Stablecoins and the State: to Ban or to Issue by Themselves?
Stablecoins have all the advantages of cryptocurrencies with one significant difference — their price is stable. That is why they are so interesting to central banks and financial regulators around the world.
What Are Stablecoins Used For?
For many cryptocurrency traders, stablecoins are an opportunity to hedge their cryptocurrency portfolio without cashing it out. This is very effective, especially during a bear market or for withdrawing profits. In most cases, stablecoins are pegged to the price of fiat currencies, such as the US dollar or the Euro, or commodities, such as Gold.
Stablecoins are also an essential component of decentralized finance (DeFi) system. DeFi presents an alternative to the existing financial system based on the public blockchain. The use of stablecoins has recently surged, and the number of projects such as p2p lending and loans has increased dramatically.
Commercial Stablecoins: From JPM Coin To Libra
The stablecoins were in the spotlight of the media, as large companies and even financial institutions began their researches. Word leading bank institutions are examining the creation of their digital stablecoins., f.e. JP Morgan’s JPM-Coin.
In the second half of 2019, Facebook announced its revolutionary project, Libra. The project was positioned as a stablecoin tied to a basket of several currencies and assets.
No less important are the projects of the Central Banks about which we spoke in our previous article: the projects of the “digital renminbi”, “the digital euro” and the “digital dollar”. JP Morgan stated the importance of creating a “digital dollar”: “… the spread of state cryptocurrencies from other countries will damage the dominant position of the dollar and the geopolitical power of the United States. The only way to mitigate the blow is to create a digital Dollar. ”
The Three Types of Stablecoins
In a rather broad categorization, there are three identifiable types of stablecoins.
Centralized Stablecoins Backed By FIAT
These are backed 1:1 by fiat currencies, which are stored in bank accounts, f.e. Tether (USDT), USD Coin (USDC), Gemini USD (GUSD), etc. They are centralized because they are launched and governed by a central organization, which could be either a company, a bank, or even a government.
Decentralized Stablecoins Backed By Crypto
These are a relatively new type of stablecoins which don’t have a central operator but are governed by a consensus of the users who take part in the network.
An example here is Maker DAO’s stablecoin — DAI. Users can lock up a certain amount of cryptocurrencies, such as Ethers, as collateral for borrowing DAI, which is pegged to the US Dollar.
Decentralized Algorithmic Stablecoins
These are still relatively new. They don’t have any collateral backing their system, and they rely on algorithms to get the price to remain stable.
The Most Popular Stablecoins By Market Cap
Although there are quite a few different stablecoins in existence, some of them stand out in terms of usage and market cap.
Pro and Cons of Stablecoins
Stablecoins come with a range of different benefits because of their digital, programmable, and blockchain-based nature. Apart from them being safe because of their stability, there are some of the other advantages include:
Borderless Payments
Just like Bitcoin, stablecoins can also be sent via the internet with no regard for countries, banks, or any intermediaries. The transactions are direct and immutable. They can’t be blocked or censored because they are carried out on the blockchain.
Low Fees
The lack of intermediaries and the peer-to-peer nature of stablecoins make transactions a lot cheaper than traditional transactions of funds.
Unlike regular bank transfers or credit card payments, which immediately charge you a certain fee and commissions, transactions carried out with stablecoins incur a minimal cost.
Faster Transactions
Blockchain-based transactions are a lot quicker compared to traditional ones. The reasons for this are for verifications and anti-money laundering (AML) processes, but perhaps an important one is that there are no intermediaries and waiting periods. As soon as the transaction is initiated, it usually takes minutes for the funds to hit the receiver’s account.
Transparency
Stablecoin transactions are carried out on public blockchains. Users can monitor each transaction, regardless of whether they initiated it or not. This is impossible with traditional payments, and it provides the much-needed transparency that a lot of people are looking for.
Of course, stablecoins come with certain disadvantages as well.
Centralization
The majority of the stablecoins pertain to an individual organization. This means that the stablecoin, though decentralized on its own, is owned by a single entity that controls its issuance and minted supply.
This is entirely counter-indicative of the very nature of cryptocurrencies because it creates another form of authority, similar to what banks currently have. However, not all the stablecoins are centralized (DAI, as mentioned above).
Dependence On Traditional Financial Markets
One of the main ideas behind cryptocurrencies is to handle the challenges that traditional financial markets have. Stablecoins are usually pegged to fiat currencies, making their value depends on the current condition of the global economy and subject to inflation, which FIAT currencies have.
Unregulated
The lack of regulation within the field is something that all cryptocurrencies pertain to. Stablecoins are no exception. As such, there’s a long way for them to grow into what they are intended to and to function as a means of transacting.
State vs. Stablecoins
In our previous article, we discussed state cryptocurrencies, which will be presented in the form of stablecoins. For CBDC, the ability to maintain value in a way that eliminates volatility is crucial. This option allows retailers to accept cryptocurrencies without having to worry about price fluctuations.
On the one hand, stablecoins can simplify state cooperation. So, Shen Nanpeng, Member of the People’s Political Advisory Council of China and Managing Partner of Sequoia Capital China, proposed to create a stablecoin, which is provided with a basket of Asian currencies. It will include the currencies of countries in the Asian region: Japanese yen, Korean won, the Hong Kong dollar, and the Chinese yuan. According to Shen Nanpen, such a stablecoin will help increase trade in the Asia-Pacific region: it will be much easier for exporters and importers to pay for goods and services of foreign suppliers, and fast and cheap international payments, which will positively affect the growth of economies in the region.
However, on the other hand, a number of states seek to prohibit the circulation of stablecoins. Thus, the German Federal Government recently stated that: “from the point of view of the federal government, it will be ensured that stablecoins do not prove themselves as an alternative to state currencies and, thus, cast doubt on the existing currency system.”
A similar position is held by John Cankliff, Deputy Governor for Financial Stability, Bank of England. He said that the cryptocurrency economy could weaken or even eliminate the practice of bank lending. In his opinion, the integration of stablecoins in social networks can cause people to stop trusting the storage of their funds to banks.
Conclusion
There’s no doubt that stable coins should have a place in the crypto space. They provide a bridge between the real world of fiat and crypto, as well as a storage place for investors and traders to escape the massive volatility of the crypto markets temporarily.
Yet one has to be concerned that crypto users are too reliant on stable coins and that their absence or potentially a crash of Tether or any other leading stablecoin could lead to far more damage to the crypto space than any hacking incident or FUD story could ever inflict.
Ultimately, if stablecoins are to remain a focal point within the crypto space, then the best way to operate them is under a regulatory compliant framework that still allows a significant degree of decentralization and censorship resistance.
