A friend among enemies or an enemy among his own
The recent report by the OKEx crypto exchange analysis team represents all of the important trends in the stablecoin sub-market. Based on this and certain other assumptions, we will try to understand what is going on in this segment of cryptocurrency.
A stablecoin is a type of cryptocurrency that often has its value linked to another asset, such as currency, precious metals or other types of crypto.
While the main cryptocurrencies are experiencing high volatility and your cup of Bitcoin coffee could cost 50% more in a few hours, stablecoin aims to solve this problem. By being collateralised, the stablecoin represents a value of 1 unit – $ 1, 1 oz of gold, etc. The underlying is reserved for the same amount in circulation and vaulted by the issuing company.
History shows that stability is not always the case for this particular type of cryptocurrency. For example, Dai and NuBits at their “best times” recorded volatility of 27% and 37% respectively. The problem for stable coins is the same as for the Saudi riyal, are there enough reserves to maintain parity with the US dollar. In the case of Tether, whose capitalization is $ 4.6 billion (as for February 3, 20), the company only holds 83.75% of the reserves for all USDT in circulation.
Tether’s management team considers 83.75% to be a significant amount; however, if you ask an investor the least acceptable percentage of reserves, the answer will be – 100%. In addition, Tether has never performed a third party audit transparently. Therefore, we cannot be sure, even in the percentage of reservations announced. USDC, the stable coin launched by CoinBase and Circle, has a capitalization of $ 443 million. Nor like Tether, USDC is continuously audited and holds 100% of all USD coins in circulation. However, there are still a few issues that every stablecoin faces.
To be clear, almost no stablecoin is safe. Stablecoin with 100% reserves or even supported by calculation circuits, which controls supply and demand to exclude the risks of high volatility is never certain. All of these features do not guarantee that stablecoin will not be default. And the biggest threat is regulation.
Almost all projects with stable parts are centralized in terms of reserves, with the exception of a few, which means that in one day, all the company’s assets could be blocked by the regulator in the event of illegal actions or even regulatory review. Consequently, the majority of stable parts are exposed to a significant risk of failure.
Before you start using a stablecoin, first of all, check a number of banks that the company uses to build up reserves. In addition, some companies prefer to manage funds and invest in different assets. If a company does not mention the investment strategy, it is a warning sign. On behalf of USD Coin, it stores reserves in several partner banks and invests part of them only in securities rated AAA.
Stablecoins disrupt and break all the fundamental concepts of the traditional financial model. The idea that a modern system can survive without banks does not work for regulators and financial institutions. All the advantages of stable coins compared to bank transfers and fiat currencies are on the table:
- Stablecoins are more practical in transactions
- Transactions are faster and easier to implement
- You can deposit and receive interest
- It is possible to take out loans and credits
Some may say that traditional banks could integrate stable coin technology and become more advanced and reap the full benefits. However, stablecoin marks the beginning of the end of the banking era within the existing financial system. The cryptocurrency ecosystem enables personal and professional commercial activity as well as investments to the exclusion of any fiat currency. This means that intermediaries – banks and financial institutions are enlightened. Victory is only a matter of time and technological progress.
This issue was raised by the International Monetary Fund in order to draw attention to the risk of a slowdown in the demand for bank deposits due to the introduction of the stable coin market.
Imagine, once you execute the transfer using stablecoin and exchange fiduciary assets for USDC, you will only be able to conduct investment activities with the help of cryptocurrency, which excludes you from the system traditional financial as a participant.
In the recent ECB report, it is stated that without blockchain, no cryptocurrency becomes another form of digital currency; However, decentralized ledger technology plays a critical role, making cryptocurrencies a reliable bank in your pocket. ECB specialists assume that the best performing stable parts for the foreseeable future will become the ones that implement specific features:
- Gain responsibility as an issuer
- Implement decentralization of responsibilities
- Algorithmic control of supply and demand
Such attributes, in the opinion of the ECB, would threaten the Central Bank and jeopardize its activity in controlling monetary circulation and interest rates, in the event of a stable large-scale project.
Over the past year, rivalry in the segment has become increasingly brutal. This leads to the default values of certain stable parts or even prevents some of them from entering the market. Facebook’s Libra is facing strong resistance from regulators and can’t even get started.
US regulators are puzzled that Libra is geared toward a large user population. Libra is ready to offer financial services to people who are not part of the banking system in the world but who have a Facebook account. It was at this point that regulators realized the extent of the treatment. Imagine that Facebook could replace FED and become the leading player in the American and global economy…
According to Blockdata, 220 different stablecoins have been launched, of which only 30% work today. Total market capitalization has grown to around $ 5 billion, and the total trading volume for the past 12 months has been $ 13.5 billion, according to the ECB.
The majority of projects are not large enough for regulators to pay attention to, so we will see a lot of progress in the near future. However, when a stablecoin plans to expand regionally or even globally, regulators would pressure with third-party licenses and audits, as is currently the case with Libra and how it will be with Venus – Binance Stablecoin. At the same time, the USDC is issued through a reliable exchange, which has allied relationships with regulators and helps establish the regulatory landscape for the entire crypto space.
Stablecoins will never become the enemy of traditional banks. As the concept of technological advancement does not say quietly, but shouts loud and clear that the banks are vestiges of the past and that the new era of democratized financial management is approaching. At the same time, the cryptocurrency space will never regard stablecoin as a friend, as it does not appear to be a supplement to fiat money, but a more advanced version of it.