Understanding Stablecoins & a glance at 5 prominent players in the crypto landscape

With PayPal's recent announcement of its foray into the stablecoin arena with PayPal USD (PYUSD), the spotlight has shifted to stablecoins and their crucial role in providing stability to the often volatile cryptocurrency market.

What is a Stablecoin?

Stablecoin is a type of cryptocurrency that is pegged to other asset classes like fiat currency or precious metals, aiming to stabalise prices and counteract the price fluctuations that have made mainstream cryptocurrencies less suitable for everyday transactions.

Types of Stablecoins and renowned players

Stablecoins come in three distinct types, each employing a specific mechanism to maintain their value stability.

• Fiat-collateralised stablecoins: First, there are fiat-collateralised stablecoins, such as Tether (USDT) and TrueUSD (TUSD), which hold reserves of fiat currencies like the US dollar.
• Crypto-collateralised stablecoins: Second, crypto-collateralised stablecoins like MakerDAO's Dai (DAI) are backed by other cryptocurrencies, ensuring value stability through overcollateralisation.
• Algorithmic stablecoins: Third, algorithmic stablecoins utilise programmed algorithms to control supply and maintain price stability.

A glance at the popular stablecoins

Several renowned stablecoins have gained popularity in the cryptocurrency space due to their reliability and utility. Tether (USDT), one of the pioneers in this domain, facilitates quick fund transfers between exchanges to exploit price disparities.

USD Coin (USDC), backed by Circle and Coinbase, offers an open-source protocol for innovative development. Binance USD (BUSD), created by the largest trading volume exchange Binance, has a continuous boost due to the exchange's rewards system.

MakerDAO's Dai (DAI), pegged to the USD and secured by Ethereum, focuses on decentralisation through smart contracts.

Additionally, Magic Internet Money (MIM) stands out with its 1-to-1 soft peg to the US dollar, ensuring stability and ease of use.

Government concerns mount over stablecoins' impact on financial stability

Stablecoins, the digital cash alternatives pegged to various assets, have come under intense scrutiny from various government authorities and central banks, primarily due to the perceived risks they pose to the stability of the financial system. While offering potential benefits, stablecoins have triggered concerns that have prompted regulatory backlash.

Central institutions and regulators have raised alarm bells over stablecoins potentially undermining national currencies, thereby threatening the stability of fiat money. The fear lies in the possibility of stablecoins replacing traditional currencies, which could have far-reaching consequences for the established financial order. Another point of contention centers on the erosion of governments' exclusive authority to issue new currency, a monopoly that stablecoins could disrupt.

Gary Gensler, the chairman of the U.S. Securities and Exchange Commission, likened stablecoins to poker chips and even hinted at the possibility of categorising them as securities. Such pronouncements underscore the regulatory skepticism surrounding these alternative forms of digital currency.

Also, the People's Bank of China has expressed its reservations as well. Former deputy governor, Fan Yifei, emphasised that global stablecoins carry inherent risks that could destabilise international monetary mechanisms and clearing systems. This apprehension highlights the potential global ramifications of widespread stablecoin adoption.