In this article, we'll talk about the rise in popularity of stablecoins in recent weeks. Why are regulators paying attention and how are they responding? What is the reason for the current rapid growth in the popularity of Tether, which is among the most popular stablecoins?
Why is everyone talking about stablecoins?
Digital assets are highly volatile. Stablecoins are a variant of them with a possible fixed value. Stability comes from pegging to other stable assets, including fiat money and precious metals. The name "stablecoin" indicates the stability of their value compared to Bitcoin or Ethereum.
The market capitalization of stablecoins surpassed 100 billion in early 2021, and growth continues more than six months later. This is the reason why stablecoins are an important topic of discussion for regulators and all other market players.
Regulators in the US and around the world are looking at stablecoins in terms of their regulatory options. The choice of rules for a specific cryptocurrency determines the level of information transparency on the part of issuers and the rights of customers.
Like any coin, there are two sides to it. First of all, the rules will mitigate the expected systemic risk to the financial system from stablecoins. Alternatively, ineffective regulations may simply worsen the situation.
Stablecoins and regulation
Over the past couple of months, there have already been several meetings of various regulatory groups on the topic of stablecoins. The PWG even published some proposals during the administration of former President Donald Trump.
The optimal regulatory framework for stablecoins remains unclear. Their regulation depends on the specific linked asset.
For example, Gary Gorton and Jeffrey Zhang, an economist at Yale University and a Federal Reserve attorney respectively have proposed banking rules and FDIC compulsory insurance. Other experts suggest a regulatory structure for stablecoins similar to securities.
"Exchange-traded tokens and stablecoins backed by securities can be treated as securities under US law," said SEC Chairman Gary Gensler.
Also, recently, Gensler said at a meeting with the American Bar Association that some platforms offer cryptocurrency tokens that are "reduced in price" on securities and resemble derivatives. The expert believes that any products linked to safety issues must comply with trade reporting rules and other laws.
Traders also have concerns. They are worried by the fact that stablecoins in the current situation have liquid reserves that are far from being in full. This means that the bond to the dollar will break in case of massive redemptions. It's the crypto equivalent of a bank getaway.
Tether is a good example. The currency has a controversial status. Its reserves are unclear, leading to additional regulatory anxiety regarding stablecoins in general. Experts see Tether as a kind of money market fund. This is a dangerous concept when it comes to withdrawing funds.
Legendary broker Jordan Belfort (the Wolf of Wall Street) believes that regulation should come to the crypto world as soon as possible. This will be a big plus for Bitcoin, stablecoins and any other cryptocurrency at the same time.
According to Alexis Goldstein, senior analyst at Americans for Financial Reform, regulators should look for ways to ensure that stablecoins are backed by the assets they need to have.
"I don't think it is unreasonable to strive to ensure that something that pretends to be pegged to one US dollar is not able to turn the tide and people will lose their funds," she said.
The bigger they are, the harder they fall
Tether is a blockchain-based digital asset pegged to the US dollar. 1 USDT is always equal to 1 USD. Tether is very popular and low risk. It works to keep the value of the cryptocurrency stable and remains the largest, safest, and most widely used stablecoin.
The main goal of Tether is to simplify and reduce the cost of cryptocurrency trading. More than 3/4 of the bitcoin trading market takes place through Tether in 2021. Someone invest in Tether, but this is not the main function of this cryptocurrency. USDT is used to guarantee liquidity and protect against volatility when trading other cryptocurrencies such as bitcoins. This is the reason for the popularity of Tether today.
However, Tether has received a lot of attention in recent weeks. And the news is by no means good.
For example, last week worried bears were looking for the cryptocurrency equivalent of a credit default swap. It is a derivative that allows buyers to place bets on the creditworthiness of another trading counterparty. That is, they were betting on Tether's fall below its alleged redemption value of $ 1.
Regulatory authorities are showing massive interest in it, as part of a general concern about the rapid growth of stablecoins, as we have already written about above. Even broker Jordan Belfort is concerned about the fate of Tether and considers it a stain on the credibility of the entire crypto industry:
"Currently, Tether works flawlessly, but past mistakes can be prohibitively expensive," he said.
Teter's growth is high, but liquidity is questionable. Tether's reserves are often discussed, and Tether Limited has previously given false information on the matter. Previously, the company claimed that Tether was backed by the US dollar 1 to 1. But this was not the case.
In 2019, a lawyer for Tether Limited reported that 74% of Tether was backed by cash and cash equivalents. And in 2021, Tether Limited showed a breakdown of reserves showing that only 2.9% of Tether was backed by cash. The rest of the cryptocurrency reserves are a collection of assets, including commercial paper, secured loans, and corporate bonds.
If you are thinking about buying a stablecoin, then Tether becomes the most obvious option. But this is not the only possible solution. There are other stablecoins as well. It is important to find a trustworthy option. For example USD Coin, TrueUSD, Gemini dollar. The companies that develop these stablecoins regularly publish information about the available reserves.
Regarding issues of government regulation, the wave of discussions on stablecoins will continue. However, speech about the formed specifics is not anticipated yet.
WARNING: Virtual currencies are highly volatile and novel instruments traded on unregulated exchanges with minimal or no regulatory supervision. Investing in virtual currencies is highly risky, and you can rapidly lose your entire invested capital. Before buying virtual currencies, you should consider whether you understand how the market in virtual currencies works and whether you can afford to take the high risk of losing your money.