In the course of continuously diversifying and growing cryptocurrency market, stablecoins occupy a certain place. These digital assets combine the future of cryptocurrencies and the reliability of the existing fiat money types.
More so, in the United States has seen stables as they bring together the volatile technologies of the digital currencies and the stable financial systems that consumers and businesses depend on. Stablecoins will be described on what they are, how it works in the United States, and how it will affect finance.
What are stablecoins?
The basics of stablecoins
Stablecoins are a type of cryptocurrency backed in value by an underlying asset or rather they anchor their value to another type of asset for example a fiat currency such as the US dollar, a commodity such as gold or even other cryptocurrencies.
Unlike other cryptocurrencies such as the popular ones like Bitcoin and Ethereum which have been seen to fluctuate in value, stablecoins are expected to maintain stable value therefore they can be used in the day to day trading activities and as potential long term investment.
There are several types of stablecoins, categorized based on their underlying assets:
- Fiat-Collateralized Stablecoins: These stablecoins are assets that are fully reserved with fiat money. For instance, in the same way that one tethers, one actual fiat currency asset is locked up as a reserve. Some of the general examples include Tether (USDT) and USD coin (USDC).
- Crypto-Collateralized Stablecoins: It is stablecoins backed by cryptocurrencies as the method of securing the value of a certain digital currency. These are usually over collateralized in a bid to provide for fluctuations in the collateral. One of such prominent example is Dai which is issued by MakerDAO.
- Algorithmic Stablecoins: These do not require collateral for the stablecoin, but instead, implement the supply of the stablecoin and attempt to maintain its value to the target asset. An example is Ampleforth (AMPL), amoung many others that I am unable to list here.
The main use of stablecoins is to retain the attributes of cryptocurrencies like being fast and cheaper to transact while being as reliable as the traditional financial system. For that reason, they are considered very suitable for various applications in the financial environment.
How stablecoins operate in the United States
Regulation and legal framework
Stablecoins regulation in the United States is still under development, and the regulation of these products remains rather diverse. There are different applicable regulations concerning stablecoins whose primary purpose is to keep consumers safe while using stablecoins.
As for the latter one, the major player in the field is the Securities and Exchange Commission (SEC) that determine whether a particular stablecoin falls under the definition of securities in the United States of America. Also, some stablecoins may fall under the category of commodities recognized by the Commodity Futures Trading Commission (CFTC).
In addition, the Financial Crimes Enforcement Network related to the US Treasury Department demands AML and KYC policies from stablecoin issuers. This keeps off the misconception of stable coins being used in negative docket and also keeps issuers under check given that they will be accountable to the public.
Earlier this year, the President’s Working Group on Financial Markets published a report in which it deemed necessary to bring stablecoins under the framework of recurrent extensive regulation. There was a proposal of regulation that required stablecoin issuers to be regulated under the federal regulator prudential standards like other financial institutions..
Usage and adoption
As for the specifics of stablecoins’ usage, it is for today sufficient to state that there are many applications of stablecoins in the U. S. financial system. They are gradually adopted for peer to peer transactions, transfers, and participate as a means of payment in De-Fi applications. They are usually regarded as stable and efficient for both the consumer and the business people in the society.
Another key benefit associated with stablecoins is their efficiency in business transactions across borders within the shortest time and at a lesser amount than it would cost to use the banking sector.
This has been specifically important for funds transfer solutions that allows an individual to transfer some money to his or her loved ones in another country with less charges and faster clearance period.
As for their use in DeFi applications, stablecoins are used to facilitate liquidity and offer many DeFi services, including lending, borrowing, and trading. These cryptocurrencies as a stablecoin provide options for receiving interest on deposits or for taking a loan secured by a digital asset.
The future of stablecoins in the U.S.
Potential benefits and risks
But stablecoins are much more promising as they can change the existing financial system for the better making it stable, efficient, and rather inclusive. Financial innovation can improve the access of finance through a provision of financial services to the financially excluded or under-banked demographics.
Yet at the same time, the prevailing of stablecoins also has a number of dangers. A very significant risk is that of regulatory risk through which stablecoin issuers will structure their stablecoins in a manner that automatically makes them outside the regulatory regime.
This could financially compromise things and at the same time, be a potential danger to the consumers involved. Also, the centralized nature of the peg of fiat-collateralized stablecoins increases risks inherent in having a single trusted third party and fraud/mismanagement threats.
Central Bank Digital Currencies (CBDCs) being proposed and developed across the globe by central banks including the Federal Reserve could also affect the future of stablecoins. CBDCs will be the digital version of the already existing paper money with the same stability and trustworthiness but integrated with blockchain applications.
Close integration between stablecoins and CBDCs might help in the creation of higher quality and quite diverse ecosystem of digital assets but at the same time it raises important concerns related to competition and regulation.