What is a Stablecoin?
A stablecoin is a type of digital currency designed to maintain a stable value by being backed by a reserve asset. These currencies have gained popularity due to their ability to combine the instant processing and security of traditional cryptocurrencies with the stable value of fiat currencies. While Bitcoin remains the most well-known cryptocurrency, its value is highly volatile.
For example, it skyrocketed from around $5,000 during the COVID-19 pandemic in March 2020 to nearly $65,000 in April 2021, but then dropped by more than 50% to around $30,000 in June of the same year. In November 2021, the price went back up to exceed $65,000.
The value of Bitcoin and other popular cryptocurrencies can also experience significant fluctuations within a single day, often jumping up or down by more than 10%. This type of short-term volatility makes them less practical for everyday transactions.
Ideally, a currency should serve as a reliable medium of exchange and a stable store of value, with its purchasing power remaining relatively steady over longer periods of time.
If a currency’s value is too unstable, people may be hesitant to use it. Stablecoins aim to address this issue by maintaining the purchasing power of their tokens and encouraging spending rather than saving. However, stablecoins are also under scrutiny from regulators, as the market for these currencies has grown to over $130 billion and could potentially have a significant impact on the broader financial system.
In October 2021, the International Organization of Securities Commissions (IOSCO) proposed regulations to treat stablecoins as financial market infrastructure, subjecting them to the same rules as payment systems and clearinghouses. These rules would specifically target stablecoins that are deemed to be systemically important and could potentially disrupt payment and settlement transactions.
