What Are Stablecoins?
Stablecoins are digital currencies pegged to stable assets like fiat currencies (e.g., US Dollar, Euro), a basket of goods, or other crypto assets. Their primary goal is to maintain a stable value, providing a reliable medium of exchange and store of value within the volatile cryptocurrency market.
Types of Stablecoins
- Fiat-Collateralised Stablecoins: These stablecoins are backed by a reserve of fiat currency held in a bank account or other trusted institution. Each stablecoin in circulation is typically backed by an equivalent amount of fiat currency. Examples include Tether (USDT) and USD Coin (USDC), which are backed by US Dollar reserves.
- Crypto-Collateralised Stablecoins: These stablecoins are backed by a reserve of other crypto-assets. Given the volatility of cryptocurrencies, these stablecoins are often over-collateralised to ensure stability. MakerDAO’s DAI is a prominent example, backed by ETH and other crypto assets.
- Algorithmic Stablecoins: These stablecoins are not supported by any collateral but instead utilise algorithms and smart contracts to automatically regulate their supply in order to maintain the stablecoin’s peg. Examples of such stablecoins include Terra (UST) and Ampleforth (AMPL).
- Commodity-Collateralised Stablecoins: These stablecoins are backed by reserves of commodities like gold or silver. They offer the stability of a physical asset while leveraging blockchain technology. Tether Gold (XAUT) is an example of a commodity-collateralised stablecoin.
Benefits of Stablecoins
- Stability: The main advantage of stablecoins is their ability to maintain a stable value, making them ideal for everyday transactions, savings, and remittances.
- Efficiency: Stablecoins facilitate fast and low-cost transactions, especially for cross-border payments, compared to traditional banking systems.
- Decentralisation: Decentralised stablecoins provide such benefits as reduced dependence on traditional financial institutions and greater access to financial services for unbanked populations.
Regulatory Considerations
Strict Regulation
Many countries, such as the UK, Singapore, and the European Union (EU), have introduced or proposed stablecoin regulation. These mainly target fiat-backed stablecoins and impose strict requirements to ensure their stability and reliability. Issuers of stablecoins must maintain a reserve of assets to back the circulating stablecoins. Regular independent audits are required to verify the presence and adequacy of these reserve assets. Additionally, issuers must provide comprehensive white papers detailing the stablecoins’ structure, operation, and backing.
European Union (EU) Regulation Example
From June 30, 2024, the section of the Markets in Crypto Assets (MiCA) regulation governing crypto assets came into effect in the EU. Stablecoins under MiCA need to meet strict requirements to operate within the EU, and be classified as either Asset-Referenced Tokens (ARTs) or E-Money Tokens (EMTs).
- ARTs are crypto assets that are pegged to the value of one or more real assets, such as fiat currencies, gold, or securities. ART issuers must
- Create and maintain a reserve of assets separate from other assets.
- Ensure the reserve consists of liquid and low-risk financial instruments.
- Disclose the circulating supply of tokens and the composition of reserves monthly.
- Undergo independent audits every six months.
- Store reserves with reliable custodians, such as banks or investment firms.
- EMTs represent digital equivalents of fiat currencies, backed by issuers who guarantee a 1:1 exchange ratio with fiat. EMTs are regulated under both MiCA and the Electronic Money Directive, ensuring they adhere to strict standards for stability and consumer protection. Issuers of EMTs must obtain licences as credit institutions or electronic money institutions (EMIs). They are also required to ensure that token holders can convert the crypto-asset into the pegged currency.
Algorithmic Stablecoins
After the Terra/Luna ecosystem collapse, several countries, including the UAE, have banned the issuance and use of algorithmic stablecoins. These stablecoins rely on algorithms and smart contracts to maintain their peg without traditional asset backing, making them inherently riskier. This prohibition aligns with a wider regulatory trend towards enhancing the stability and reliability of stablecoins.
What Are Stablecoins?
Stablecoins are digital currencies pegged to stable assets like fiat currencies (e.g., US Dollar, Euro), a basket of goods, or other crypto assets. Their primary goal is to maintain a stable value, providing a reliable medium of exchange and store of value within the volatile cryptocurrency market.
Types of Stablecoins
- Fiat-Collateralised Stablecoins: These stablecoins are backed by a reserve of fiat currency held in a bank account or other trusted institution. Each stablecoin in circulation is typically backed by an equivalent amount of fiat currency. Examples include Tether (USDT) and USD Coin (USDC), which are backed by US Dollar reserves.
- Crypto-Collateralised Stablecoins: These stablecoins are backed by a reserve of other crypto-assets. Given the volatility of cryptocurrencies, these stablecoins are often over-collateralised to ensure stability. MakerDAO’s DAI is a prominent example, backed by ETH and other crypto assets.
- Algorithmic Stablecoins: These stablecoins are not supported by any collateral but instead utilise algorithms and smart contracts to automatically regulate their supply in order to maintain the stablecoin’s peg. Examples of such stablecoins include Terra (UST) and Ampleforth (AMPL).
- Commodity-Collateralised Stablecoins: These stablecoins are backed by reserves of commodities like gold or silver. They offer the stability of a physical asset while leveraging blockchain technology. Tether Gold (XAUT) is an example of a commodity-collateralised stablecoin.
Benefits of Stablecoins
- Stability: The main advantage of stablecoins is their ability to maintain a stable value, making them ideal for everyday transactions, savings, and remittances.
- Efficiency: Stablecoins facilitate fast and low-cost transactions, especially for cross-border payments, compared to traditional banking systems.
- Decentralisation: Decentralised stablecoins provide such benefits as reduced dependence on traditional financial institutions and greater access to financial services for unbanked populations.
Regulatory Considerations
Strict Regulation
Many countries, such as the UK, Singapore, and the European Union (EU), have introduced or proposed stablecoin regulation. These mainly target fiat-backed stablecoins and impose strict requirements to ensure their stability and reliability. Issuers of stablecoins must maintain a reserve of assets to back the circulating stablecoins. Regular independent audits are required to verify the presence and adequacy of these reserve assets. Additionally, issuers must provide comprehensive white papers detailing the stablecoins’ structure, operation, and backing.
European Union (EU) Regulation Example
From June 30, 2024, the section of the Markets in Crypto Assets (MiCA) regulation governing crypto assets came into effect in the EU. Stablecoins under MiCA need to meet strict requirements to operate within the EU, and be classified as either Asset-Referenced Tokens (ARTs) or E-Money Tokens (EMTs).
- ARTs are crypto assets that are pegged to the value of one or more real assets, such as fiat currencies, gold, or securities. ART issuers must
- Create and maintain a reserve of assets separate from other assets.
- Ensure the reserve consists of liquid and low-risk financial instruments.
- Disclose the circulating supply of tokens and the composition of reserves monthly.
- Undergo independent audits every six months.
- Store reserves with reliable custodians, such as banks or investment firms.
- EMTs represent digital equivalents of fiat currencies, backed by issuers who guarantee a 1:1 exchange ratio with fiat. EMTs are regulated under both MiCA and the Electronic Money Directive, ensuring they adhere to strict standards for stability and consumer protection. Issuers of EMTs must obtain licences as credit institutions or electronic money institutions (EMIs). They are also required to ensure that token holders can convert the crypto-asset into the pegged currency.
Algorithmic Stablecoins
After the Terra/Luna ecosystem collapse, several countries, including the UAE, have banned the issuance and use of algorithmic stablecoins. These stablecoins rely on algorithms and smart contracts to maintain their peg without traditional asset backing, making them inherently riskier. This prohibition aligns with a wider regulatory trend towards enhancing the stability and reliability of stablecoins.