Stablecoins_00.1
UPSC Exam   »   How to Prepare for UPSC CSE Mains Examination: Step-by-Step Guide for Beginners   »   Stablecoins

Stablecoins

 

Relevance

  • GS 3: Science and Technology- developments and their applications and effects in everyday life.

 

Context

  • The Treasury Department of US and other agencies are moving towards tighter regulation for a fast-growing cryptocurrency called stablecoins.

 

Key points

What are stablecoins?

  • Stablecoins are cryptocurrencies without the volatility. They have the same characters as other cryptocurrencies.
  • 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.
  • So, unlike Cryptocurrencies like Bitcoin, whose prices tend to vary a huge amount in a short span of time, value of stablecoins are steady, more like a traditional currency, like Indian Rupee or US Dollar.
  • With stablecoins, a person can maximise his/her chances of protection from market fluctuations. So, stablecoins form a bridge between old-world money and new-world crypto.
  • Tether is the third largest cryptocurrency by market value, and until now, the most famous stablecoin.

 

Patents (Amendment) Rules, 2021

 

Why the prices of stablecoins are stable?

  • There are two types of stablecoins depending on the collateral: national currency backed, and cryptocurrency backed.
  • Collateralised stablecoins are attached to another asset, like the US dollar. Their issuers back up the value of their coin by holding on to that asset.
  • Some stablecoins also employ algorithms to manage supply and demand of the coin so that circulation matches reserves.

 

Stablecoins_50.1

 

Why to use stablecoins when US dollar serves the purpose?

  • While trading cryptos for dollars, there are longer processing lags for dollar withdrawals, on some exchanges.
  • Additional fees are also often imposed when dollar withdrawals are frequent or large.
  • Stablecoins are used across a greater cross-section of crypto exchanges unlike, traditional currencies like USD.

 

Can stablecoins replace US Dollar?

  • Stablecoins turnover has boomed since 2019, rising from a few bn dollars a day to an average of US$100 bn in April 2021.
  • Big companies like PayPal and Visa have recently announced that they would allow payments with stablecoins.
  • International money transfers in stablecoins involves less friction than via a bank.
  • The settlement time is also faster and it is 24/7 available.
  • To replace dollar with stablecoins, however, will require some kind of regulation.
  • First of all, it is important to ensure that the issuer actually has the assets to back up its coins can be a start.
  • The way stablecoins are growing, its regulation has become more important than ever.

 

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