PANews reported on August 16 that Circle, the issuer of USDC stablecoin, recently released a white paper titled "Risk Capital for Stable Value Tokens", proposing a new risk-based capital management model for stablecoins and other digital cash tokens. The authors of the paper believe that in order to mitigate the unique risks faced by stablecoins, other fiat currency equivalent tokens and their issuers, stablecoins require sufficient capital reserve requirements that should exceed the capital standards currently established under the Basel banking regulatory framework. According to the authors, these unique risks include, but are not limited to, token price shortages due to market transactions and the prevalence of secondary markets, digital token "runs" due to excessive selling, operational risks, and technical risks.

These unique challenges distinguish stablecoin issuers and the digital assets they issue from traditional banks. The paper’s authors argue that the solution to this problem is to adopt what they call a Token Capital Adequacy Framework (TCAF). Circle’s paper explains that current banking regulations use fixed-ratio risk standards and risk weights that do not necessarily reflect true risk levels. The authors use long-term Treasury bonds as an example, noting that despite their high interest rate risk, they are weighted low in current banking standards. TCAF addresses this problem by adopting a dynamic risk-sensitive model that first stress tests reserves and then listens to stakeholder input. The TCAF model also considers technical risks such as blockchain network performance and cybersecurity. The paper also notes that TCAF’s dynamic approach could result in higher or lower capital requirements than current banking standards, which would vary depending on the risk environment.

Circle’s new model has five objectives. First, it seeks to distinguish between emerging “disappearing” risk factors and “disappeared” risks that have been successfully mitigated or no longer pose a threat. The model also seeks to play a complementary role, helping regulators to adequately address operational risks while being as “simple” as possible and avoiding the bloated and costly risk management departments of the traditional banking industry. The fourth main goal of TCAF is to provide a set of risk management standards that are applicable across jurisdictions and institutions. Last, but not least, the model aims to provide incentives and accountability to mitigate negative risk externalities.