Stablecoins — a bridge between cryptocurrencies and traditional money
On May 5 2022, London became the venue for the Financial Times’ Crypto and Digital Assets Summit. One of the main topics of panel discussions was stablecoins, their stability and the problems people and companies face when adapting them. Drofa Comms joined this event to delve into the trends in the market and continue to keep up with them.
Stablecoins are digital assets that reflect the exchange rate of fiat currencies or other assets. For example, you can purchase tokens related to the dollar, euro, yen, and even gold and oil. Stablecoins allow the holder to fix profits and losses and transfer assets at a stable price in peer-to-peer blockchain networks. Unlike cryptocurrencies, the prices of stablecoins remain stable depending on which currency or commodities support them.
Like most digital assets, stablecoins are mainly used as a store of value and a medium of exchange. They give traders a temporary respite from volatility when the market falls, and can also be used in the fast-growing world of DeFi for things like profitable farming, lending and providing liquidity.
They are a safe haven for worried investors. Many exchanges, including the world’s largest Binance exchange, do not allow traders to buy traditional currencies, but only allow them to buy and sell cryptocurrencies. This means that it is often difficult for investors to cash out their cryptocurrencies quickly when the situation becomes complicated. To do this, they have to make a transfer through several exchanges or even wait a few days.
That’s where stablecoins can help. Since they are cryptocurrencies, they work on most crypto exchanges. However, since they are related to the value of a single fiat currency, they act as a kind of temporary shelter for investors who want to secure their funds during storms in the market. Thus, stablecoins are similar to blockchain-enabled versions of the dollar.
Most traders and investors get access to stablecoins by buying them on exchange platforms, but it is also often possible to mint new stablecoins by depositing the necessary collateral to the issuing company, for example, US dollars or physical gold.
USDT is one of the first stablecoins and the most famous. It is claimed that it is supported by a reserve of real dollars located outside the blockchain. Having this stash in a reliable bank vault, investors can be sure that their USDTs really cost one dollar apiece, while maintaining a stable price. But the problem is that Tether which mints USDTs has never fully proved that there is a huge vault full of dollar bills working on their coins` stability.
That is why the problem of trust remains relevant. One of the ways to solve it is to educate the population about the proper use of stablecoins, as well as the transparency of the companies that mint their own stable cryptocurrencies. Investors need proof that coins’ prices are based on traditional currency prices or other factors like oil or gold value. Otherwise, investors will think that cryptocurrencies were created and minted out of the air.
One of the most striking examples of an attempt to introduce cryptocurrencies at the state level was El Salvador, which was described by panellists Julian Godsil and Sandra Ro. The government of the country tried to make bitcoin a national currency in order to increase economic development and encourage young people not to leave the country. Some critics have suggested that bitcoin’s anonymity will facilitate money laundering and criminal activity. All this suggests that it is necessary to make such important decisions wisely, without chasing the dazzling opportunities that cryptocurrency can give.
Christian Angermayer from Apeiron Investment Group raised the following questions: “Who should issue stablecoins? Can they be minted by government bodies, banks or the Federal Reserve?” The problem of creating a universal base that will ensure the stability of these coins around the world remains unresolved. Experts are thinking about whether it is worth tying stablecoins to the US dollar, euro, gold or oil prices. Now we don’t have answers to these questions.
However, one of the important solutions to the problem related to stablecoins and cryptocurrency, in general, may be the involvement of financial industry giants. So, the Visa payment system launched a project that uses USDC stablecoins. During the transaction, the digital currency is converted into fiat, which can be deposited into a bank account associated with the crypto wallet. PayPal and Mastercard are also actively implementing cryptocurrencies.
Thus, we see that stablecoins and cryptocurrencies can become a very real replacement for the usual money. They have greater liquidity, ease of use and are harder to steal. Attracting famous people and major brands to the crypto payments industry will be able to increase trust and ensure the fastest mass adoption. Stablecoins will be able to become a transitional link, a kind of guarantor of cryptocurrency security for the period until the cryptocurrency is improved to the point that it can fully function without being tied to fiat money.