Institutions have also shown interest in recent times, looking for ways to diversify their portfolio. The SEC also approved three exchange-traded Bitcoin funds just last month. The backed ETFs have given more access to institutional investors to get engagement with the asset class.
Other parts of the cryptocurrency industry have also experienced an explosion; notable mentions include decentralized finance projects, NFTs, metaverse projects, and stablecoins. Stablecoins have seen an over 1000% rise in value within a year. There are about five stable coins in the market, with more tokens in development.
Growth Of Stable Coins
The stablecoins include Tether, USD Coin, Binance USD, Dai, and TerraUSD. Stablecoins operate on blockchain technology similar to other cryptocurrencies. The difference between stablecoins and other cryptocurrencies is that their value is tied to fiat currencies, the most common of which is the United States dollar. These stablecoins provide a less volatile alternative to popular cryptocurrencies, allowing investors to protect themselves from market swings without exchanging their crypto for fiat dollars.
, Dai, and TerraUSD. Stablecoins operate on blockchain technology similar to other cryptocurrencies. The difference between stablecoins and other cryptocurrencies is that their value is tied to fiat currencies, the most common of which is the United States dollar. These stablecoins provide a less volatile alternative to popular cryptocurrencies, allowing investors to protect themselves from market swings without exchanging their crypto for fiat dollars.
It reasons that these investors have one less reason to hold a bank account. The cryptocurrency revolution started as an alternative to centrally controlled financial providers. The idea of stablecoins seems to resemble this more closely. It is important to note that a huge chunk of the buying and selling of cryptocurrency is done with stablecoins.
Decentralized exchanges have contributed to this surge as they do not support central bank-issued currencies. The combined value of stablecoins has spiked to over $140 million from about $20 million in just one year. The figures make the growth of the blockchain industry impossible to hide. The growth of stablecoins, in particular, has piqued the interest of regulators in recent times as they pose a peculiar problem.
The Problem Stablecoins Pose
Stablecoins came onto the scene around 2016. Different cryptocurrency firms own them, making them centralized. Tether, for one, is owned by Bitfinex, a crypto exchange based in the British Virgin Islands. It becomes a little ideologically inconsistent that the cryptocurrency market that ought to be decentralized has such an important part of it centralized. More pressing is that these coins being tied to fiat is only possible if the firm has enough financial reserves to back it.
While the creators of these stablecoins claim to have enough reserves, the available data proves otherwise. The increasing rate of inflation makes the situation a little precarious. In the event of an economic downturn, where investors become risk-averse and rush to pull out their assets from these stores of value and convert them into cash with the lack of reserves, these stablecoin providers may be unable to give these people their money at the fiat value.
Why Tether Has Come Under Fire
Tether in recent times has taken center stage for the attention of lawmakers. The stablecoin provider has minted billions of dollars in the last couple of weeks, minting $1 billion just two days ago. The move puts the total supply of the stablecoin over $70 billion.
Many have condemned the move as there are reports that Tether does not have enough reserves to back its supply. Recent data shows that Tether only about 3% of its collection is backed by cash reserves. Both lawmakers and crypto enthusiasts have decried Tether’s decision to keep increasing its supply. The firm has already faced a $41 million fine from regulators for claiming from 2016 to the early parts of 2019 that the United States Dollar fully backed the token.
As of right now, the firm will have to do something about its cash reserves as regulation becomes more stringent. United States lawmakers have already requested documents from stablecoin companies concerning their collateral, with talks of a briefing being possible in the future. The President’s Working Group on Financial Markets has already suggested that these firms be converted into banks but leave the decision to lawmakers.