Stablecoins

Table of Contents

Relevance

GS 3: Science and Technology- developments and their applications and effects in everyday life.

Context

The Treasury Department of US and other agencies are moving towards tighter regulation for a fast-growing cryptocurrency called stablecoins.

Key points

Stablecoins are cryptocurrencies without the volatility. They have the same characters as other cryptocurrencies.
To promise holders that every $1 they put in will remain worth $1, stablecoins hold a bundle of assets in reserve, usually short-term securities such as cash, government debt or commercial paper.
So, unlike Cryptocurrencies like Bitcoin, whose prices tend to vary a huge amount in a short span of time, value of stablecoins are steady, more like a traditional currency, like Indian Rupee or US Dollar.
With stablecoins, a person can maximise his/her chances of protection from market fluctuations. So, stablecoins form a bridge between old-world money and new-world crypto.
Tether is the third largest cryptocurrency by market value, and until now, the most famous stablecoin.

There are two types of stablecoins depending on the collateral: national currency backed, and cryptocurrency backed.
Collateralised stablecoins are attached to another asset, like the US dollar. Their issuers back up the value of their coin by holding on to that asset.
Some stablecoins also employ algorithms to manage supply and demand of the coin so that circulation matches reserves.

While trading cryptos for dollars, there are longer processing lags for dollar withdrawals, on some exchanges.
Additional fees are also often imposed when dollar withdrawals are frequent or large.
Stablecoins are used across a greater cross-section of crypto exchanges unlike, traditional currencies like USD.

Stablecoins turnover has boomed since 2019, rising from a few bn dollars a day to an average of US$100 bn in April 2021.
Big companies like PayPal and Visa have recently announced that they would allow payments with stablecoins.
International money transfers in stablecoins involves less friction than via a bank.
The settlement time is also faster and it is 24/7 available.
To replace dollar with stablecoins, however, will require some kind of regulation.
First of all, it is important to ensure that the issuer actually has the assets to back up its coins can be a start.
The way stablecoins are growing, its regulation has become more important than ever.