Can Stablecoins Rise Above the Criticism From Regulators And Questions About Legitimacy?

Something is always happening in the world of Cryptocurrency every day. Whether it is Elon Musk’s tweet about Dogecoin or El Salvador becoming the first country to recognise Bitcoin as legal tender, the world of crypto is eventful, today the least. Just two months ago, everything in the crypto world was jolly. Traders and Crypto investors were rejoicing coins such as Bitcoin and Ethereum reaching all-time high prices. However, the market crash in May 2021 caused by China’s mining prohibition has again brought the legitimacy of cryptocurrencies into question. With regulators lined up to shackle the rise of digital currency, some financial experts are seriously doubting just how long the crypto bubble will last. 

Earlier in June, the Bank of England suggested that several cryptocurrencies may be subject to scrutiny as regulators double down on their intentions to curb digital assets. Apart from highly volatile coins such as Bitcoin, Ethereum, Ripple, etc, the regulators may also target “Stablecoins” such as Ether soon. In such a murky scenario, the question that everyone is asking is if Stablecoins can rise above the criticism and emerge as the most acceptable digital currency. 

What are Stablecoins and why Do they Matter?

The market cap of Stablecoins reached $40 billion in 2021 and their rise has been nothing short of miraculous. Tether is the most popular Stablecoin in the market and has become a preferred mode of trading for cryptocurrencies. In simple words, Stablecoins are digital representations of traditional fiat currencies such as USD, EUR, GBP, etc that live on Blockchain. The main difference between Bitcoin (BTC) and Stablecoins such as Tether (USDT) is that Stablecoins are said to be backed by traditional currency reserves. 

For example, 1 USDT (Tether) stable coin in circulation is backed by 1 US Dollar reserve, thereby shielding stable coins from the volatile nature of the cryptocurrency market. Many traders prefer to buy USDT as transactions on the crypto market using traditional fiat currencies are more difficult. It is thus more convenient for traders to transfer funds but financial policymakers and regulators plan to have stringent questions regarding the use-case and legitimacy of the Stablecoins.  

Concerns About Stablecoins & Their Use-Case

The initial rise of Stablecoin gathered interest due to Bitcoins failure to become an effective alternative option to monetary transactions and payments. Even after many years, today, Stablecoins such as Tether is mostly used to make buying other cryptocurrencies easier. If Stablecoins are an alternative to fiat currencies because they are less affected by the volatility of the market, they need to address some important concerns about liquidity, risks and usability. 

Why Do Regulators Think Stable Coins Are Risky? 

The Bank of England’s views on Stablecoins perfectly highlight some of the risks involved. The BoE said, For stablecoins to be used alongside commercial bank money, the Bank must be satisfied that they are safe . . . and they must not rely on making promises that they cannot guarantee to keep over time,”.

A. Consumer / Investor Protection 

The foremost risk about Stablecoin (and cryptocurrency in general) is regarding the risk protection for consumers and investors. The very nature of digital currency opens it to the different regulatory frameworks in different jurisdictions and thus it seems impossible that the consumer will receive appropriate protection. If Stablecoins are to replace banknotes and fiat currency, it will not happen without the government-backing and the decentralized principles of digital currency may make it difficult to safeguard the consumer’s risk on a global level.

B. Lack of Market Competition

One of the biggest criticisms of Tether, the most prominent Stablecoin in the market, is that it is handled by a private corporation. Despite the claims that every USDT is backed by an equal amount of US Dollars reserves, financial analysts refuse to believe it as there has been no proof of the exact amount of reserves yet. Another concern is about technology giants creating monopolies by grabbing consumer data and endangering the financial stability of the markets. 

C. Impact on Global Monetary Policy

Cryptocurrency believers received a huge boost after El Salvador legally recognised Bitcoin as a mode of payment but the concerns from regulators remain. The government in China, U.S., and England is contemplating a central bank digital currency because of the threat that cryptocurrencies pose to monetary policy worldwide. Large scale adoption of Stablecoins poses a huge competition to fiat currencies and as a result, could give rise to the privatisation of money itself. 

As the adoption of cryptocurrencies such as Bitcoin increases, so will the market capture of Stablecoins. Regulating the cryptocurrency market may still be a few years ahead but to survive the financial systems, the cryptocurrencies will need to prove that they are stable and have the consumer/investor’s best intentions.