Will Stablecoins Lead to (Un)Stability?

Will Stablecoins Lead to (Un)Stability?

Faria Zafar

In 2019, the U.S. Federal Reserve Board, in its November Financial Stability Report, cautioned that a stablecoin calamity could harm global economy. So why do some people call it “the holy grail of cryptocurrencies?” .

Stablecoins are a form of cryptocurrency that have their worth pegged to another asset like fiat currencies, other cryptocurrencies, precious metals or a combination of the three. Stablecoins such as Tether, USD Coin, True USD, Stably, Paxos Standard and Gemini Dollar have US dollar as their underlying asset. There are also those that have cryptocurrencies as collaterals such as Bitshares, MakeDAO, Sweetbridge, Havven and Augmint. Digix Global and Hello Gold are metal backed stablecoins.

Stablecoins are not affected by extreme price volatility as compared to other cryptocurrencies as they are pegged to assets that in turn are stable. For example, Stablecoins could be pegged against gold reserves whose valuations remain free from wild swings.But regulatory bodies like IMF, G7 finance ministers, U.S. Federal Reserve Board and many more are concerned about the stability of stablecoins as the stablecoin network is not well regulated. U.S. Federal Reserve Board noted that “the possibility for a stablecoin payment network to quickly achieve global scale introduces important challenges and risks related to financial stability, monetary policy, safeguards against money laundering and terrorist financing, and consumer and investor protection.”

While Reserve Bank of India has already banned any transactions involving cryptocurrencies, it would be interesting to see what steps other regulatory bodies across the globe take to make sure that global economy is not destabilized by digital currencies.

Bitcoin: Can It Become An Alternate Currency?

Innovation is the Buzzword

Will the Fifth Industrial Revolution make the world a ‘better’ place to live?