As a form of tender, cryptocurrencies are becoming widely adopted. Many governments have concerns with these currencies due to their volatile and decentralized nature. This may lead to unforeseen circumstances and unknown dimensions in terms of policies, safety, privacy, and AML.
To circumvent this problem, the usage of stablecoins was introduced as a means to stabilize the price of volatile cryptocurrencies. As is the nature of financial assets, these too now face policymakers’ scrutiny because of their potential risks.
Government agencies are focusing on stablecoins as the lead in the progression of crypto regulations, as their value can be pegged to fiat currency. This merger seems to have an impact on the reduction of fluctuation faced in the crypto markets.
Governments consider money laundering and fraud an immense threat and for this reason, they are steadfast in regulating digital currencies. Stablecoins are built on a blockchain, which makes it possible for regulators to develop systems similar to the traditional centralized ones.
Regulating industries that are involved with money, creates a sense of trust and credibility. On the same token, fintech regulation can be applied to cryptocurrencies, lending, and contracting.
Following the crash of Terra the demand to regulate stablecoins has become eminent. The protection of investments and prevention of disasters were brought to the forefront. A report by the PWG stated that stablecoins possibly had been used to sidestep AML and fund terrorist groups.
This has resulted in additional scrutiny by policymakers with the opinion that cryptocurrency could be used to fund wars. The regulation of stablecoins may be a first in the crypto territory but each type of digital asset may be regulated accordingly.
The crypto market has proven to be extremely volatile leading to investors losing money, that’s when a variation of crypto was designed. Stablecoins are a form of cryptocurrency, that value is linked to a stable currency like fiat currencies or gold.
If a stablecoin is linked to the dollar its value should be $1. Stablecoins rose in popularity in 2017 soon after the intense volatility experienced when the bitcoin price skyrocketed and then remarkably dropped.
Cryptos can see major fluctuations in value in a single day sometimes over 4%. Whereas the British pound or U.S dollar is not easily influenced. Another way of looking at it, is stablecoins are utility tokens built on a coin’s blockchain. Stablecoins can be a necessity for crypto investors, and transaction fees have proven to be very cost onerous.
Stablecoins are backed by the value of the asset that is pegged to, and how it can retain its value. Stablecoins are different depending on what they are backed by. Some commodity-backed coins are linked to precious metals such as gold and silver. Fiat is the most common type, and the U.S dollar is one of the most popularly used.
Some stablecoins can operate using other cryptocurrencies like ether. Algorithmic-backed stablecoins work with smart contracts that manage the tokens in circulation.
The USDC is one of the most popular stablecoins and is pegged to the dollar, its value of 1 USD coin will remain at $1. Circle’s partnership with US institutions and transparency commitment has established its reputation well.
Tether or USDT is a blockchain-enabled platform backed by gold or fiat currency. Its commonly known for its low-cost, quick, and safe transactions and the smooth integration between exchanges.