On May 5, 2022, London became the venue for the Financial Times’ Crypto and Digital Assets Summit. One of the main discussion topics was stablecoins, their stability and the problems people and companies face when adopting them. Drofa Comms joined this event to delve into the trends in the market and continue to keep up with them.
What Stablecoins Are and How They Work
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 most typical cryptocurrencies, stablecoins maintain their stable price depending on which fiat currency or commodities support them. Investors use them both as a store of value and a medium of exchange. At the same time, when the market falls, they can act as a safe haven, giving traders temporary respite from volatility. Meanwhile, in DeFi, users rely on stablecoins for things like yield farming, lending and providing liquidity.
Many crypto exchanges do not allow traders to buy fiat assets, but only allow them to buy and sell cryptocurrencies. This means that it is often difficult for investors to cash out their crypto 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, most crypto exchanges allow them on their platforms. However, since they are also tied to the value of fiat currencies, stablecoins can act as a shelter for investors who want to secure their funds during market storms.
In essence, stablecoins are similar to blockchain-powered versions of the dollar or another fiat currency. For the most part, traders and investors get access to stablecoins by buying them on exchanges. But it is also often possible to mint new stablecoins by depositing the necessary collateral with the issuing company.
Trust and Stability: Reserves, Transparency, and Risks
USDT is one of the first stablecoins and the most widely recognised. Its minter, Tether, claims all USDT tokens are backed by a reserve of real US dollars, allowing the stablecoin to retain its price. But the problem is that Tether has never fully proved that claim, which is why the issue of trust remains.
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 may think that crypto coins are being minted out of thin air.
One of the most striking attempts to introduce cryptocurrencies at the state level was El Salvador, which is what panellists Julian Godsil and Sandra Ro spoke of at length. 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 government bodies, banks or the Federal Reserve mint them?”
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.
Conclusion
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 increase trust and ensure the fastest mass adoption.
Stablecoins can become a transitional link: a kind of guarantor of crypto stability and security. At least until the time when cryptocurrencies improve to the point of functioning fully without being tied to fiat.
