Bank of England, BIS outline Pyxtrial project for monitoring stablecoins

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A joint project between the Bank for International Settlements (BIS) Innovation Hub and the Bank of England (BoE) has shown it can deliver near real-time data on stablecoins‘ liabilities and the assets backing them.

In a report, the two banking bodies outlined the initiative—Pyxtrial—which has been exploring how technology solutions can enable the monitoring of asset-backed stablecoins’ balance sheets, providing insight into whether the backing assets exceed their liabilities at all times.

“Stablecoins are a growing and largely unregulated sector with a market capitalisation of around US$162 billion as of June 2024… there is a lack of appropriate supervisory technology (suptech) tools to improve the monitoring of risks that these instruments could create. Pyxtrial represents an important first step in creating a suitable suptech tool,” said the report.

It added that the project’s ultimate goal is “to support the supervision of issuers of asset-backed stablecoins.”

This BIS and BoE collaboration comes at a time of increased focus on stablecoin regulation globally, not least the stablecoin provisions of the EU’s Market’s in Crypto Assets (MiCA) regulation coming into force at the end of June.

Stablecoins have been in the regulatory crosshairs since the collapse of TerraUSD (UST), Terraform Labs algorithmic ‘stablecoin’ that purported to maintain a 1:1 peg with the U.S. dollar through a link to Terraform’s own LUNA token. In spring 2022, UST lost its peg to the U.S. dollar, leading to the printing of more LUNA to prop it up. This, in turn, led to a crash in LUNA, and the whole Terra ecosystem came tumbling down, wiping an estimated $60 billion from the digital asset space in the process.

According to the July 31 report, Pyxtrial’s “modular, customisable approach” would allow regulators around the globe to adapt it to their particular technology setup and help prevent further UST-style disasters.

“Pyxtrial enables earlier identification of potential risks as supervisors have access to timelier stablecoin data in a standardised format. Additionally, Pyxtrial could bring value to cross-border supervisory cooperation as it enables host regulators to assess the backing of an overseas-issued stablecoin,” said the report.

Pyxtrial developed a prototype data analytics pipeline that includes features that allow authorities to pull data directly from issuers’ systems to verify on-chain liabilities. The system’s flexibility means it could also potentially be applied to monitor “other tokenised products that are backed by real-world assets,” the report added.

The BIS and BoE rounded off by voicing their hope that the project will inspire supervisors and other authorities to consider how they can customize Pyxtrial, extend its use cases to encompass other digital assets and motivate new approaches to supervision.

Despite promising early signs from Pyxtrial, the report emphasized that, like any proof-of-concept (PoC), “Pyxtrial needs to be further tested and refined before it can be deployed. This process is under way.”

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