Why in news?
Regulators and investors renewed discussions on stablecoins after price volatility in some crypto projects. Questions arose about how these digital tokens maintain a stable value and what risks they pose.
What is a stablecoin?
A stablecoin is a digital token designed to maintain a consistent value, often pegged to a currency like the US dollar or a commodity like gold. They aim to combine the instant settlement of cryptocurrencies with the stability of traditional money.
Types of stablecoins
- Fiat‑backed: Issuers hold cash or bank deposits to back every token. Examples include Tether (USDT) and USD Coin (USDC).
- Commodity‑backed: Tokens are backed by assets such as gold or oil. Holders can redeem tokens for the underlying commodity.
- Crypto‑collateralised: These use other cryptocurrencies as collateral, often over‑collateralised to manage price swings. MakerDAO’s DAI is an example.
- Algorithmic: Supply is automatically expanded or contracted through smart contracts to maintain the peg. Some algorithmic stablecoins have failed because of market shocks.
Benefits and risks
- Benefits: Stablecoins enable fast cross‑border payments, reduce reliance on volatile cryptocurrencies, and support applications such as decentralised finance.
- Risks: Lack of transparent reserves can lead to loss of confidence. Algorithmic designs may collapse under stress, as seen with the TerraUSD crash in 2022. Stablecoins may also be used for illicit transactions if not properly regulated.
Regulatory perspective
Authorities worldwide are debating how to supervise stablecoin issuers. Many propose rules requiring full reserve disclosures, segregation of customer funds and licensing similar to banks. Some jurisdictions are considering central bank digital currencies (CBDCs) as safer alternatives.