Stable coins: What do you serve - and how stable are you?

What are stable coins?

stable coins are a form of cryptocurrency. In contrast to Bitcoin and other speculative coins, stable coins are nominally bound to the underlying assets in order to limit price fluctuations. She made this stability for the preferred currency for the purchase of other cryptocurrencies.

StableCoins first appeared around 2014, but their use has increased quickly since the beginning of this year. In January, coins worth around $ 30 billion were in circulation. Until October, this had risen to over $ 130 billion.

There are dozens of types of coins, but a handful of the overall value makes it out: by October, the market leader Tether had spent a value of $ 70 billion; Another 32 billion USD were in USD Coin, which is operated jointly by the payment service company Circle and the Cro -Base cryptocurrency exchange.

How are they used?

Customers buy stable coins from stock exchanges, with part of this money being used theoretically to buy reserves to secure the assets. Stable coins can then be used to buy other cryptocurrencies. Compared to transfers of dollars, stable coins can handle shops much faster. This makes them suitable for both the acquisition of volatile cryptocurrencies and for the exit in the case of price declines.

stable coins have also been used in decentralized finance, where they can achieve revenues for customers in different ways, including the award to other users or the provision of liquidity for trade. In the offline world there are also reports on stable coins that are used for cross-border transfers at places where access to dollars is restricted.

What assets are they bound to?

The vast majority of the stable coins are bound to Fiat currencies. Holding rope, USD Coin and the third largest issuer, Binance USD, all state that they are coupled to the US dollar. Others are coupled to euros and yen, although they only make up a very small part of the category. Some stable coins are tied to gold reserves, including offers from Tether and Paxos, the Binance USD.

A smaller but still remarkable proportion of these currencies is referred to as algorithmic stable coins. They are linked to other cryptocurrencies, in some cases including stable coins. Their algorithms are intended to create and destroy coins to avoid breaking the abbey. The largest of them, Dai, has coins worth around $ 6 billion in circulation.

How are they supported?

While issuers may say that fiat stable coins are bound to dollars, their reserves can be more exotic-the result of more relaxed regulation than the rules for commercial banks or money market funds. Without clarity, it has offered different details.

In the case of Tether there is about half of the 70 billion dollars in Commercial Papers, a form of short-term debt. The issuer and even the country of origin of these papers is unknown, although the portfolio includes at least some international papers. The sheer size of the company's designated reserves has also raised the eyebrows with supervisory authorities and others, which fear that this could affect financial stability. FITCH, the rating agency, warned that a resolution of the stocks of stable coins on Commercial Papers could lead to infection on the credit markets.

CIRCLE and COINBASE have undertaken to ensure that USD Coin will be fully backed up by cash and treasuries (government bonds) by the end of September. It was completely covered by dollars until March 2020, although Coinbase continued to claim this until August of this year. The certificate for September is not yet available.

What do the regulatory authorities say?

tether has long been targeted by the supervisory authorities. In February it paid $ 18.5 million for a comparison with the New York general attorney Letitia Jones, who accused the company and sister exchange Bitfinex to cover up "massive" losses. The investigation showed that the company did not have access to bank accounts anywhere in the world at times, although it was claimed that it had a dollar for every tether. None of the companies admitted misconduct.

among the supervisory authorities, the conviction is now growing that the entire sector must be contained due to risks in relation to consumer protection, the effectiveness of monetary policy and the stability of the financial system.

In the United States, the working group of the President for Financial Markets, headed by the Ministry of Finance, works on a report on a report that contains recommendations to regulate stable coins.

In the UK, the Bank of England warned that stablecoins have to ask themselves "difficult questions". The Financial Action Task Force found last year that the mechanisms could offer opportunities for market manipulation to stabilize assets.

A report published in October suggested a report published by the committee for payment transactions and market infrastructures - part of the Bank for international payment compensation - and the international organization of the security authorities in October with existing standards for payment systems and clearing houses.