Stablecoin regulation and the concept of mass stablecoin use grows daily. What began with news of an unfortunate crash highlighting the “risks” of stablecoins continues to snowball into a globally supportive movement for fiat-backed stablecoins.
The key to understanding: algorithmic stablecoins, relying upon an algorithm to maintain a hard peg to an external asset, suffer from a shaky foundation. The goal is creative, novel–even noble, in its hope to remove fiat’s inflationary influence. Yet can an algorithm deal with freefalling markets?
No. Investors and regulators alike learned, very quickly, that introducing volatility or unguaranteed assets anywhere in the chain of a stablecoin’s reserves almost guarantees disaster. Remove that monkeywrench and we have something of a masterpiece.
The European Council introduced a comprehensive framework effectively accepting fiat-backed stablecoins. The United States purported legislation calling for stablecoin regulators and protections for crypto investors, although this is in flux until September.
But why, all of a sudden, the mad dash from governments across the world? The answer lies in market capitalization. For example, Tether reached over 83 billion USD in 2022, from under 1 billion USD in 2017.
This article delves into the top five fiat-backed stablecoins and what you need to know before regulation is likely passed everywhere.
Launched in 2014, Tether is a fiat-backed stablecoin, pegged 1 to 1 to the US dollar. One USDT equates to one USD.
As a recap, a fiat-backed stablecoin generally keeps 100% of the value of coins in regulations backed in actual US dollars. It may publish regular, audited reserve reports proving this backing.
Tether, for example, is famous for publishing reports detailing the makeup of its reserves. Currently, almost 80% goes to cash and cash equivalents, including short-term paper (debt).
Launched in 2018, USD Coin is also a fiat-backed stablecoin, pegged 1 to 1 to the US dollar. One USDC equates to one USD.
Like Tether, USD Coin publishes its reserve reports frequently. It expressly markets itself as a “digital dollar.”
Launched in 2019, Binance USD is a fiat-backed stablecoin offered by the world’s largest crypto exchange, Binance.
Binance USD operates identically to Tether or USD Coin, but its focus remains for users of the Binance exchange.
Launched in 2017, Dai is a crypto-backed stablecoin focused on upholding its ethos of decentralization. Instead of US dollars or euros, only other cryptocurrencies comprise the reserve assets of Dai. Decentralization refers to a mandate of not having a central entity controlling the supply of Dai coins.
Dai remains popular in DeFi (decentralized finance) circles, with each “DeFi” referring to a protocol or other entrepreneurial effort to improve or replace traditional white collar services.
Launched in 2018, TrueUSD builds upon the fiat-backed stablecoin ethos with daily holdings reports, monthly audits, and protections against theft.
Despite offering a pure fiat-backed solution for US dollars, it still falls by the wayside and well under the rank of crypto-backed Dai. This may be due to the dominance of Tether and USD Coin.
Three of the top 10 cryptocurrencies in the world by market cap are stablecoins. Specifically, they are fiat-backed stablecoins whose mandates are to provide stability, utility, ease, and minimal transfer costs.
That is to say, their mandates do not include “changing the system” or “bucking the trend.” They make no ideological arguments and, unlike DeFi, seek not to challenge the overarching dominance of central banks.
Will this change? Will inflation and global inequality reach a point to where many more might risk stability for a currency not prone to double-digit inflation? Time will tell–and fiat-backed stablecoins may yet be the first step.
Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.
The co-author of this text, Conor Scott, CFA, has been active in the wealth management industry since 2012, continuously researching the latest developments affecting portfolio management and cryptocurrency. Mr. Scott is a Freelance Writer for Deltec International Group, www.deltecbank.com.
The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade.
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