Stablecoins Explained
Stablecoins are a type of digital currency designed to have a stable value, unlike other cryptocurrencies like Bitcoin or Ethereum, whose values can be quite volatile. The word “stable” in stablecoin refers to the fact that its value is supposed to remain relatively steady.
Stablecoins are typically tied to some underlying asset, such as a traditional currency like the US dollar or a basket of currencies. This connection to a real-world asset helps maintain their stability. For example, a stablecoin might be created so that one unit of the stablecoin is always worth one US dollar.
Stablecoins can be useful because they combine the benefits of cryptocurrencies, like fast and secure transactions, with the stability of traditional currencies. They provide a way for people to use digital currencies for everyday transactions without worrying too much about their value changing dramatically.
Some common uses of stablecoins include facilitating international money transfers, trading on cryptocurrency exchanges, and serving as a store of value during times of market volatility. They can also be useful in countries with unstable currencies, as they provide a more reliable alternative for people to hold and use money.
In summary, stablecoins are digital currencies that aim to maintain a stable value by being linked to real-world assets, making them a more predictable and reliable form of cryptocurrency.
Advantages of stablecoins
Stablecoins offer several benefits that make them appealing for various use cases. Here are some of the key advantages of using stablecoins:
Stability: Stablecoins are designed to maintain a stable value, usually pegged to a fiat currency like the US dollar or a basket of assets. This stability makes them reliable as a medium of exchange and a store of value, reducing the volatility commonly associated with cryptocurrencies like Bitcoin or Ethereum.
Fast and Efficient Transactions: Stablecoins are built on blockchain technology, enabling near-instantaneous peer-to-peer transactions across borders. This speed and efficiency can streamline cross-border payments, remittances, and other transactions, eliminating the need for intermediaries and reducing costs.
Accessibility: Stablecoins offer financial inclusion by providing individuals and businesses with access to digital assets, even in regions where traditional banking services may be limited or unreliable. Stablecoins can be stored, transferred, and used via a digital wallet, making them accessible to anyone with a smartphone and internet connection.
Transparency: Blockchain technology ensures transparent and immutable transactions. Stablecoins, being built on blockchains, benefit from this transparency. Users can verify transactions on the blockchain, promoting trust and accountability within the system.
Programmability: Many stablecoins are based on smart contract platforms, such as Ethereum, which allow for the creation of programmable money. Smart contracts enable the automation of various financial processes, such as recurring payments, decentralized lending, and decentralized exchanges, opening up innovative possibilities for decentralized applications (dApps) and decentralized finance (DeFi).
Hedging and Trading: Stablecoins provide a valuable tool for traders and investors to hedge against the volatility of other cryptocurrencies. By moving funds into a stablecoin during market downturns, users can protect their investments from significant losses. Stablecoins also serve as a bridge currency on cryptocurrency exchanges, allowing traders to move in and out of other cryptocurrencies quickly.
Regulatory Compliance: Some stablecoins aim to comply with existing financial regulations, providing a bridge between traditional finance and the cryptocurrency ecosystem. These compliant stablecoins can facilitate regulatory oversight, anti-money laundering (AML) measures, and Know Your Customer (KYC) procedures, which may be required for certain financial activities.
It’s important to note that while stablecoins offer benefits, they are not without risks and challenges. The stability of stablecoins relies on the collateral or reserve assets backing them, and there have been instances where stablecoins have faced issues or controversies. Therefore, it’s crucial to conduct proper due diligence and choose stablecoins issued by reputable organizations, such as Stablecoin Standard Assured Members.
Stablecheck
StableCheck™️ is the quality badge scheme in development by Stablecoin Standard. StableCheckmark™️ refers to the badge itself.
StableCheck™️ was developed by stablecoin issuers to help expedite the due diligence process between issuers when choosing to deploy trading pairs on exchanges. Over time, this has become the minimum industry standard we believe necessary to ensure consumer protection and trust.
StableCheck™️ currently only applies to fiat backed stablecoins. We believe that whilst there is a global lack of regulatory clarity, fiat backed stablecoins are the safest place to start. Stablecoins with other types of collateral backing may still feature in some of our industry working groups, but there are currently no plans for them to be part of StableCheck™️.
The stablecoin standards themselves behind the StableCheck™️ scheme are constantly under revision given the rapidly evolving crypto landscape. Please see the abbreviated standards here.
The Stablecoin Standard Executive Committee is currently finalising the StableCheck™️ badge scheme itself, and is developing a regulatory reporting dashboard with KYAX for verification & regulatory reporting purposes, that will look at not just proof of reserves, but also assets and liabilities. It’s official launch will be made in the coming months.
