Categories of stablecoins
Typically, stablecoins are pegged to US dollars, but there are also stablecoins pegged to other cryptocurrencies, or, in some DeFi applications, to a basket of coins used as collateral. Some stablecoins use algorithms to manage the supply and demand of the coin so that the volume in circulation matches the volume in reserves.
Benefits of fiat-backed stablecoins
Benefits of stablecoins backed by cryptocurrency
Benefits of unsecured (algorithmic) stablecoins
Portfolio hedge tool
Stablecoins can be used to hedge investment portfolios. It is possible to effectively reduce the overall risk allocating a certain part of the portfolio for stablecoins.
Additional opportunity to fix the balance and exchange digital currencies
The main advantage of stablecoins is the additional ability to fix balances and exchange digital currencies. Due to the high level of volatility, cryptocurrencies have not been able to find their use in everyday life, for example, for making various payments. By providing a higher level of stability, such stable currencies act as a solution to this problem.
Safe haven asset
Stablecoins do not face the problem of rate fluctuations. The stablecoin model allows you to track price movements and changes in the value of a fiat currency or other underlying asset. This allows the stablecoin to play the role of a safe haven asset in a market volatility situation.
There are positive and negative aspects of the stablecoin boom. The creation of stablecoins can attract users to the digital asset market. This will lead to an increase in the use of the remaining coins and mass adoption.
On the other hand, most stablecoins run on the Ethereum blockchain. This entails an increase in network fees and actualizes the problem of scaling the second largest cryptocurrency in terms of capitalization.
Stablecoins are popular with traders as liquid and low-risk assets and as stable collateral in the DeFi space. They are actively used in Ponzi schemes like MMM, online retail payments, and even find application in export-import transactions bypassing capital controls.
Obviously, many stablecoin use cases are balancing on the brink of legality. This attracts the attention of influential supranational organizations, including the FATF. The latter expresses concern about the growing popularity of stablecoins and focuses on the need for their issuers and cryptocurrency exchanges to comply with strict regulatory requirements.
According to the supranational regulator, stablecoins can pose the same threat to fiat money as cryptocurrencies, due to their privacy, global reach and potential for illegal use.
The organization proposes to consider stablecoins as virtual assets or traditional financial products, and oblige their issuers to follow the established AML/CFT rules.
According to the new standards being developed by the FATF, even for decentralized exchange stablecoins, money transfer service providers and custodian wallets will be required to implement appropriate AML/CFT procedures.
The organization will also oblige virtual asset service providers (VASPs) to introduce mandatory transaction monitoring to control the movement of funds.
Stablecoins are not only used as a medium of exchange and store of value in the context of centralized exchanges and cryptocurrency wallets. These assets have become a key element of the rapidly growing decentralized finance (DeFi) market.
Central banks are closely watching the growth of the stablecoin segment. The latter are not eager to compete with anyone and revise the usual instruments of monetary policy.
The combination of the advantages of blockchain and the low volatility nature of sovereign currencies creates a powerful value proposition. This is confirmed by transactional activity, which significantly exceeds the performance of traditional cryptocurrencies.
Prospects of stablecoins
We can assume that in the future stablecoins:
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