Stablecoins are a special kind of crypto coins, explains crypto expert Teunis Brosens of ING. They have a central role in crypto trading. Exchanging one crypto currency for another, especially the lesser known ones, is often done via stablecoins. They thus have the function of ‘real’ money, such as dollars or euros.
They are also more stable than ‘regular’ cryptocurrencies, such as bitcoin, precisely because they are linked to traditional money. But US regulators fear that monitoring these coins is not enough. Cryptocurrencies are particularly attractive for money laundering, because there are hardly any rules. But more importantly, stablecoins can also cause financial instability.
Time for the same strict rules for stablecoins such as Tether, USD Coin and Binance USD, the regulators write in a report.
Risk for investors
It seems contradictory that stablecoins can cause financial instability, but it is indeed a risk. Tether and other stablecoins basically hold $1 for every stablecoin they issue. Therefore, for example, Tether should always be worth exactly 1 dollar. And consumers can in principle always ask for 1 dollar back for their Tether. Hence the name stablecoin.
But the dollars that the company behind, say, the Tether receives when it spends Tethers, is often invested. And it is often not clear where stablecoins put their money.
In early 2019, for example, it turned out that only 74 percent of Tether was backed by dollars. The rest of the coins were not backed.
Some stablecoins also invest in, among other things, Chinese loans, or in the financing of crypto exchanges. “That’s a risk for individual investors,” Brosens said. “Consumers need to be confident that they can get their value back in dollars if they want to. You can’t have a stablecoin not being stable.”
Influence on stability
Because stablecoins have become so big, it could also hit the rest of the financial markets if consumers somehow want to exchange their stablecoins for dollars on a large scale, explains Brosens.
After all, the companies that issue stablecoins are then forced to sell many of their investments quickly. And that can have major consequences for stock prices and therefore for financial stability.
You can overcome this by applying the same rules to stablecoins as there are now for banks, Brosens also concludes. And if stablecoins are regulated, then, just like with savings, the government could guarantee funds up to a certain amount if a stablecoin goes down, Brosens says.
An additional advantage, with the same strict rules as for banks: there is also immediately more control over money laundering and countering terrorist financing, according to Brosens.