This article is from cointelegraph.com.br and the original article can be read here in Portuguese
Private stablecoins issued by banking institutions that will be used as currency from the implementation of the digital real will not need to be backed in a 1:1 ratio with the Brazilian CBDC , reported by Valor Econômico published this Thursday, 9.
In practice, private banks will be able to issue a greater amount of coins than the amount deposited in reais by their respective customers, in leverage operations guaranteed by the monetization of these deposits through tokenization. Only payment institutions will have to offer 100% guarantees in digital reais.
As stated by the President of the central bank, Roberto Campos Neto, at the opening panel of the Rio Crypto Summit 2022 last Monday, 6th, the Brazilian CBDC is being structured to inherit the regulatory framework currently in place for borrowings carried out in reais:
“By monetizing deposits, you inherit the pre-existing regulation on bank deposits, and that makes it much easier. And banks can develop a system with the same structure that they already use for deposits. So, the way we are creating our CBDC has several advantages over what I’ve seen out there.”
Thus, the security of the system will be adequate to the international standards determined by the Basel Committee for Banking Supervision, which, among other things, stipulates criteria for calculating minimum capital requirements to cover credit, market and operational risks.
The objective is to ensure that institutions are able to absorb possible embezzlement, such as those caused by events known as “bank runs”, which are characterized by a concentrated demand for withdrawals by customers.
Submission to the Central Bank will be the great differentiator of stablecoins issued by private stablecoin banking institutions, such as Tether (USDT) and TerraUSD (USTC). The latter was an algorithmic stablecoin whose parity with the dollar was maintained by a mechanism of burning and emission of tokens depending on supply and demand in the market.
The loss of parity ended up destabilizing the system and causing the mechanism to collapse, causing the token to collapse. Today the USTC is a doomed currency, although it is still trading 99% below its target price, according to data from CoinMarketCap.
Banking multiplier
Under current legislation, banks use an expedient known as banking multiplier. It works as follows: whenever a customer makes a deposit, the bank uses the funds raised to make a loan, after allocating a portion for compulsory deposit at the Central Bank.
The borrowed funds revert back to a bank deposit, restarting the cycle again and causing the original deposit to multiply. The possibility of making several loans allows the bank to leverage its operations.
According to the BC, the same system will be replicated by the digital real. After raising funds from customers, banks will be able to issue their own stablecoins, deducting the compulsory deposit. These stablecoins will enter into circulation and eventually become new deposits, which in turn will allow for the issuance of new stablecoins, replicating the cycle of creation of the conventional real.
In short, private stablecoins will not be backed on a one-to-one basis with the digital real, but will have the Central Bank as a guarantor institution.
Although based on the Basel Committee, this prerogative runs counter to the regulatory siege that has been forming on private issuers of dollar-pegged stablecoins. As Cointelegraph Brasil recently reported, The New York State Department of Financial Services (DFS) has determined that stablecoins must be fully backed by reserves at the end of each business day. The issuer must maintain a redemption policy approved in advance in writing by the DFS that guarantees the holder the right to redeem stablecoins for dollars at any time.
Disclaimer: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. EmeringCrypto.io does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.