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Stablecoins: Risks and Potential

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It’s all turbo fast upwards at first, then a fall into the abyss – before the game starts all over again. Bitcoin’s and other digitally currencies’ zigzag paths are now well known. Cryptocurrencies are known for their wild price swings and extreme volatility. However, some cryptos are intended to be unique.

What exactly are stablecoins?

Stablecoins claim to have a stable value. This is because, unlike other cryptocurrencies, the price of most stablecoins is tied to an underlying asset one-to-one. Typically, this is a national fiat currency like the US dollar or a precious metal like gold. Other commodities or government bonds, on the other hand, are possibilities.

What is the purpose of stablecoins?

The first stablecoin was created in 2014 to facilitate transactions in the cryptocurrency system, as banks were hesitant to give crypto companies accounts at the time.  Banks were not interested in having such companies on their books. This is due to the potential for money laundering, terrorist financing, and tax evasion.

Stablecoin speculation

Stablecoins, in addition to their current primary use on cryptocurrency exchanges, can also be used for other types of financial transactions. Stablecoins, for example, allow for quick and easy international payments. They can be a bridge between two worlds that weren’t meant to mix: cryptocurrencies and fiat currency.

According to Coingecko, the market cap of all stablecoins was around $136.1 billion as of October 29, 2021. The majority of these are pegged to the US dollar. Tether Holdings Ltd. is the largest (and arguably most well-known) stablecoin issuer. According to Fortune.com, there were 69 billion tethers in circulation in October 2021. USD Coin is another cryptocurrency on the rise. It ranks tenth in the list of the largest cryptocurrencies for 2021, with a market capitalization of more than $32.8 billion.

The USD coin has increased more than eightfold as a result; at the start of January, the market capitalization was still four billion dollars. Stablecoins were still small in 2017, but they are now an important part of the crypto ecosystem. Financial products (DeFis) Stablecoins are also referred to as “lubricants in the DeFi world.”

The issue of transparency

Even though stablecoins are seen as a low-cost way to trade crypto assets and transfer funds across borders, the issue of transparency persists. Do your own thorough research because there are many different stablecoin issuers. Each on has its policies and varying degrees of transparency. 

The judiciary

Tether as an example: According to the financial news service Bloomberg, the company has long been chastised for a lack of transparency and has been the subject of numerous investigations by the US judiciary. Tether is currently being fined $41 million for falsely claiming that its digital tokens were fully backed by fiat currencies. At the same time, the US regulator CFTC issued a statement stating that Tether’s current operations are not problematic. Tether’s 48 billion USDT tokens, which are said to be worth $1 each, are also being scrutinized. Tether was fined $18.5 million and barred from trading in New York in February 2021.

Risk for the global financial system?

Stablecoins, such as Tether, have recently been targeted by financial authorities and are viewed as a potential systemic risk. According to the FAZ, the rating agency Fitch is concerned that stablecoins will impair the functioning of the market for short-term loans over time. According to experts, one reason for the increased regulatory efforts is that stablecoins have a clear advantage over digital central bank currencies, which will most likely take years to implement globally.

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