Stablecoins

In News

• Recently, the Financial Stability Board (FSB), a body which advises major economies on international finance, promised to push for stablecoin regulation citing recent turmoil in the cryptocurrency market.

About Stablecoins

• Digital currency:
  • A stablecoin is a digital currency whose value is pegged to a ‘stable’ asset, such as the U.S. dollar or gold.
• Tether:
  • The best-known stablecoin in the crypto ecosystem today is arguably Tether (USDT), whose market cap is close to $66 billion, putting it below Ethereum, the second largest cryptocurrency in existence.
    • 1 USDT is meant to be worth 1 USD, though market factors can take prices slightly above or below this mark.
• Not authorised:
  • Stablecoins are not authorised for use by a country’s lawmakers or central bank. That means investors take on considerable legal and financial risk to hold them.

Significance

• Safeguarding earnings
  • In countries such as Turkey, Nigeria, and Argentina where the local currency is rapidly losing value, converting funds to stablecoins is one way for residents to try and safeguard their earnings.
• Remittance
  • In Taliban-occupied Afghanistan, with remittance channels choked by American sanctions, stablecoin transfers helped a few crypto users live to see another day.
• Minimize volatility
  • The value of cryptocurrencies like Bitcoin and Ether fluctuates a lot sometimes by the minute. An asset that’s pegged to a more stable currency can give buyers and sellers certainty that the value of their tokens won’t rise or crash unpredictably in the near future. 
• Trade or save assets
  • You don’t need a bank account to hold stablecoins, and they’re easy to transfer. Stablecoins’ value can be sent easily around the globe, including to places where the U.S. dollar may be hard to obtain or where the local currency is unstable. 
• Earn interest 
  • There are easy ways to earn interest (typically higher than what a bank would offer) on a stablecoin investment.
• Transfer money cheaply
  • People have sent as much as a million dollars worth of USDC with transfer fees of less than a dollar.

Way Forward

• The risks within the stablecoin ecosystem are very high. 
• Now as regulators step in the market is expected to make traders more fearful. 
  • Terra is not the first or only fault line in the stablecoin market, and it won’t be the last. 

Source: TH