What are stablecoins?
Stablecoins are a form of cryptocurrency. Unlike BTC and other speculative coins, however, stablecoins are nominally pegged to underlying assets in order to limit price fluctuations. This stability has made them the currency of choice for buying other cryptocurrencies.
Stablecoins first emerged around 2014 but their use has grown rapidly since the start of this year. In January, there was about $30bn worth of coins in circulation. By October, this had risen to more than $130bn.
How are stablecoin used?
Customers buy stablecoins from exchanges, and some of their money is, in theory, used to purchase reserves to provide asset backing for the coins. Stablecoins can then be used to buy other cryptocurrencies. Compared with wire transfers of dollars, stablecoins can settle deals far more quickly. That makes them suitable both for acquiring volatile cryptocurrencies and for shifting out of them in case the price falls.
Stablecoins have also found uses in decentralized finance, where they can earn income for customers in a variety of ways, including being lent out to other users or providing liquidity for trading. In the offline world, there are reports of stablecoins being used for cross-border transfers in places where access to dollars is limited.
To which assets are stablecoin pegged?
The vast majority of stablecoins are pegged to fiat currencies. The issuers of tether, USD coin, and binance USD, the third biggest, all say that they are pegged to US dollars. Others are pegged to the euro and yen, although these account for a very small part of the category. A few stablecoins are pegged to gold reserves, including offerings from Paxos, whose pax dollar is being used in a trial by Meta’s Novi digital wallet.
A smaller, though still noteworthy, proportion of these currencies are known as algorithmic stablecoins. They are pegged to other cryptocurrencies, in some cases including stablecoins. Their algorithms are meant to create and destroy coins in order to avoid breaking the peg. The largest of these, dai, has about $6bn worth of coins in circulation.
What do the regulators say?
Tether has long been in regulators’ sights. In February, it paid $18.5m to settle with New York attorney-general Letitia Jones, who accused the company and sister exchange Bitfinex of covering up “massive” losses. The investigation said that, for periods of time, the company had no access to bank accounts anywhere in the world, despite its claims that it held one dollar for every tether. Neither company admitted wrongdoing.
In the US, the President’s Working Group on Financial Markets, led by the Treasury, released a report in November which called on Congress to legislate to regulate stablecoins as banks.
In the UK, the Bank of England has warned that stablecoins must face “difficult questions”. The Financial Action Task Force noted last year that the mechanisms for stabilizing the assets could present avenues for market manipulation.
A report released in October by the Committee on Payments and Market Infrastructures — part of the Bank for International Settlements — and the International Organization of Securities Commissions proposed bringing stablecoins into line with existing standards for payment systems and clearinghouses.
Source: Financial Times