According to TechFlow, Circle, the issuer of the USDC stablecoin, recently released a white paper titled "Risk-Based Capital for Stable Value Tokens", proposing a new risk-based capital management model for stablecoins and other digital cash tokens.
The white paper believes that stablecoins need to go beyond the adequate capital reserve requirements of the existing Basel banking regulatory framework to mitigate the risks unique to stablecoins, other fiat currency-equivalent tokens and their issuers.
These risks include shortages in token prices due to market transactions, "runs" caused by excessive selling, operational risks, and technical risks. To address these challenges, Circle proposed the "Token Capital Adequacy Framework" (TCAF).
The framework adopts a dynamic risk-sensitive model, starting from stress testing reserves and stakeholder opinions, while considering technical risks such as blockchain network performance and network security.
TCAF aims to differentiate between emerging "persistent" risk factors and "disappearing" risks that have been successfully mitigated, simplify the risk management process, provide risk management standards across jurisdictions and institutions, and provide incentives and accountability to mitigate negative risk externalities.
