The future of money: is stablecoin a compromise between cryptocurrency and fiat money?
There is a public perception that next to the concept of cryptocurrency goes side by side with the definition of volatility. For users to trust money, it must retain its face value and be useful in the purchase of goods and services. For this reason, the introduction of stablecoins brings together the best of fiat money and cryptocurrencies: lower volatility, more anonymity, lower fees, and faster transactions time. In this blog, I’ll look at what stablecoins are and why they’re of interest to the big players.
Stablecoin is the common name for digital coins, which are cryptographic tokens circulating on public blockchains. They are attached to currencies, such as the dollar or the euro, to stabilize their value. They can also be linked to precious materials, minerals, some securities, and even real estate. In other words, they are tied to any physical asset that can provide a guarantee of stability.
In the cryptocurrency market, stablecoin benefits large depositors. An investor is able to convert fiat money into currency within the blockchain, thus being able to trade and invest using digital currency. It is also possible for an investor to convert their existing cryptocurrency into stablecoin in order to wait out a period of instability and then return to investing.
Stablecoin has similar features not only to cryptocurrencies but also to fiat money. For this reason, tokens backed by national currencies have received restrictions from the law. One may recall how U.S. financial regulators suspended Facebook’s Libra stablecoin project. The reasons for the ban were the excessive influence of Facebook and the insecurity of users’ personal data, as well as the lack of necessary legislative regulation.
The advantages of stablecoin:
- Price stability. Many payment transactions become available thanks to the coin’s sufficient level of predictability. It allows this currency to take its place in the credit market and to squeeze the dominating position of fiat money.
- Speed and transparency of transactions. Blockchain transactions are faster than conventional money transfers. You don’t have to wait for confirmation from a third party to make a transfer. Transactions are more transparent because they pass through a public blockchain.
- Use as a safety net. Stablecoins can be used as a safety net to hedge investments.
Disadvantages of stablecoin:
- A single-center. As opposed to cryptocurrencies, stablecoins are issued by centralized organizations that hold the cryptocurrency.
- Low price. Do not have high profitability as a cryptocurrency.
Centralization was on the list of disadvantages for a reason. Digital money is issued in one place and remains under its control. Compared to bitcoin, there is no need for mining, so the supply is essentially unlimited. The issuing company can make money from any assets derived from the sale of its own coins. That said, in theory, it should have assets equal to the deposits of all token holders, in order to return their deposits if necessary. It is worth bearing in mind that it is legally impossible to obtain information about a company’s assets. For example, we can consider the most popular stablecoin Tether. According to the latest data, there are over 78.3 billion of their coins in circulation. In fact, this means that the company has $78.3 billion and is one of the largest financial institutions in the U.S. However, no one will provide official confirmation of this amount.
Stablecoins have good potential for development due to their balance of reliability, anonymity, and security. For example, they can be used for financial transactions in countries with unstable economies, where fiat money is rapidly losing value. It is for this reason that large companies are working to create their own digital coins. Payment platform PayPal is considering launching its own Stablecoin, this information appeared after reviewing the source code of the application. Obviously, the major players are interested in new types of payments to attract customers and increase their area of influence. At the beginning of this year, 5 American banks created a consortium to issue the USDF stablecoin, and it is not excluded that other financial institutions will join them in the future. The new coin will operate on the publicly available Provenance blockchain. The inclusion of official banking institutions means opening up new opportunities for more users.