The cryptoasset world has become a very complex environment over the past decade or so. During that time, we have seen the emergence of exchange tokens in the form of cryptocurrencies, as well as utility tokens, security tokens and e-money tokens. To that list we can now add another digital currency: the stablecoin.
What is a stablecoin?
A stablecoin is another type of cryptoasset or digital currency. What makes it ‘stable’ is that it is underpinned by a fiat currency, a cryptocurrency or another type of asset such as an Exchange-Traded Commodity. In other words, stablecoins are asset-backed.
A stablecoin works in much the same way as a classic cryptocurrency such as Bitcoin in that it allows users to store, send and receive digital tokens on a peer-to-peer basis using digital exchanges, platforms and wallets.
Because stablecoins use blockchain technology, the payment transfers are secure and instantaneous and can be made at a fraction of the cost of more conventional banking methods.
Why has the stablecoin emerged as a digital currency?
One of the downsides of using cryptocurrencies as a form of payment or as a store of monetary wealth is the level of volatility in its day to day value. It is not unknown for the price of cryptocurrencies such as Bitcoin or Ether, to move up or down 10% or more in a single day.
This unpredictable price movement can make cryptocurrency unsuitable for everyday trading transactions. Consumers need certainty over the purchasing power of their money, which should remain relatively constant.
This price volatility also means cryptocurrencies acquire some of the characteristics of a speculative investment leading to sharp movements in value while at the same time trying to continue as a form of electronic payment.
One solution to addressing the price volatility problem was the introduction of a digital currency known as the stablecoin.
Tether coin (USDT)
The best example of a stablecoin is the Tether coin. It was considered to be the first stablecoin when it was launched in 2014. It is believed to account for 90% of all stablecoin transactions.
Tether uses a combination of blockchain technology and traditional currency which converts cash into a stable digital currency equivalent. Tether has been described as the central bank of digital currencies. It has the highest trading volume of all cryptocurrencies.
The Tether coin is anchored to the value of fiat currencies such as the US Dollar and the Euro. This means that its value is supported by actual assets. One Tether equals one underlying unit of the currency backing it.
The stability of the Tether compared to the volatility of other cryptocurrencies mean that it has a similar risk profile to fiat currencies while simultaneously offering all the advantages of blockchain such as low transaction fees and rapid payments.
While the company behind Tether claims that every Tether is backed by the company’s reserves, it has been unable to produce any audit documentation to prove that it was fully supported by the equivalent in US Dollar or Euro value.
Although this claim has been challenged in court by the New York Attorney General, Tether publishes proof of funding along with current daily balance sheets which fully support their assertion.
Tether has been at the centre of various controversies. For example, it has been accused of issuing new coins without being backed by the fiat currency equivalent. This is similar to printing money and the new coins were then allegedly used to buy Bitcoin and escalate Bitcoin prices.
Some of the features of the Tether coin include the following:
- Market capitalisation (approx.): $10.1 billion (as at 25th August 2020)
- Coins in circulation: 9.998 billion
- Maximum coins: no maximum
- All-time high: $1.21
- Current price can be found here.
Are stablecoins regulated by the Financial Conduct Authority?
In July 2019, the Financial Conduct Authority (FCA), the organisation responsible for supervising the UK financial services industry, issued a policy statement on which type of cryptoassets needed to be regulated.
Regulated cryptoassets include Security tokens which are tokens that effectively qualify as investments (such as shares or bonds); and e-Money tokens that meet the definition of e-money and are accepted as payments by third parties.
Unregulated cryptoassets are Exchange tokens including cryptocurrencies such as Bitcoin, which are used as a form of electronic payment; and Utility tokens which allow access to a service or network.
While stablecoins are considered to be cryptoassets, the decision to classify them as regulated or unregulated will be made by the FCA on a case by case basis. The FCA will examine the structural features of each stablecoin issued to determine whether they qualify as Security tokens, e-Money tokens or Exchange tokens.
For example, Libra, the proposed digital currency to be launched through Facebook has been described by the FCA as a stablecoin.
To learn more about which type of cryptoassets are regulated by the FCA, please click here.
