FCA plans new UK regulatory regime for fiat-backed stablecoin

what is a stablecoin

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  • 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.
  • You need a cryptocurrency to facilitate transactions, but one that has the price stability of cash.
  • USDC was created by Circle in collaboration with Coinbase; however, Circle issues the stablecoin tokens.
  • In May 2022, the meltdown of TerraUSD showed that not every stablecoin can guarantee price stability.
  • Our rules would only apply to stablecoins that are widely used for payment in the UK.
  • In contrast, the price of a stablecoin should not change relative to the currency to which it’s pegged.

You may obtain access to such products and services on the Crypto.com App. In addition, the Crypto.com Exchange is distinct from the Crypto.com Main App, and the availability of products and services on the Crypto.com Exchange is subject to jurisdictional limits. Before accessing the Crypto.com Exchange, please refer to the following link and ensure that you are not in any geo-restricted jurisdictions. So, for every Dai that exists, there’s collateral in excess of the value locked in a Maker Vault as a precaution against the impact of market volatility.

The rise of Tether ($USDT)

So another way to think about stablecoins is as a tokenized version of a fiat currency. In theory, a U.S. dollar-based stablecoin is a token that will reside on a blockchain and always trade for one dollar. It’s hard to find an investor or trader nowadays who hasn’t held a stablecoin at some point. Stablecoins are often held in crypto exchanges so that traders can quickly capitalize on new market opportunities. They’re also very useful to enter and exit positions without having to cash out into fiat. Apart from trading and investing, stablecoins can be used for making payments and international transfers.

  • Stablecoins attempt to bridge the gap between these stable options and cryptocurrencies, which have shown volatility but offer greater utility benefits.
  • He holds FINRA Series 3 and Series 34 licenses in addition to a dual MFA in critical studies/writing and music composition from the California Institute of the Arts.
  • A stablecoin is a cryptocurrency that is designed to make transacting with crypto more practical.
  • Even if a stablecoin’s monetary value is pegged to a given currency, it may not be recognized as a legitimate form of payment by government or commercial entities.
  • Instead of fiat currencies, however, they’re pegged to commodities—typically gold.
  • As of late July 2023, Tether (USDT) was the third-largest cryptocurrency by market capitalization, worth more than $83 billion.

These coins are well known due to their market capitalization as well as their utility in financial markets. The primary purpose of stablecoins is to provide a crypto asset that maintains a stable value within a volatile market. This stability makes stablecoins useful in facilitating transactions making them cheaper and faster what is a stablecoin especially across borders. Furthermore, stablecoins enable the movement of crypto between different exchanges. These coins are kept stable through a computer program running a preset formula; hence, its name. The algorithm controls the coin’s demand and supply, which are dictated by smart contracts, affecting its value.

Types of stablecoins

Unlike traditional cryptocurrencies such as Bitcoin, a stablecoin is one that is pegged to a real-world asset like fiat money (e.g. the Euro) or exchange-traded commodities (e.g. gold). Stablecoins also can anchor crypto trading and protect investors during volatile markets. In a bear market, traders can flip their Bitcoin, Ethereum, or other crypto assets to stablecoin in a split second.

The future regulatory environment for crypto is currently uncertain, and crypto is not insured by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC). Prior to the event, the TerraUSD project was widely regarded by crypto enthusiasts as one of the most exciting stablecoin innovations. Its demise created a domino effect in the industry, bringing down multiple crypto institutions that had assets stored in UST and accelerating a downturn in the crypto market. Dai is a stable hedge against popular digital currencies like Bitcoin or Ethereum. Since Dai is stable, businesses can rely on it to accept and send stable money on the crypto networks. Mainstream users consider traditional cryptocurrencies, which lack both long-term and short-term stability, to be extremely risky.

The future of stablecoins

But instead of using the fiat as collateral, cryptocurrencies are locked up as collateral that backs up the crypto-backed stablecoin. To see the volatile nature of cryptocurrencies, look no further than the first cryptocurrency, https://www.tokenexus.com/ Bitcoin. Since its inception, Bitcoin’s price has gone through significant highs and lows. For example, Bitcoin rose to a then-all-time high of $64,000 in early 2021, then fell below $30,000 by that summer.

However, one of cryptocurrency’s key drawbacks is that they are notoriously volatile, meaning the prices are unpredictable and have a tendency to fluctuate wildly. Although the exact mechanisms vary from one coin to the other, backed stablecoins are built to be somewhat resistant to that volatility, so you won’t see significant price changes. Second, because cryptocurrencies are usually more volatile than other assets, these organizations typically hold more in their reserves than the amount in circulation. For example, if Organization C has $10 billion of their ethereum-backed stablecoin in circulation, they will hold more than $10 billion of ethereum in reserves. This is called “overcollateralization,” which attempts to smooth out some volatility. Note that fiat-backed and commodity-backed stablecoin organizations can also choose to overcollateralize.

Why do people use stablecoins?

Allocating a certain percentage of a portfolio to stablecoins is an effective way to reduce overall risk. Your portfolio as a whole will be more resistant to market price swings, and you will also have funds on hand in case a good opportunity comes up. You can also sell crypto for stablecoins during a market downturn and repurchase them at a lower price (i.e., shorting).