crypto.news covers breaking crypto news as well as all other updates relevant to the crypto and blockchain space, keeping you plugged right into the market. One of the most important tools traders have when seeking to manage volatility in the crypto market is stablecoin technology.
Stablecoins are a popular form of cryptocurrency that operates as the bridge between fiat currency and cryptocurrency. The first stablecoin was Tether launched in 2014, and was originally called ‘realcoin.’ But over the years a host of different stablecoins have come onto the scene, such as BUSD, USD coin, and DAI.
The idea of a stablecoin is to create a virtual cryptocurrency that has strong liquidity provisions, the potential for better regulatory cohesion, and of course, to be financially stable. To achieve this goal a stablecoin must be ‘pegged’ or linked to another form of asset, often at a 1:1 ratio. Usually, this asset is the US Dollar, but it can also be different fiat currencies, physical assets such as gold or silver, and in some cases even other cryptocurrencies.
By linking a crypto coin with another asset, providers effectively bridge the functionality of fiat and crypto, which can allow businesses to operate in the digital crypto space, but with the security of a different asset. This type of function allows for a host of financial services to take advantage of the many benefits of the crypto space while maintaining regulatory cohesion.
Regulatory cohesion is a key reason for the use of stablecoins. Many countries like China and India for example have moved for tighter and tougher regulation of crypto and crypto-assets. Often this push for regulation happens due to instability in crypto markets or the need on the part of regulators for greater degrees of control.
Stablecoins potentially allows for users and businesses to employ better KYC practices, engage in more substantial and thorough audits, and provide stronger liquidity provisions. All of these benefits potentially allow for stablecoin operations even in strict regulatory contexts.
However, stablecoins are not without criticism. Sadly, some stablecoin providers such as Tether have found themselves in trouble with users and regulators due to omitting or outright lying about the ratio of fiat currency to cryptocurrency.
There has been an ongoing scandal and investigation concerning whether Tether’s TUSD coins are really backed 1:1 by US dollars, with Tether famously firing the auditor looking into the matter. An undercollateralized stablecoin could have disastrous effects on the market, as a loss of confidence could trigger a selloff. In the event of users being unable to sell their dollar-pegged stablecoin for $1, the crypto market could face a liquidity crisis.
To date, no evidence has been found proving that Tether is undercollateralized, nor has there been any hard evidence that the stablecoin is fully backed by US dollars in the way Tether Holdings Ltd. claims. This, of course, undermines the credibility of a stablecoins provider and massively disrupts the security of the asset.
Yet other stablecoins, such as Binance BUSD for example are far better examples of this particular form of cryptocurrency, offering legitimately backed liquidity, confirmed ratios, and regulatory cohesion. Working in partnership with companies like Paxos, a New York FinTech corporation, BUSD operates ‘above board,’ granting legitimacy and interoperability to this particular stablecoin and the crypto concept in general.
As cryptocurrency moves further and further into different financial spaces, the technology runs into various operational and regulatory challenges. Stablecoins seek to answer some of these challenges, granting new opportunities and better securities to users and businesses alike.