Stablecoins

Subject – Science and Tech

Context – Washington worrying about Stablecoins

Concept –

Stablecoins might be the most ironically named innovation of the cryptocurrency era, at least in the eyes of many Washington regulators and policymakers.
These digital currencies promise to maintain their value, which is generally pegged to a government currency like the dollar or euro, by relying on stable financial backing like bank reserves and short-term debt.
They are exploding in popularity because they are a practical and cheap way to transact in cryptocurrency.
Stablecoins have moved from virtual nonexistence to a more than $120 billion market in a few short years, with the bulk of that growth in the past 12 months.
But many are built more like slightly risky investments than like the dollars-and-cents cash money they claim to be. And so far, they are slipping through regulatory cracks.

What is a stablecoin?

A stablecoin — stablevalue coin, is a type of cryptocurrency that is typically pegged to an existing government-backed currency.
To promise holders that every $1 they put in will remain worth $1, stablecoins hold a bundle of assets in reserve, usually short-term securities such as cash, government debt or commercial paper.
Stablecoins are useful because they allow people to transact more seamlessly in cryptocurrencies that function as investments, such as Bitcoin. They form a bridge between old-world money and new-world crypto.
But many stablecoins are backed by types of short-term debt that are prone to bouts of illiquidity, meaning that they can become hard or impossible to trade during times of trouble. Despite that somewhat shaky backing, the stablecoins themselves promise to function like perfectly safe holdings.

Types of Stablecoins –

Are they all equally risky?

Stablecoins are not all created equal.
The largest stablecoin, Tether, says it is roughly half invested in a type of short-term corporate debt called commercial paper, based on its recent disclosures.
Other stablecoins claim different backing, giving them different risks.
The common thread is that, without standard disclosure or reporting requirements, it is hard to know exactly what is behind a stablecoin, so it is tough to gauge how much risk it entails.
It is also difficult to track just how stablecoins are being used.
Stablecoins may facilitate those seeking to sidestep a host of public policy goals connected to our traditional banking and financial system: anti-money-laundering, tax compliance, sanctions and the like.

What can regulators do?

The trouble with stablecoins is that they slip through the regulatory cracks.
They aren’t classified as bank deposits, so the Fed and the Office of the Comptroller of the Currency have limited ability to oversee them.

To know more about Stablecoins, please click here.