Online Courses (English)
This just in:

State PCS

Daily Updates

Indian Economy


Star marking (1-5) indicates the importance of topic for CSE
  • 24 Sep 2021
  • 5 min read

Why in News

The US is discussing launching a formal review into whether Tether and other stablecoins threaten financial stability.

  • The first stablecoin, created in 2014, was Tether.

Key Points

  • About Stablecoins:
    • A stablecoin is a type of cryptocurrency that is typically pegged to an existing government-backed currency.
      • A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers.
    • Stablecoins hold a bundle of assets in reserve, usually short-term securities such as cash, government debt or commercial paper.
    • Stablecoins are useful because they allow people to transact more seamlessly in cryptocurrencies that function as investments, such as Bitcoin.
    • They form a bridge between old-world money and new-world crypto aslo they promise to function like perfectly safe holdings.
  • Types:
    • Fiat-collateralized Stablecoins:
      • They are collateralized by fiat money, such as the US dollar, euro or the pound, on a 1:1 ratio.
      • Examples: Tether, Gemini Dollar, and TrueSD.
    • Stablecoins Backed by Other Assets:
      • There are a few stablecoins, which are backed by a basket of multiple assets (commercial papers, bonds, real estate, precious metals, etc).
      • The value of these stablecoins can fluctuate over time subject to movement in commodity and precious metal prices.
      • Example: Digix Gold, backed by physical gold.
    • Crypto-Collateralized Stablecoins:
      • Crypto-collateralized stablecoins are more decentralised than their peers and are backed by cryptocurrencies.
      • The flipside is price volatility and to address the risk of price volatility, these stablecoins are over-collateralized.
      • Example: Dai.
    • Non-collateralized stablecoins:
      • These stablecoins do not have any backing and are decentralized in the true sense and the supply of non-collateralized stablecoins is governed by algorithms.
      • Example: Basis.
  • Concerns:
    • Related to Short term Debt:
      • Many stablecoins are backed by types of short-term debt that are prone to periods of illiquidity, meaning that they can become hard or impossible to trade during times of trouble.
    • Not all Stablecoins are Stable:
      • Not all stablecoins are really 100% price-stable. Their values are dependent on their underlying assets.
    • Asset Contagion Risk:
      • There are potential asset contagion risks linked to the liquidation of stablecoin reserve holdings.
        • A contagion is the spread of an economic crisis from one market or region to another and can occur at both a domestic or international level.
      • The risks are primarily associated with collateralised stablecoins, varying based on the size, liquidity and riskiness of their asset holdings, as well as the transparency and governance of the operator.
    • Risks to Financial Stability:
      • While stablecoins have the potential to enhance the efficiency of the provision of financial services, they may also generate risks to financial stability, particularly if they are adopted at a significant scale.
    • Lack of Accountability:
      • They are not transparent or auditable by everyone and are operated just like non-bank financial intermediaries that provide services similar to traditional commercial banks, but outside normal banking regulation.
    • Regulatory Challenge:
      • International coordination of regulatory efforts across diverse economies, jurisdictions, legal systems, and different levels of economic development and needs is another regulatory challenge.
      • There is not (yet) a uniform regulatory approach of regulators worldwide relating to stablecoins.

Way Forward

  • Stablecoins do not stand for a uniform category but represent a variety of crypto instruments that can vary significantly in legal, technical, functional and economic terms.
  • So, in order to be effective in limiting risks and not disturbing innovations the stablecoin industry must work together with the regulators to come up with a framework that helps put them at ease while protecting this nascent industry from overregulation.

Source: IE

SMS Alerts

Please login or register to view note list


Please login or register to list article as bookmarked


Please login or register to make your note


Please login or register to list article as progressed


Please login or register to list article as bookmarked