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This chapter introduces the concept of stablecoins such as Tether, DAI, or Ampleforth. It also provides a taxonomy of the different types of stablecoins consisting of (1) traditional asset-backed stablecoins, (2) crypto-collateralized stablecoins, and (3) algorithmic stablecoins and seigniorage shares. The chapter continues with a brief history of stablecoins, starting from BitShares as the first stablecoin implementation over tether and market-wide stablecoin adoption to Facebook-initiated Diem. Next, the chapter explains the impact of stablecoins on cryptocurrencies and other markets and discusses trends and challenges facing stablecoins. The chapter provides a basic understanding of stablecoins, their defining characteristics, challenges, and markets.

While monetary autonomy is self-explanatory for cryptocurrencies such as Bitcoin with predetermined supply path, it is of great interest to probe into the monetary structures of Stablecoins. In these supply contracts and expands and capital restrictions apply due to the existence of reserves as the exchange rate arrangement adheres to a price rule.

Ever since the launch of Bitcoin and its offspring, examination of cryptocurrencies' trading activity from the empirical finance viewpoint has received much attention and continues to do so. The particular monetary arrangements found in Stable cryptocurrencies (colloquially referred to as Stablecoins), however, have not been properly (1) classified and (2) studied within an empirical international finance and banking context. This paper provides an empirical framework analogous to Impossible Trinity for exploring monetary arrangements across Stablecoins wherein reserves are held as price stability is targeted.

The study findings of existence of the degree of achievement along the three dimensions of the Impossible Trinity hypothesis, namely monetary independence, exchange rate stability and financial openness for a representative sample able to cover all varieties of Stablecoins, provide fresh empirical insights and arguments to this growing literature with respect to the success of their embedded exchange rate stabilization mechanisms. While the hypothesis can be supported for all cryptocurrencies in question, the trade-off combination among exchange rate stability, capital openness and monetary independence varies with the categorical types of Stablecoins.

If Stable cryptocurrencies, therefore, claim the role of global monetary assets freed from sovereign limits and national boundaries, it is critical to explore whether they adhere to traditional monetary frameworks. It goes without saying that in this work the author does not use a complete catalogue of all the available Stablecoins, rather a complete catalogue of all the possible asset classes of Stablecoins. While there is a significant difficulty in finding Algorithmic Stablecoins and, so far, there is plethora of Stable Token initiatives, a broader sample to further examine these under this paper's empirical framework is suggested. Enrichment of the robustness analysis by constructing additional proxies, possibly building time series for the proposed cmo1 subindex and using additional estimation methods is encouraged.

Stablecoins have been developed aiming to address the issue of excessive price variation in cryptocurrencies such as Bitcoin. Holders of Stablecoins enjoy the combined advantages of using a blockchain-based digital infrastructure in fulfilling the functions of store of value and media of exchange and of using a traditional currency, which merely plays the role of the unit of account (and in some circumstances the trusted reserve to which is convertible to). Understanding the varieties of Stablecoins and quantifying the components for success of their price stabilization may result in designing better Stablecoins.

Blockchain and cryptocurrencies have introduced new challenges to money and banking. Cryptocurrencies, which independently float such as Bitcoin, have gained the interest so far due to price variation that allows for gains. But these should be by far not considered to be a substitute to traditional means of payment. Lately, Stablecoins have increasingly gained attention for that USD Tether/Bitcoin pair (a Stablecoin pegged to the US dollar at parity) has outrun the US dollar/Bitcoin pair as the most traded pair in digital exchanges marking the strong position and high demand for Stablecoins.

This approach uncovers the varieties of Stablecoins with respect to their monetary constraints compared to the rest of the cryptocurrencies, which independently float. In this paper, the author provides a conceptual framework for the analysis of the exchange rate mechanisms conditional on Stablecoin asset classes accompanied with an empirical study from the monetary viewpoint. This is the first work in this attempt. The empirical framework employed is analogous to the traditional theory of international monetary economics referred to as Impossible Trinityz.

The peer review history for this article is available at: https://publons.com/publon/10.1108/JES-06-2020-0279

The digital euro is not a monolithic project. On the contrary, the application fields are broad, and possible solutions are diverse. This chapter provides an overview of use cases, application domains, and infrastructures for the digital euro that differ significantly. A comparison with solutions for the digital dollar and the digital yuan leads to the conclusion that, in the most extreme case, the euro could become a regional currency for Europe. The main reason for this argument is the design and prioritization of current approaches within Europe as well as the European Central Bank’s digital euro project, and that stablecoin approaches seem to be neglected as solutions for the digital euro.

Decentralized finance is a technological infrastructure built on a blockchain networking environment that supplies transparent, uncensorable, and decentralized financial services and products. This infrastructure offers the opportunity to replicate traditional financial instruments on a decentralized platform and incorporate added features provided by blockchain technology. It also allows the creation of new instruments native to blockchain technology unavailable through traditional financial institutions. This chapter presents an in-depth analysis of the inner workings of stablecoins, decentralized exchanges, automated market makers, liquidity pools, decentralized lending, synthetic instruments, and asset management. It also provides specific examples for each application and presents some current challenges the sector faces.

One aspect of the opportunities and challenges for cryptoassets concerns decentralized finance (DeFi). DeFi is a growing area of cryptoassets that couples blockchain technology, digital assets, and financial services. DeFi is a publicly available system on a decentralized blockchain network, offering financial products and applications. This chapter provides an overview of the DeFi universe that has enormous potential in various industries in the global market. It also discusses the implications of DeFi’s new wave and its applications involving initial coin offerings and stablecoins and specific challenges like the scalability trilemma in DeFi and financial markets.

This chapter reviews developments concerning central bank digital currencies (CBDCs). It introduces, analyzes, and discusses the potential implications of CBDCs on the existing cryptoassets landscape. The chapter also provides an overview of the different approaches to adopting and implementing this new form of money. Additionally, it compares traditional cryptocurrencies, privately issued stablecoins, fiat currencies, and CBDCs. Although vastly divergent opinions exist on digital money’s purpose, benefits, and use cases, CBDCs can provide opportunities for innovation and experimentation at a central bank and systemic level. CBDCs may pave the way for democratizing access to unbundled financial services while rethinking the overall purpose of money, monetary systems, and global business.

This study analyzes the static and dynamic risk spillover between US/Chinese stock markets, cryptocurrencies and gold using daily data from August 24, 2018, to January 29, 2021. This study provides practical policy implications for investors and portfolio managers.

The authors use the Diebold and Yilmaz (2012) spillover indices based on the forecast error variance decomposition from vector autoregression framework. This approach allows the authors to examine both return and volatility spillover before and after the COVID-19 pandemic crisis. First, the authors used a static analysis to calculate the return and volatility spillover indices. Second, the authors make a dynamic analysis based on the 30-day moving window spillover index estimation.

Generally, results show evidence of significant spillovers between markets, particularly during the COVID-19 pandemic. In addition, cryptocurrencies and gold markets are net receivers of risk. This study provides also practical policy implications for investors and portfolio managers. The reached findings suggest that the mix of Bitcoin (or Ethereum), gold and equities could offer diversification opportunities for US and Chinese investors. Gold, Bitcoin and Ethereum can be considered as safe havens or as hedging instruments during the COVID-19 crisis. In contrast, Stablecoins (Tether and TrueUSD) do not offer hedging opportunities for US and Chinese investors.

The paper's empirical contribution lies in examining both return and volatility spillover between the US and Chinese stock market indices, gold and cryptocurrencies before and after the COVID-19 pandemic crisis. This contribution goes a long way in helping investors to identify optimal diversification and hedging strategies during a crisis.