Stablecoins are not the typical cryptocurrency, as their regulated nature and the ability to utilize blockchain suggest opportunities for some real-life cases in the financial industry.
On top of that, the broad adoption of stablecoins is coming closer to realization, as revolutionary financial platforms like Swissmoney now support swift, multi-currency payments with stablecoins and other crypto assets!
Traditional finance services lack the ability to comply with the rising user needs for faster and more efficient global transactions, and the technology of stablecoins may propose a solution. Read on to learn what stablecoins are, how they can become the next frontier in financial innovation and digitalization, and some potential challenges in their adoption.
Stablecoins Explained: What Are They, and How Do They Work?
Stablecoins are cryptocurrencies whose value is pegged to a commodity or currency or having its supply regulated by an algorithm, making the coin’s price non-volatile. You can think of stablecoins as any cryptocurrency designed to have a relatively stable price.
The price stability of this new type of digital money is achieved through collateralization or backing its value by some sort of asset. Interestingly enough, some stablecoins like Tether Gold (XAUT) are backed by gold, just like the bimetallic standard of the US dollar.
Stablecoins have different types, including coins backed by USD, cryptocurrencies, and algorithms, each providing steady valuation at different levels. The most popular are USD-pegged stablecoins, which comprise more than 90% of the market.
Bitcoin vs. USDT: Comparing Cryptocurrencies and Stablecoins
Many often misinterpret stablecoins as similar to cryptocurrencies like Bitcoin, a big misconception, as the two digital classes serve different functions. Let’s take Bitcoin to represent cryptocurrencies and compare it with USDT, the most popular stablecoin pegged to the US dollar, to showcase the three main differences:
Firstly, USDT’s value is tied to the USD, meaning it is non-volatile, which is why the coin is classified as “stable.” On the other hand, BTC’s price is constantly changing due to its volatile nature.
Another difference is that fiat money and government bonds back stablecoins and thus are regulated cryptocurrencies. Bitcoin and coins alike are decentralized and, therefore, stand as non-regulated assets.
Lastly, stablecoins can find real-life use cases, for example, in the banking industry. While Bitcoin has numerous benefits, it is widely used for trading, as a method of exchange, and for fast, global payments.
How Stablecoins Have the Potential to Lead the World Toward Digital Currency Innovation
Gathering the necessary knowledge on the core concepts of stablecoins will help people understand why stablecoins may be here to stay and disrupt the financial industry. Since we’ve got the basics out of the way, let’s dive deep into reasons why stablecoins have the potential to change the traditional financial system into a digitalized one:
- More accessible Medium of Exchange: It is far easier to transfer stablecoins compared to fiat, as it is simpler to on-ramp and off-ramp into crypto. Traders also recognize the ease of getting in and of crypto positions. Moving stablecoins around the globe in just a couple of clicks is a piece of cake, as the technology facilitates cross-border transactions.
- Ability to Hedge Against Crypto Market Volatility: Crypto traders and investors can use stablecoins to hedge against the volatility of other cryptocurrencies. When they expect a price drop, they can convert their assets into stablecoins to preserve value.
- Stabilizing DeFi Lending and Borrowing: Decentralized Finance (DeFi) platforms can benefit from stablecoins as they provide a stable unit of account for lending and borrowing activities within the DeFi ecosystem. DeFi also faces difficulties finding its way into traditional financial markets, and stablecoins and their centralized characteristics offer the facilities to bridge the gap.
- Gives Exposure to Pegged Assets Without Having to Hold The Asset: Stablecoins allow users to gain exposure to the value of the pegged asset (e.g., USD) without the need to hold the investment itself. This practice can be particularly beneficial for diversification and risk management.
Stablecoins as the Frontier Currency of the 21st Century’s Payment Systems
The disruptive technology of cryptocurrencies has vastly influenced the financial system. Stablecoins offer numerous benefits to the industry, positioning them as a frontier currency in modern payment systems.
As a result of their introduction into financial companies, services have become more streamlined and efficient. Through stablecoins, transactions are now more cost-effective, borderless, and nearly instant, and more people around the globe have access to financial services.
An intriguing question is whether stablecoins can become Central Bank Digital Currencies. And while there are potential use cases, the most obvious answer to the question is most likely no. As governments will be looking for complete centralized management over their CBDCs, giving the control in the hands of private companies seems far-fetched.
Risks and Challenges in the Adoption of Stablecoins
As with any newly emerging technology, there are many risks and challenges that need to be addressed. Although there have been rumors that PayPal has plans to launch its stablecoin and Facebook is developing its own coin called Libra, regulation remains a considerable challenge.
Regulation around cryptocurrencies is necessary to address the risks around fraudulent activities, cybersecurity, and the protection of user data. Governments are also working to develop their CBDCs, meaning that stablecoins are an opposing threat.
Taxation is another concern, as stablecoins are still considered cryptocurrencies and thus are subject to capital gain/loss. As digital currencies are treated as property, any coin-to-coin trade or sale will require users to pay taxes accordingly.
Final Words
This article aimed to present the basics of stablecoins, how they fit in today’s finances, and whether they are here to stay. Notably, stablecoins disrupt the financial industry by combining blockchain with fiat money, creating a whole new world of opportunities for payment providers.
It will be interesting to see what regulations governments impose on cryptocurrencies and how companies handle the risks of the new digital currency. As financial technology continues to propel to new heights, the stability and real-life use cases of stablecoins make them a fascinating topic to follow and learn more about.
Article and permission to publish here provided by Armantas Gajauskas. Originally written for Supply Chain Game Changer and published on September 14, 2023.
Cover photo by CoinWire Japan on Unsplash