Controversial issue of stablecoins

    02 Aug 2021

    Stablecoins are cryptocurrencies pegged to traditional currencies in order to prevent volatility, and the financial authorities all over the globe have mixed feelings about them. On the one hand, these are still cryptocurrencies, and therefore are fraught with potential danger. On the other hand, they seem to confirm the authority of fiat currencies, so prohibiting them means recognizing the faults of fiat.

    On July 19 it became known that US Treasury Secretary Janet Yellen plans to hold a meeting with leading financial market consultants and experts. Also invited are representatives from the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Chair of the Board of Governors of the Federal Reserve System, the Chair of the Securities and Exchange Commission, and the Acting Chair of the Commodity Futures Trading Commission.

    The topic of the meeting is the prospects for using, as well as the potential and risks of stablecoins. In the following months, the first official recommendations on the regulation of stablecoins will be made public.

    “In light of the rapid growth in digital assets, it is important for the agencies to collaborate on the regulation of this sector and the development of any recommendations for new authorities”, – said the U.S. secretary of the treasury.

    However, the problem is actually much more complicated than it seems. For those new to the topic, stablecoins are cryptocurrencies tied to traditional assets, the prices of which remain stable in the long term (relatively, of course). Usually, stablecoins are backed by fiat currencies of the top developed countries, as well as gold or other commodity assets.

    Stablecoin tokens circulate on public blockchains and are linked to the underlying asset. Most stablecoins can be bought by transferring fiat money from a bank account, essentially making them digital bearer assets.

    The most popular USD-pegged stablecoins are Tether, USDC, TrueUSD, and Paxos. Some stablecoins were initiated by cryptocurrency exchanges. For example, Coinbase launched USD Coin, and Binance did Binance USD (BUSD).

    For one thing, all this makes stablecoins extremely convenient to use specifically as a means of payment. For example, when paying for a product or service with USDT crypto coins, you don’t have to worry about the volatility inherent in crypto, and the payment goes through quickly, easily, and with a minimal commission.

    Nevertheless, there are several reasons why stablecoins raise concerns, so to speak, “on both sides of the barricades”. Government regulators and banks really do not like the fact that fiat money is “used without permission”, that the stablecoin circulation is almost impossible to control, that transfers cannot be regulated by the universally binding directives for all banks, etc.

    In turn, the cryptocurrency community has a hard time accepting stablecoins, often referring to them as “fiat money with a blockchain wrapping”. This would suggest that the shortcomings of fiat money will sooner or later be imposed onto stablecoins.

    In the eyes of many people who stood at the origins of the cryptocurrency movement, stablecoins cannot be called “real” cryptocurrencies at all, since they break away from the idea laid down by Satoshi Nakamoto, which involved complete independence of the cryptocurrency from government agencies and traditional financial institutions.

    Add to this the fact that, unlike “real” cryptocurrencies, stablecoins are mainly created by centralized organizations. And finally, they require independent audits. The control over stablecoins must be enforced by a third party, while community oversight is completely ruled out.

    Stablecoins also violate the principle of cryptocurrency market-based price formation. You can blame BTC and altcoins for volatility as much as you want, but their value is determined only by the market, with all its pros and cons. Whereas the stablecoin rate is subject to the actions of central banks (in the case of fiat-pegged coins), or markets strongly tied to them (for gold-pegged ones). In any event, state regulators in different countries seem to be more willing to accept (in different capacities) stablecoins than cryptocurrencies like Bitcoin. For example, in June, the Bank of England stated that payments in stablecoins should be regulated in the same way as payments processed by banks. According to the Bank of England management, if digital currencies become widespread enough to affect financial stability, they will require stricter regulation than at present.

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