However, it allows users to access capital using those assets for other use. It is issued by the Centre Consortium, which is made up of Coinbase and Circle. NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only.
- These utility benefits may include fast and straightforward international money transfers without the expensive fees charged by banks.
- NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor.
- This captures what is called the basis, which is “the difference between the spot price of a commodity and a futures contract that expires two or more months later” (Investopedia, 2024).
- The advantage of this is that it enables more efficiency, and allows central banks to use a single ledger to account for money supply.
- Each fiat-backed stablecoin is tied to a specific fiat currency in a one-to-one ratio.
Why do people use stablecoins?
Imagine buying a €500,000 house – with the relative cost in bitcoin constantly changing you’ll be glued to price charts desperately trying to time the transaction favourably. There’s also Tether Gold (XAUt) and PAX Gold (PAXG), which operate in a similar way, but are instead pegged to one troy ounce of investment-grade gold. CDP stables are not always the most capital efficient because they require extra assets to be locked up.
A BRIEF HISTORY OF STABLECOINS
Circle, one of the firms behind USDC, confirmed in July 2020 that it froze $100,000 of the stablecoin at the behest of law enforcement. In the worst-case scenario, it’s possible the reserves backing a stablecoin could turn out to be insufficient to redeem every unit, potentially shaking confidence in the coin. Eventually, the case was settled on Feb. 23, 2021, with Tether and Bitfinex forced to pay $18.5 million and submit quarterly reports showing Tether’s stablecoin reserves for the next two years. The authority to request information and conduct site visits is to empower the HKMA to regularly monitor compliance with the regulatory regime. This, in the crypto space, would lead to relatively higher prevalence of first-party custody, where entities such as crypto exchanges keep assets in custody with themselves. There are currently no designated rules or frameworks guiding virtual asset custody in Hong Kong, aside from a Trust or Company Service Provider (TCSP) licensing scheme under the Companies Registry for trust providers, introduced in 2018.
Types of stablecoin collateral
The potentially problematic aspect of this type of stablecoins is the change in the value of the collateral and the reliance on supplementary instruments. The complexity and non-direct backing of the stablecoin may deter usage, as it may take time to comprehend how the price is ensured. Due to the highly volatile and convergent cryptocurrency market, substantial collateral must also be maintained to ensure stability. The interest in stablecoins is that they are built to withstand volatility in a way that other cryptocurrencies aren’t, but still offer mobility and accessibility. A more stable cryptocurrency is still decentralized, meaning it isn’t beholden to the rules and regulations of a centralized system.
“This is called collateralization,” explains Stephen Stonberg, strategic development officer at BH Principal Investments. “Apart from being tied to another asset, collateralization also includes the buying and selling of affiliated assets through algorithmic mechanisms.” In Tether’s case, this has never been conclusively provided, sparking rumors that the currency was unbacked and was in fact minted out of thin air. Each CACHE is backed by 1g of pure gold held in the vaults stored around the world. Sending CACHE tokens is the equivalent of sending 1g of gold per token since they can be easily redeemed for physical gold at any time. Or try creating a custom dashboard which tracks the price of most major stablecoins to be on alert for arbitrage opportunities.
What can we do with stablecoins?
He also suggested that the licensing regime proposal draws on a lot of the concepts from other existing regimes, bringing in familiarity, which will help ensure a level of certainty. For example, the concept of “actively marketing” appeared in the existing Securities and Futures Ordinance (SFO). Randy is a New York-based freelance writer and author covering the world of emerging technology and entrepreneurship. Deeply interested in the way technology will impact his grandkids’ lives, Randy has been featured in several publications, including NFT Now, Forbes and Newsweek. The information herein is general and educational in nature and should not be considered legal or tax advice.
Considerations for buying stablecoins
Cryptocurrency-backed stablecoins are issued with cryptocurrencies as collateral, conceptually similar to fiat-backed stablecoins. In many cases, these allow users to take out a loan against a smart contract via locking up collateral, making it more worthwhile https://www.tokenexus.com/ to pay off their debt should the stablecoin ever decrease in value. In addition, to prevent sudden crashes, a user who takes out a loan may be liquidated by the smart contract should their collateral decrease too close to the value of their withdrawal.
Shortly after the conclusions release, the regulator announced a first batch of participants in its sandbox, which include several potential stablecoin issuers. The participants have been testing with stablecoin business plans and operations since March. Hong Kong, on its way towards establishing itself as a crypto hub, is going to press ahead with establishing a new licensing scheme for stablecoin issuers in the city. Providing access to our stories should not be construed as investment advice or a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction by Forbes Advisor Australia. In comparing various financial products and services, we are unable to compare every provider in the market so our rankings do not constitute a comprehensive review of a particular sector. While we do go to great lengths to ensure our ranking criteria matches the concerns of consumers, we cannot guarantee that every relevant feature of a financial product will be reviewed.
Borrowing elements of Stablecoin design, several countries, through their central banks, are planning to create digital versions of their currencies called Central Bank Digital Currencies. Still, if you’re considering buying stablecoins, a lack of proper reserves is one potential what is a stablecoin risk to be aware of. While the dollar’s purchasing power could change over time, it’s much less volatile than cryptocurrencies. Stablecoins are an important element of many blockchain ecosystems, and provide a less volatile way of transmitting and trading assets on-chain.