Publication date: 24 Feb 2021
Another bitcoin boom detects its attractiveness, but many still think it a chancy business. Stablecoin seems a less risky alternative.
What is stablecoin?
Stablecoin is digital money imitative of fiat currencies. As a rule, stablecoin rate depends on dollar or euro indicators (1:1 normally), also it might rest upon gold or other crypto rates. Therefore, it has all advantages of cryptocurrencies, but its price is usually less volatile. There are more than 200 varieties of stablecoin partially in circulation some varieties are being developed. At the end of 2020, stablecoin total value rocketed by 300% and exceeded $20 bn. Central bank surveys showed interest in stablecoin: two thirds of respondents are studying the potential influence of stablecoin on financial security. Finance services agents have demonstrated interest in digital currencies by setting up their own crypto. JPMorgan has established a new digital coin. The Facebook project Libra will be introduced in spring 2021. Two currencies linked to US dollar Paxos Standard (PAX) and Gemini Dollar (GUSD) are already agreed and regulated by the New York State Department of Financial Services. Sberbank of Russia may also issue a stablecoin this spring. Deputy Chairman of the Board of Directors Anatoli Popov states that Sberbank is technically prepared to work with this fiat currency since system tests proved its effectiveness.
Why do we need stablecoins?
Stablecoins have the advantages of cryptocurrencies (transparency, reliability, immutability, digital wallets, fast transactions, low fees and privacy). Stablecoins are stable and trustworthy, like traditional currencies (US dollar or euro). Initially, cryptocurrency holders used stablecoins to save money no to stay out on a market crash day. If bitcoins became cheaper, they could be converted in just a few minutes and avoid losses. Without stablecoins, you would have to convert bitcoins into traditional currencies. Such operations are not possible on every platform, and a significant commission is charged. In addition, stablecoins are useful in case you need to make fast and secure international payments: both for a migrant worker who transfers money to his family, and for large businesses that need a cheap and efficient way to settle with foreign suppliers. A decentralized, reliable and stable system will satisfy all businesses, from cross-border lending to financial planning. Stab coins can be used in the real life of every person:
- conducting day-to-day financial transactions
- optimized recurring payments and card-to-card transactions
- fast and affordable transfers for migrant workers
- protection against hyperinflation and market volatility
- improved cryptocurrency exchange and reduced impact of bitcoin on the market.
But there are some factors to restrain the use of stablecoins:
- Stablecoins linked to fiat currencies are centralized. That means they are managed by a single organization. Regular audits are required to maintain trust and reputation.
- Stablecoin is subject to all legal restrictions, as well as traditional currencies.
- Circulation may be restricted by local legislation: if a country faces high risk of inflation, the authorities may block stablecoins linked to a foreign currency to protect the domestic one.
- Stablecoins are less liquid than conventional cryptocurrencies. This is especially true for coins linked to commodity markets. To get your gold bar, you will have to make a trip to the vault.
- Stablecoins linked to fiat currencies are vulnerable to a collapse of the exchange rate. Even if the coin is linked to a cryptocurrency, it can also devalue along with the exchange rate of the base currency. In addition, cryptocurrency-backed stablecoins are the most complex and, therefore, risky asset.
The blockchain prospects seem uncertain, but stablecoins can contribute to the spread of cryptocurrencies. The leading players in the financial market are already studying their capabilities, and government agencies are writing rules for the circulation of digital coins. At the moment, it is difficult to predict how successful these assets are going to be in the future, but their potential impact shouldn’t be underestimated and ignored.
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