency essentially crowding out the central bank currency. And so they're from a financial stability standpoint, there's a lot of issues about adoption of Libra and whether it would crowd out central banking, banking systems, the ability for banks to have deposits, which they can then use to lend through a fractional reserve system. So there's a lot of financial stability implications that need to be addressed for Libra to happen. But I think that it can be beneficial for countries but for other countries they could they could essentially have the central bank currency

made redundant even if it was a stable regime so for those countries that could be welfare losses and for Libra to work there needs to be more integration with the banking system so the banks need to be able to take Libra deposits So their ability to take deposits is not impaired if people store Libra currency elsewhere. Because you could have a situation where if banks can't take Libra deposits, then all of the households are just storing their wealth in Libra. And essentially, banks don't have the deposits to create money. So the money base of the country's essentially becomes redundant.

So there needs to be a lot of integration of Libra into the banking system, which is not unlike integration of a central bank digital currency into the banking system as well. So I mean, the same questions arise there that can the private bank, be able to take central bank digital currency deposits. I think that the infrastructure for that would be obviously much closer to being realized because the central banks already do a lot of transactions with the banking system. So I think that this, what Libra could end up doing is kind of forcing the move to central bank, to digital currencies faster.

that could be one equilibrium. And then I think Central Bank digital currencies are more likely to be preserved by that country. So if that country issues their own central bank digital currency, they're less likely to get into

this Libra dollarization kind of issue that we talked about. Ganesh, this has been absolutely fascinating and really unique. I'd say it's actually quite rare to find, you know, an academic that has a very, obviously very strong grounding in, in macroeconomics and and Forex markets, who also deeply understands the crypto markets. So it's, it's been

real privilege having you on. Where can people follow you and follow your work? Yes. So, I have a sort of website that sort of details my current research and and obviously I'm hoping stable coins will be a productive research agenda going forward and and yeah I mean I think it's it's a great place to be in and trying to find sort of bridging this knowledge from mainstream sort of Forex and and other markets and then bringing that knowledge into the crypto space, I think it's a very fruitful research agenda. So you can find some of my research online.

So thank you for the opportunity to talk about my research. And I'm happy that it's of interest to people working on cryptocurrencies. It certainly is. and I very much look forward to reading your output in the future. Thanks so much for coming on. Thank you, Nick. Appreciate it.