Importance, relevance and future. Risk and utility. What’s in store for stablecoins?
The importance and relevance of stablecoins in the crypto space is a clear demonstration of what stability means for the markets. Stability is more important than scarcity. Investors normally measure their financial growth in dollars, because most commitments are in dollars (taxes, debts, expenses, etc.). If our daily needs are covered in dollars, it is It is logical that when weighing the success or failure of our finances we use the dollar as the reference.
In practice, Bitcoin is a pair. A fee that is made up of two elements. Bitcoin is actually code on a computer network. A series of letters and numbers in a database. What happens is that this code is used as a monetary exchange rate by its users. Which implies that the code itself has no intrinsic value. It is an abstraction. However, it does have monetary value. What we normally call “the price”. That price fluctuates with market dynamics.. And, in those fluctuations, lies its appeal as a speculative investment.
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Bitcoin rises in price. Bitcoin falls in price. But the reference is still the dollar. Which shows the importance of the dollar in this space. Despite the supposed rivalry between the two instruments, in practice, what there is is complicity. The creation of stablecoins arose out of necessity. I am referring to the need to eliminate friction in the flow of capital. This space needs capital to prosper. Without money constantly coming in from outside, this industry doesn’t survive. The investor needs to get in and out with ease.
Stablecoins are privately issued tokens with a 1:1 parity with a fiat currency. A stablecoin is a representative instrument. It is convertible code to fiat money 1 to 1 ratio. In this article we will focus on the dollar. For the cryptocurrency investor, they are extremely practical instruments, because they make things much easier. However, the administrators of these tokens are intermediaries. The big question: Are these intermediaries honest?
In theory, these private entities should have in their reserves the exact amount of money for each token issued. In this way, to be able to comply with the declared parity. However, due to a lack of regulation and supervision, that is not guaranteed. In practice, these entities are operating as unregulated non-banks. This, of course, does not imply that these actors are automatically dishonest. However, due to the lack of transparency of the vast majority, doubt is inevitable.
Now, stablecoins are as useful as they are dangerous. They are useful, because they can substitute for the dollar in many scenarios. But they are dangerous, because they are not really dollars. And they do not have the guarantees of the official dollar. If a US bank, for example, goes bankrupt, the insurance kicks in and depositors won’t lose their money. Because? Well, because, to operate as a bank in the United States, you have to meet certain requirements. Banks are regulated. And, with that regulation, there are also some guarantees.
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Now if, on the other hand, a stablecoin goes bankrupt, The owners of these tokens do not have the same guarantees, nor the same level of protection. In many ways, those affected are alone. Considering the importance of stablecoins for the cryptocurrency market, this situation reveals a great vulnerability. The systemic risk is very high. And the volatility of prices contributes a lot.
We could safely bet that regulators start with stablecoins. In many ways, they are private money-printing machines. It is not too foolish to assume that the priority must be there. like it or notgovernment intervention is necessary in this case. This is a lot of money in very few hands. And it’s a problem with many mourners.
Of this lot, the ticking time bomb is USDT. And it’s not because I know something that others don’t. He mentioned USDT, because, on the opacity scale, USDT “Tether” wins the prize. Tether, for better or worse, works. And, despite the criticism, it has managed to survive the passing of the years. However, it still fails to dispel all doubts. The other stablecoins (USDC, BUSD) do not fall into the same category as Tether. However, they are not free of suspicion either. And this happens, because we are still in the Wild West from a regulatory standpoint. We could bet that none of the existing stablecoins meet the required standards. Changes will be necessary.
What will the regulators do? Wellthe first thing is the creation of a regulatory framework. In other words, clear and definitive rules of the game must be established. What are stablecoins? What is the relationship with the dollar? What are the requirements and responsibilities to be able to issue a stablecoin? What protections do users have?
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The future of stablecoins is regulation. And that regulation will bring new limits. In other words, we will no longer be so free. However, I would like to believe that this sacrifice will bring its benefit. Consequently, I suppose we will have a much more mature and secure market.
Stablecoins have recently gained a lot of popularity in the gray economy due to their great versatility. They are particularly useful for removing friction in cross-border payments. Will the regulation impose controls on the flow of capital? Will sanctions be implemented for political reasons?
Regulation is inevitable. But there are adequate regulations and inadequate regulations. Which one will we get? In these characters, compromises are necessary. How far should we go with the compromises? If we exceed, we reduce the utility of these instruments. If nothing is done, the implosion will destroy what has been built. LWhat is required is a middle ground. In other words, what is required is the best possible regulation. User protection. Transparency on the part of issuers. And standards that reduce systemic risk. But, without taking away the utility.
Personally, he used stablecoins to make transactions. However, I don’t highly encourage its buildup for long. AND It’s a matter of weighing the risks. What offers me more guarantees? The dollar? Or an (unregulated) stablecoin pegged to the dollar?
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
It may interest you:
- Inflation: Why not reducing it further will not be so easy?
- The scrutiny after FTX. What awaits us?
- Crowd Psychology: Why Do Markets Tend to Exaggerate?