Stable coin

Introduction

Finance and technology have always been co-developmental, with global trends in digitisation and datafication transforming finance over the past several decades. The 2010s, however, ushered in a burst of energy around digital innovation in finance, emanating from rapidly evolving technologies, particularly information and communications technologies (ICT). These innovations have affected not only financial services like payments, credit, investment and insurance, but also the core foundations of the financial system – namely money, itself.  The Covid-19 crisis has accelerated the shift to digital payments.

Crypto vs Stablecoins – Quick Comparison Table 

Before we get into details, let’s have a quick glimpse at the comparison table to know how crypto and stablecoins differ from each other: 

What are Stablecoins?

Stablecoins are specialized cryptocurrency that are designed to keep their value stable. They do this by connecting their value to something that doesn’t change much, such as the U.S. dollar or a valuable item like gold.

There are three main types of stablecoins: 

1. Fiat-backed

2. Crypto-backed

3. Algorithmic

Fiat-backed stablecoins are tied to currencies like the U.S. dollar, and other cryptocurrencies back crypto-backed ones. Algorithmic stablecoins use computer programs to control their supply. 

To keep their price stable, stablecoins hold reserves of the asset they’re linked to or use programs that adjust with supply and demand.

This makes stablecoins a better option for daily use than regular cryptocurrencies. Stablecoins are becoming more popular, with over $162 billion in circulation.

Authorities around the world are grappling with the rise of digital currencies and decentralised finance based on both emerging technologies – particularly various combinations of distributed ledger technology (DLT) and blockchain3 – and advances in traditional centralised systems underpinning finance. Many argue that a technological revolution is occurring in money and payment systems. While Bitcoin and other cryptocurrencies have not evolved into major alternatives to sovereign monetary arrangements, stablecoins have raised new challenges. They also offer opportunities for specific use cases, with private stablecoins aiming to be adopted as a means of payment for online purchases (“e[1]commerce”), peer-to-peer and micro-payments and a range of potential future applications.

Histroy of Stable coins.

Like the proverbial phoenix, stablecoins have risen from the ashes of the 2018 cryptocurrency bubble. After its introduction in 2009, Bitcoin saw at least two distinct periods of boom and bust – first in late 2013/early 2014, ending with the high-profile hack of crypto-exchange Mt. Gox, and second in late 2017/early 2018, when the market capitalisation of Bitcoin, Ether and other crypto-assets peaked at USD 830 bn 6 BIS Working Papers No 905 before crashing. After the latest high-profile speculative bubble, it became clear that the high price volatility of existing cryptocurrencies impaired their usability as a means of payment, store of value or unit of account.8 As such, attention moved to a new type of digital asset which sought a stable value against one or more fiat currencies and/or other assets. Stablecoins like Tether (introduced in January 2014), USD Coin, Dai and others entered the limelight. However, it was the announcement of Facebook’s Libra proposal in June 2019 which for the first time offered a stablecoin with serious potential to emerge as a monetary alternative with scale – the first so[1]called “global stablecoin”.

Stablecoins aim to preserve a stable value through at least two distinct mechanisms. Most commonly, stablecoin issuers purport to back stablecoins with fiat currency, assets or other cryptocurrencies; these are called asset-linked stablecoins. By contrast, algorithm-based stablecoins seek to use algorithms to increase or decrease the supply of stablecoins in response to changes in demand.

 Concerns and regulations

The concerns which have arisen around stablecoins and to provide an appropriate framework for market evolution, authorities around the world are working to develop regulatory systems and structures. At the international level, discussions around crypto-asset and stablecoin approaches are taking place through the G20, G7, FSB, IOSCO, BCBS, FATF and others. A range of other authorities including those in Switzerland, Russia and the UK have either enacted related legislation or are in the process of development. From the standpoint of major jurisdictions, probably the most comprehensive approach so far was announced by the EU in September 2020 (EC, 2020). As a starting point, it is important to differentiate between stablecoins in general – which raise many regulatory issues but so far are not systemically important – and what the FSB has called “global stablecoins” or the EU calls “significant stablecoins” – where the bar for compliance on a range of policy issues will be much higher. In particular, the latter pose higher risks to financial stability, monetary policy transmission and monetary sovereignty that would not be present for more limited[1]purpose coins. They may be considered “systemically important payment systems” or other forms of FMI. This section will consider principles for regulating both in turn. In regulating any stablecoin, the starting point should be an appropriate registration or licensing regime, which allows for adequate information and monitoring, combined with prudential requirements in appropriate cases. It is essential to build systems to collect data on such instruments. Thus, a registration requirement is likely to be useful in the jurisdiction of establishment. Because of the inherent cross-border potential, authorities will need to combine this with information sharing arrangements between each other. Without data and monitoring, potential financial stability risks may develop unobserved. In particular, there is the potential that a limited-purpose stablecoin may quickly evolve into a global stablecoin, thus fomenting much higher financial stability risks. This highlights the value of proportional graduated approaches, with differential treatment based on factors relating to the underlying structure or scale. For example, the proposed EU approach will provide different requirements for utility tokens (non-stablecoins), financial instruments (under the existing financial regulatory framework), e-money stablecoins (single currency, on-demand payment at par), asset-backed stablecoins, and significant stablecoins. The latter, which pass certain thresholds, have much higher regulatory requirements.

Regulation and supervision are evolving with technology. In some cases, in addition to the use of technology for regulatory compliance, monitoring and implementation (regtech and suptech), regulatory and supervisory requirements are being built into technological systems. Some jurisdictions are already implementing or planning automated reporting (see EC, 2020). In recent work, Auer (2019b) puts forward the concept of “embedded supervision.” Embedded supervision is a framework that provides for compliance to be automatically monitored by reading the ledger of a DLT-based market (see Graph 6). The ledger of a DLT-based market contains much information relevant for supervisory purposes. As such, it can be used to improve the quality of data available to the supervisor, while reducing the need for firms to actively collect, verify and report data to authorities. Through their use of DLT, stablecoins could allow this approach in practice.

Conclusion

It is my view that there is very high belief in the social media and press about the Stable coin and it is believed that the value of the stable coin is linked to a specific asset and hence there is less chances of speculation.

There are issues with regulation and monitoring of underlying assets. People will believe the myth such as

Capital protected fund – will not fail or at least my capital is protected. But people forget that the company which issue the bonds or units can also fail.

Gold and Land will never depreciate – we learned from sub prime that it can also depreciate.

Let us welcome the new currency or settlement media such as Stable coin. At the same time let see how it progresses.

Source : Bis.org

Internet.