Stablecoins Cryptocurrency

Stablecoins might be the most ironically named innovation of the cryptocurrency era, at least in the eyes of many Washington regulators and policymakers.

These digital currencies promise to maintain their value, which is generally pegged to a government currency like the dollar or euro, by relying on stable financial backing like bank reserves and short-term debt.
They are exploding in popularity because they are a practical and cheap way to transact in cryptocurrency.
A stablecoin — stablevalue coin, if you’re feeling proper — is a type of cryptocurrency that is typically pegged to an existing government-backed currency.
To promise holders that every $1 they put in will remain worth $1, stablecoins hold a bundle of assets in reserve, usually short-term securities such as cash, government debt or commercial paper.
They 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.
But many stablecoins are backed by types of short-term debt that are prone to bouts of illiquidity, meaning that they can become hard or impossible to trade during times of trouble. Despite that somewhat shaky backing, the stablecoins themselves promise to function like perfectly safe holdings.

Are they all equally risky?

They are not all created equal.
The largest stablecoin, Tether, says it is roughly half invested in a type of short-term corporate debt called commercial paper, based on its recent disclosures.
Source: Coinbase
The commercial paper market melted down in March 2020, forcing the Fed to step in to fix things.
If those types of vulnerabilities strike again, it could be difficult for Tether to quickly convert its holdings into cash to meet withdrawals.
Other stablecoins claim different backing, giving them different risks. But there are big questions about whether stablecoins actually hold the reserves that they claim.
The common thread is that, without standard disclosure or reporting requirements, it is hard to know exactly what is behind a stablecoin, so it is tough to gauge how much risk it entails.
It is also difficult to track just how stablecoins are being used.
Stablecoins “may facilitate those seeking to sidestep a host of public policy goals connected to our traditional banking and financial system: anti-money-laundering, tax compliance, sanctions and the like.

What can regulators do?

A few of the top regulatory options include:

Designate them as systemically risky. Because stablecoins are intertwined with other important markets, the Financial Stability Oversight Council could designate them a systemically risky payments system, making them subject to stricter oversight.
Treat them as if they were securities. The government could also label some stablecoins securities, which would bring bigger disclosure requirements. Gensler told lawmakers during a recent hearing that stablecoins “may well be securities,” which would give his institution broader oversight.
Regulate them as if they were money market mutual funds. Many financial experts point out that stablecoins operate much like money market mutual funds, which also act as short-term savings vehicles that offer rapid redemptions while investing in slightly risky assets. But money funds themselves have required two government rescues in a little more than a decade, suggesting their regulation is imperfect.
Treat them as if they were banks. Given flaws in money fund oversight, many financial regulation enthusiasts would prefer to see stablecoins treated as bank deposits.
Try to compete with central bank digital currency. Jerome H. Powell, the Fed chair, has signaled that outcompeting stablecoins could be one appeal of a central bank digital currency — a digital dollar that, like paper money, ties back directly to the Fed.

But how a central bank digital currency is designed would be critical to whether it succeeded at replacing stablecoins. And industry experts point out that since stablecoin users prioritize privacy and independence from the government, a new form of government-backed currency might do little to supplant them.

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Stablecoins cryptocurrency