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Cause and Effects of Governments Introducing Their Own Stablecoins

What happens when the government gets involved in stablecoins and Cryptocurrency?

Stablecoins are cryptocurrencies pegged to or linked to another asset class, such as the U.S. dollar, other currency, or gold, to keep the price from fluctuating wildly. Stablecoins are designed to have a more fixed or “stable” value than traditional cryptocurrencies. One of the most fundamental benefits of cryptocurrency is you don’t need a banking institution to send payments, thus opening up their use to anyone around the world. The lack of government regulation and privacy is a driving force in the success of coins.

Stablecoin Growth

The demand for stablecoin is surging. According to The Block, between October 2020 to October 2021, the total value of stablecoin assets grew by about 495 percent. This momentum is driving what’s being referred to as the “stablecoin invasion.” Currently, there are more than 200 stablecoins worldwide with a worth of approximately $130 billion. The rise of stablecoins as cryptocurrency is posing a threat to the established, government-backed currency.

Government Calls for Regulation

The government can’t shut down cryptocurrency, but it can regulate it. The government states investor protection and fraud prevention as the main reasons for wanting to regulate cryptocurrency. Of course, with government involvement comes taxation.

In August of 2021, Gary Gensler of the U.S. Securities and Exchange Commission made a bold statement regarding coins. His words: “It’s time to regulate cryptocurrency markets.” He’s not alone. Jerome Powell of the Federal Reserve issued an urgent call for regulation of stablecoins, specifically.

Government Created Cryptocurrency

Governments around the world, including the U.S., Russia, China, Japan, Canada, Venezuela, Sweden, and Uruguay are all actively working on some form of digital currency or at the very least exploring the topic of their own government-issued cryptocurrency.

Why Is the Government Interested?

It’s important to note, regulators usually only pay attention to vital segments of the financial system. The particular statements made by government regulators support the evidence that unlike cryptocurrencies such as Bitcoin and Ethereum — which are known to widely fluctuate in value — stablecoins possess the potential to play a vital (even if it’s yet to be defined) role in the future of finance globally. In fact, we could go as far as saying they could become a backbone for payments and other financial services. According to economists, the benefits of stablecoins include their lower costs, safety, and real-time capability. Stablecoins could make it cheaper for businesses to accept payments and easier for governments to run major cash transfer programs (including social security checks or stimulus money).

What Does Government-Issued Currency Look Like?

Based on the definition of cryptocurrency, digital currencies backed, issued, and tracked by a government would not be a cryptocurrency. Government “cryptocurrency’ is referred to as “centralized digital currencies” or CDCs. The government-issued currency would never be a replica of bitcoin. In fact, the government and true cryptocurrency have very different interests. They’re at the opposite end of the spectrum when it comes to cryptocurrency. They are as centralized as can be, whereas cryptocurrency is all about decentralization.

Potential Benefits

Government CDCs could potentially be a good thing. Digital currencies could eliminate the middlemen and banks, resulting in fewer people taking a share out of transactions and more money in your wallet. Government officials claim they’re trying to move ahead with a central bank digital currency is to create a payment system that is essentially free for consumers and businesses.

A major upside of a CDC is that central banks would be able to directly change the interest rates on the currency. Incentives for saving and spending would be more significant. A CDC could turn the interest rate negative to stimulate growth — something central banks can’t do now.

Risks Involved

Although there’s the potential for greatness, other economists fear they could become anything but stable with the government’s involvement. Without a strong legal and economic framework, there’s a legitimate risk stablecoins could collapse like money market funds in 2008 or become entirely worthless.

State and Private Sector Stablecoins

The Paxos Standard (PAX) and Gemini Dollar (GUSD are two USD-backed stablecoins approved and regulated by the New York State Department of Financial Services.

JPMorgan Chase piloted and launched a stablecoin, JPM Coin, for its corporate clients. A January 2021 survey of central banks revealed two-thirds of those surveyed are actively researching the potential impact of stablecoins on financial stability.

Challenges With Change

Major changes to how money works are complex. The public sector (in the United States and other countries) hasn’t had much success in deploying digital services. China is the exception, however.

There are also risks with private sector involvement as stablecoins move beyond cryptocurrency trading. Crime, stability, and lack of consumer protection are significant private sector concerns that any solution would have to address.

Impact on Trading

Economists believe government CDCs are so different from cryptocurrency and stablecoins that the two are unlikely to impact each other. The effect of government regulation on bitcoin and other cryptocurrencies is anticipated to be limited.

Notable economist Kenneth Rogoff wrote in an essay that bitcoin will never replace government-issued money because it “would make it extremely difficult to collect taxes or counter criminal activity.”

CurPay, a leader in artificial intelligence, revolutionizes the way businesses manage crypto. In 2022, the company announced the integration of two more centralized crypto exchanges, Gemini and KuCoin.

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