[Paper Review] From Tether to Libra: Stablecoins, Digital Currency and the Future of Money

Alexander Lipton, Aetienne Sardon+2 more|arXiv (Cornell University)|May 26, 2020

Banking stability, regulation, efficiency17 citations

TL;DR

This paper proposes a new definition and taxonomy for stablecoins, distinguishing them as tradable digital assets not directly linked to issuers or existing currencies, with key characteristics including secondary market trading and price stability. It argues that technology-based stablecoins represent a genuine innovation, while claim- and faith-based models are evolutionary extensions of traditional money, offering a framework to assess disruptive potential in digital finance.

ABSTRACT

This paper provides an overview on stablecoins and introduces a novel terminology to help better identify stablecoins with truly disruptive potential. It provides a compact definition for stablecoins, identifying the unique features that make them distinct from previously known payment systems. Furthermore, it surveys the different use cases for stablecoins as well as the underlying economic incentives for creating them. Finally, it outlines critical regulatory considerations that constrain stablecoins and summarizes key factors that are driving their rapid development.

Motivation & Objective

• To clarify the ambiguous concept of 'stablecoin' and prevent deceptive innovation by distinguishing true innovations from rebranded legacy systems.
• To analyze the historical evolution of stablecoins from Tether to Libra, identifying key drivers of adoption and technological shifts.
• To propose a novel, technology-neutral definition of stablecoins based on three core criteria: not a traditional currency, no direct issuer relationship, and tradable on a secondary market.
• To develop a new taxonomy distinguishing claim-, faith-, and technology-based stablecoins, aligned with the IMF’s money tree and regulatory frameworks.
• To evaluate the economic incentives, use cases, and regulatory perspectives on stablecoins, assessing their potential to disrupt traditional payment systems.

Proposed method

• Proposes a new definition of stablecoins based on three criteria: not an existing currency, no direct issuer relationship, and tradability on a secondary market.
• Introduces a three-tier taxonomy: claim-based (backed by reserves), faith-based (backed by trust), and technology-based (algorithmically stabilized via DLT).
• Uses Christensen’s Theory of Disruptive Innovation to differentiate between genuine innovation and rebranded financial products.
• Analyzes historical stablecoin projects (e.g., Tether, WIR Bank) to trace the evolution of stablecoin design and use cases.
• Reviews regulatory frameworks from FINMA, ECB, and U.S. authorities, emphasizing technology-neutral regulation.
• Compares the proposed taxonomy with existing classifications, including the IMF’s money tree, to validate conceptual coherence.

Experimental results

Research questions

• RQ1 What distinguishes a genuine stablecoin innovation from a rebranded legacy payment system?
• RQ2 How can stablecoins be meaningfully defined and classified to avoid regulatory and conceptual confusion?
• RQ3 What are the key economic incentives and cost structures that drive stablecoin issuance and scalability?
• RQ4 To what extent do stablecoins represent a disruptive force in global finance, particularly in cross-border payments and DeFi?
• RQ5 How do regulatory approaches (e.g., FINMA, ECB, U.S. policy) treat stablecoins, and what implications does this have for future financial stability?

Key findings

• Tether, despite reserve controversies and price deviations (e.g., dropping to $0.91 in early 2017), remains the most actively traded stablecoin, with over 4.1 billion tokens in circulation as of December 2019.
• The WIR Bank system, operational since 1934, demonstrates that non-state-backed, community-issued stable money can achieve 2 billion CHW in annual turnover with over 62,000 SME participants.
• Technology-based stablecoins are decoupled from traditional money creation mechanisms and represent a fundamental shift, while claim- and faith-based models are evolutionary extensions of existing monetary forms.
• Stablecoin issuers benefit from high scalability due to fixed-cost structures, with significant upside from interest earnings on reserve assets.
• Regulators such as FINMA and the ECB adopt a technology-neutral stance, seeking to regulate stablecoins under existing financial infrastructure and anti-money laundering (AML) laws.
• The emergence of central bank digital currencies (CBDCs) could potentially upstage private stablecoins, altering the future landscape of digital money.