A new report from the Bank of England and the Bank for International Settlements (BIS) has shared the outcomes of a proof of concept (PoC) for Pyxtrial, a regulatory or supervisory tool designed to monitor the asset backing of stablecoins. This joint project between the BIS Innovation Hub and the Bank of England explores how technology can enable the monitoring of asset-backed stablecoins’ balance sheets, providing insight into whether the backing assets exceed their liabilities at all times. The trial encompassed Tether, USDC, Binance USD, True USD, and Pax Dollar.
Project Pyxtrial: Overview and Development
Project Pyxtrial has developed a prototype data analytics pipeline that includes data collection, storage, and analysis to support the supervision of issuers of asset-backed stablecoins. This technology is a preliminary step towards a tool that could help supervisors and regulators proactively detect issues in stablecoin backing and assist in developing policy frameworks based on integrated data.
Pyxtrial’s development is driven by several factors: the stablecoin sector’s rapid growth and largely unregulated status, with a market capitalisation of around USD 162 billion as of June 2024; ongoing regulatory development; and the lack of appropriate supervisory technology (suptech) tools to enhance risk monitoring. The value of asset-backed stablecoins is pegged to traditional financial assets, and any mismatch between a stablecoin issuer’s liabilities and the assets backing it could undermine confidence and potentially prompt a “run,” where there is a sudden loss of belief in the stablecoin’s value.
Pyxtrial’s Architecture
Pyxtrial’s architecture consists of three elements: a data model, database, and APIs. The data model defines how data are structured, with the database reflecting data on liabilities and assets retrieved from on-chain (public) and off-chain (non-public) sources. Pyxtrial provides the most recent data to its users—the stablecoin issuer’s regulator or supervisor—via a dashboard. The testing of Pyxtrial demonstrated its capability to support the monitoring of asset-backed stablecoins’ balance sheets, covering five such stablecoins in the PoC.
The use of APIs allows Pyxtrial to monitor stablecoin issuers’ assets and liabilities without directly connecting to the blockchain network, with the potential to also obtain data from permissioned private chains in the future. However, Pyxtrial does not currently assess asset quality or the rigour of asset valuations, indicating a dependency on the quality of data provided. Future functionality for asset valuation would require integration with external data providers via APIs.
Challenges and Findings
Developing the PoC involved overcoming two key challenges: the evolving nature of stablecoin regulations and accurately assessing a stablecoin issuer’s assets backing its liabilities. The quality of reporting on such assets varies across issuers, with no standardised regulatory obligation. An algorithm was used to match the reporting frequency of assets to the real-time availability of liabilities-side data, though it cannot track the composition of those assets between reports.
Key findings from Pyxtrial include:
- Pyxtrial provides a PoC monitoring tool that could support supervision of digital assets by collecting and processing both on-chain and off-chain data.
- Regulators must have the necessary in-house skills for operating and implementing Pyxtrial, requiring a multidisciplinary team.
- Further development is needed before Pyxtrial can be rolled out, as it is currently a PoC rather than a ready-made product.
- If implemented, Pyxtrial could facilitate risk monitoring by enabling earlier identification of potential risks and enhancing cross-border supervisory cooperation.
- Pyxtrial’s design prioritises flexibility, allowing regulators to adapt it to their current and future needs, including higher frequency attestation reporting and integrating it into existing systems.
Stablecoin Reporting Regularity
At present, stablecoins have varying reporting schedules. For example, Tether reports its reserves quarterly with a one-month lag, while Circle’s USDC provides monthly attested reports and weekly website updates, with BlackRock providing daily updates. Some proposed stablecoin regulations have relatively relaxed reporting requirements.
The report highlights the significant disconnect between real-time liabilities-side data and the less frequent assets-side data, which is unsustainable from a regulatory viewpoint. It advocates for higher reporting frequency and potential confidentiality of data for regulatory access only, despite users’ preference for maximum transparency. Research indicates that an excess of data can sometimes destabilise stablecoins.
Pyxtrial’s PoC shows promise in enhancing the supervision and regulation of stablecoins by providing a comprehensive tool for monitoring their asset backing. Its flexible and adaptable architecture, combined with the need for ongoing regulatory development and skill acquisition by regulators, positions Pyxtrial as a foundational step towards effective suptech solutions for stablecoin oversight.
You can download the full BIS paper here.
