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- Stablecoins are a hot topic in the crypto community and also regulators and traditional market investors
- In theory, stablecoins are insulated against the market-price fluctuations
- U.S. Justice Department is investigating Tether
It is seven years since the first stable coin was launched in Tether (USDT) in late 2014 by a group called Tether Limited. The stablecoin was based on a simple concept –create a crypto asset that maintained its value. Today Stablecoins is a hot topic not only among the crypto community but also regulators and traditional market investors.
What is a stablecoin?
Stablecoins are deemed as a cryptocurrency whose values are connected to a wide array of assets. For example, the assets could be a government-issued currency like the U.S. dollar, a precious metal like gold or even another cryptocurrency.
Stablecoins are issued, and issuers have varied methods to maintain the value of the stablecoin. For example, USDT is a stablecoin that has a value pegged at 1-to-1 to the U.S. dollar. USDC, BUSD and GUSD are stablecoin whose values are backed by reserves whose dollar value is supposed to match the stablecoin’s circulating supply. Some stablecoins are backed by physical commodities, such as Tether gold, representing one troy fine ounce of gold on a London Good Delivery bar. Decentralized stablecoins also exist, such as DAI (+0.03%) and FEI, powered by algorithms.
StableCoin and its use
Before the rise of stablecoins, investors traded cryptocurrency against fiat currency and other cryptocurrencies. However, Pankaj Balani, CEO of the crypto derivatives exchange Delta Exchange, said that spot trading against stablecoins started to dominate a larger share of the trading activity after 2017.
Stablecoins, in comparison with cryptocurrencies against fiat currencies, are quicker, less expensive and enable better liquidity. Thus, in theory, stablecoins are insulated against the market-price fluctuations witnessed in other cryptocurrencies.
Stablecoins can be used in crypto lending. The investor can gain a yearly interest rate of 4% from his deposit of USDC in any savings account at Coinbase. It is pertinent to note that Coinbase is one of the companies with an interest in stablecoin. Interests for depositing USDT could range from 1.66% to 13.5%.
Tether under investigation
The USDT is the backbone of the entire cryptocurrency ecosystem. It is one of the most traded cryptocurrencies in the market, and over half of all Bitcoin trade is made against it. However, Tether has in recent times been at loggerheads with the regulatory authorities.
According to a report in Bloomberg published on Monday, the U.S. Justice Department is investigating if Tether in its early days had information from the banks that transactions were linked to crypto. Tether immediately published a response and said that the allegation is many years old and the media house is only republishing to increase viewership. Tether, however, did not deny the allegations either.
Investors are also anxious about Tether’s reserves. They are also not sure if Tether can fully redeem the tokens if things came to a bind. Tether had revealed the details of its reserves as part of its settlement with the New York Attorney General’s office. 50% of the reserves are held in “commercial paper” – typically short-term corporate debt – while 13% are in secured loans and 10% are in corporate bonds and precious metals.
Tether’s reserves of commercial paper, loans and corporate bonds are not insulated against market risk, term risk and credit risk, said economist Frances Coppola. If the value of these corporate bonds tanks, Tether will not redeem the value of the tokens.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while pursuing his post-graduation major in blockchain development. He is a keen observer of details and shares his passion for writing, along with coding. His backend knowledge about blockchain helps him give a unique perspective to his writing skills, and a reliable craft at explaining the concepts such as blockchain programming, languages and token minting. He also frequently shares technical details and performance indicators of ICOs and IDOs.
