Stablecoins: a safer form of cryptocurrency, or more of the same?
Updated: Dec 16, 2021
First introduced in 2018, this form of virtual currency is growing in popularity – as is the debate around associated risks and opportunities
Generally speaking, the cryptocurrency market is not for the faint of heart. Roller-coaster fluctuations and volatility might be considered an appropriate price to pay, given crypto’s limited supply and absence of a central regulatory system – but it also a hurdle to many.
Enter stablecoins. First introduced in 2018, stable coins are another form of virtual currency, which run on blockchains, but whose values are pegged to traditional (stable) reserve assets such as fiat currencies (the US dollar, for example), or commodities, such as gold.
Coinbase explains that they are designed to reduce the volatility relative to unpegged cryptocurrencies, such as Bitcoin. Basically, they can be viewed as a bridge between the cryptocurrency sphere and the fiat currency sphere.
Leaders in the stable coins sector today are Tether (USDT) USD Coin (USDC), and Pax Dollar (USDP), as well as various others such as Binance USD (BUSD), and TerraUSD (UST). Like fiat currency – these coins are minted, not mined.
According to the abovementioned Coinbase report, “Stablecoins are open, global, and accessible to anyone on the internet 24/7. They’re fast, cheap and secure to transmit. They’re digitally native to the internet and programmable.”
Sounds great, what can go wrong? Well, according to a report issued by the Department of the Treasury, “speculative digital asset trading…presents risks related to market integrity and investor protection” which encompass “possible fraud and misconduct, including market manipulation, insider trading, and front running, as well as a lack of trading or price transparency.”
Earlier this year, The President’s Working Group on Financial Markets, recommended that Congress act promptly to enact legislation to ensure that payment stablecoins and payment stablecoin arrangements are subject to a federal prudential framework on a consistent and comprehensive basis.
As popularity is growing, so are legislators’ concerns
The stablecoin popularity is on the rise. Just last week, for example, Meta (formerly Facebook) announced a pilot program that will allow users to send and receive money using the corporation’s digital wallet, Novi (which uses USDP, or the Pax Dollar), via WhatsApp.
Last Wednesday, CEOs of six major cryptocurrency companies testified before the House Financial Services Committee, providing legislators with a five-hour “Crypto 101” crash course. The hearing marked the first crypto hearing the committee has had since the Bitcoin whitepaper was published, 13 years ago.
At the hearing, the crypto execs called for tailored legislative solutions, rather than forced compliance with existing regulations. The stablecoin issue was also discussed at great length, with Congressman Warren Davidson calling it “the lowest-hanging fruit.”
Another hearing took place yesterday (Wednesday), this time dedicated exclusively stablecoins. Held before the Senate Banking, Housing and Urban Affairs, it was titled “Stablecoins: how do they work, how are they used, and what are their risks?”
Consistent with general Democratic skepticism on cryptocurrency, Chairman Sherrod Brown (D-OH), evoking the 1929 and 2008 market crashes. “So far, what happens in the crypto markets has stayed in the crypto markets. But stablecoins create a very real link between the real economy and this new fantasy economy,” he said.
“To a whole lot of people, that seems like a fantasy economy too. But a Big Tech scheme that makes it easy for hardworking Americans to put their money at risk isn’t the answer.”