What are stablecoins, and how do they differ from other cryptocurrencies?

The price of bitcoin, ether and other popular cryptocurrencies fell this week as investors cut their losses and sought refuge in less volatile assets. A catalyst for this week’s fall Concerns are growing about so-called stable currencies, another type of cryptocurrency that is supposed to protect buyers from the sharp changes typical of virtual money.

Keep reading for information on stable currencies.

What are stable currencies?

Stablecoins are cryptocurrencies that are tied to a reserve asset, such as a currency (such as the dollar or the euro) or a commodity (such as gold, oil, or real estate). The support of other assets makes the value of stable currencies less prone to roller coaster price changes, hence the name.

For example, the stable currency PAXG, or Pax Gold, is pegged to gold prices, while terraUSD is pegged to the US dollar. There are approximately 200 varieties of stable currencies worldwide, according to the Blockchain Council. As of Friday, the three largest stable currencies by market value were pegged to $ 78.6 billion, USD ($ 49.9 billion) and Binance USD ($ 17.2 billion).

On Friday, the total market value of stable currencies was $ 163 billion, according to CoinMarketCap.

What are stable currencies for?

Investors use stable currencies to protect their money sudden fluctuations in prices associated with other cryptocurrencies. Indeed, stable currencies are intended to serve as a tokenized version of the fiat currency or other real-world assets with a fixed value.

Decentralized financial platforms such as BlockFi and Celsius use stable currencies to lend crypto to their customers. The reason they use stable currencies is that the value of collateral or currency tokens is unlikely to change drastically between the time a customer is approved for a loan and the cryptocurrency reaches the digital wallet of the lender. ‘individual.

More advanced cryptocurrency investors can use stablecoins to avoid paying transaction fees on cryptocurrencies such as Binance and Coinbase, many of which do not charge fees for stablecoins currency exchanges.

Are stable currencies really stable?

Cryptocurrency creators have marketed stable currencies as safe and predictable, but as investors discovered this month, this is not always the case.

Although linked to the US dollar, for example, the stable currency terraUSD fell to 77 cents this week. Luna, another stable dollar-backed currency, fell below $ 1 Wednesday night; The tether fell to 95 cents on Thursday.

Some investors were so outraged by the devaluation of their stable currencies that they filed a lawsuit Thursday against Coinbase. Demand is focused on the stable currency GYEN, which is pegged to the Japanese yen.

“Investors placed orders believing that the value of the currency was, as advertised, equal to the yen, but the tokens they were buying were worth up to seven times more than the yen,” the lawsuit said. “Just as suddenly, the value of the GYEN fell back into ambush: it fell 80 percent in one day.”

Why are some stable coins falling?

Stable currencies have fallen victim a larger cryptocurrency sale which was launched shortly after the The Federal Reserve raised interest rates in half a percentage point. Higher interest rates, combined with rising inflation and supply chain problems, have caused investors to fear that the US economy will collapse under pressure in the near future.

Due to this growing economic uncertainty, many investors have shifted their riskier asset portfolios, including stable currencies and other cryptocurrencies. According to CoinMarketCap, the price of most cryptocurrencies fell by between 5% and 85% last week.

What worries government regulators?

U.S. lawmakers are pondering ways to regulate the growing cryptocurrency market, and stable currencies have been at the center of these discussions.

Stable currencies in particular need control because of their rapidly growing popularity and because “they are backed by assets that may lose value or become illiquid during stress,” making them “vulnerable to executions,” according to a report. of the Federal Reserve released Monday. A “run” in the banking world is when all or most account holders withdraw their money at the same time because they think the institution will not be around much longer.

The Fed’s report also noted that the stable currency sector is “highly concentrated with the three major issuers of stable currencies: Tether, USD Coin and Binance USD, which account for more than 80% of total market value.”

U.S. Treasury Secretary Janet Yellen echoed the call for stable currency regulation this week, noting how quickly a fall in prices could affect investors.

“A stable currency known as TerraUSD experienced a run and had declined in value, “he told a Senate banking committee on Tuesday.” I think this simply illustrates that this is a fast-growing product and that there are risks to financial stability and we need a proper framework.