PwC Global CBDC Index and Stablecoin Overview 2022

what is a stablecoin

The idea is to allow people to own and trade the underlying asset, without necessarily holding it. Holders can theoretically redeem their coins at any time and get the underlying assets in exchange. Collateralised stablecoins maintain a pool of collateral to support the coin’s value. Whenever the holder of a stablecoin wishes to cash out their tokens, an equal amount of the collateralising assets is taken from the reserves. Pegged cryptocurrencies or stablecoins generally opt for one of two main reserve assets – gold or the US dollar.

what is a stablecoin

Luckily, 2014 delivered something more resistant to exchange rate fluctuations. In this article we will be talking about stablecoins, the idea behind this type of cryptocurrency, and how to make a stablecoin. At the same time, stablecoins are emerging as a complement to existing payment ecosystems, with market capitalisation reaching around USD 190 billion in early 2022.” CBDCs are measured via a synthetic index capturing the central banks’ progress and stance on CBDC development, in both a retail and wholesale context. For the stablecoins, we have deliberately chosen not to rank, instead providing an overview of the criteria by which they can be compared, depending on the use case which may be specific to the reader. Given the fall in public sector cash use and the rise in private sector cryptoassets, our new report gives a timely update on the progress and development of CBDCs and stablecoins.

How do I buy a stablecoin?

CBDCs are digital versions of banknotes and coins, issued with the full backing of central banks. One of the major drawbacks talked about in the media is the loss of privacy nonetheless. Tether (USDT), USD Coin (USDC), Pax Standard (PAX), True USD (TUSD), Binance USD (BUSD), and Gemini Dollar (GUSD) are examples of fiat-collateralized stablecoins that are pegged to the US dollar. Centralized stablecoins are also known as fiat-collateralized stablecoins or custodian stablecoins. Centralized stablecoins are the first type of stablecoin category to hit the market, and to some extent explains why they are the most dominant type of stablecoin in the market. Stablecoins are primarily used for trading purposes, giving crypto traders the ability to switch their volatile crypto into more stable assets that mimic their home fiat currencies.

Unlike traditional cryptocurrencies, stablecoins have their value pegged to a particular asset in an attempt to limit some of the volatility that is often seen in typical crypto trading. Regulated financial markets
Recently the Financial Stability Board (FSB) pointed to the increased intertwining of the crypto world with the traditional financial world. Up till recently links between crypto markets and regulated financial markets remained weak. The potential for crypto
market volatility to spill over and cause wider financial instability was limited.

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Stablecoins are a type of cryptocurrency that aim to deliver price stability by having their value pegged to another asset. Most commonly, these coins are backed by a fiat currency such as the US dollar, which means $1 is kept in reserve for every unit of a stablecoin in circulation. Stablecoins can also be pegged to cryptocurrencies and precious metals like gold. While cryptocurrencies are often highly volatile, stablecoins are pegged to another asset, most often the US dollar. They can maintain this peg in several ways, but the most common and safest manner is to back the coin with reserve assets, which can take several forms, such as fiat currencies, other cryptocurrencies, or commodities. Stablecoins are most commonly backed by fiat currency, cryptocurrency or real-world assets.

what is a stablecoin

They have played a crucial role for cryptocurrency traders, allowing them to hedge against spikes in Bitcoin’s price or
to store idle cash without transferring it back into fiat currency. A growing number of regulated financial entities have increased their exposure to cryptocurrencies, DeFi and other forms of digital finance in recent months. If crypto market volatility becomes severe the risks for the financial stability of the real economy
could as a result escalate.

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In the case of a fiat-collateralized stablecoin, a potential run would result in a custodian having to sell fiat-based assets in a forced sale to honour its obligation towards the sellers of a stablecoin. That type of scenario would of course have an impact on the wider financial system. This results in the crypto-backed stablecoin having a lower supply compared to its reserve, which can hedge against any volatility the underlying digital assets may experience. Meanwhile, stablecoins attempt to stick to the value of their underlying asset as much as possible – you will typically see that the value of stablecoins will only stray very slightly from its backed asset.

what is a stablecoin

The content has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Following the surge in people’s interest in crypto over the last few years, scammers have been increasingly active in targeting potential investors. Find out how to protect yourself and others from investment scams on our ScamSmart site. The peak trading price of Tether was in July 2018 when its value reached £1.01. If you invested £300 at its peak, this would be worth £246.54 in December 2022. Crypto can be thought of as ‘digital representations of value or rights’ that are secured by encryption and typically use some type of ‘distributed ledger technology’ (DLT).

Any limits on the level of fiat-collateralization could see this category move to a hybrid model. There are many types of crypto and the market continues to evolve rapidly. Though, when you stake, you are typically given a chance to earn rewards, including voting rights on the network or mining perks. According to Yahoo Finance, BUSD’s market capitalization (market cap) stood at $22.86 billion as of 24 November 2022.

Is a Bitcoin a stablecoin?

Stablecoins are cryptocurrencies that claim to be backed by fiat currencies. Unlike cryptocurrencies like Bitcoin, their prices remain steady.

As the name implies, crypto-collateralized stablecoins are not backed by any legal tender but rather by other cryptocurrencies such as Ethereum. In doing so, users have the ability to mint and burn tokens without needing to utilize the services of a centralized third party trust company. Despite this, you will find that fiat-backed stablecoins, such as Tether or Binance USD, are some of the largest and most traded stablecoins on the market. Since fiat currencies, such as the US dollar, tend to be far more stable than other assets, such as cryptocurrencies and commodities, this could offer an extra layer of stability for investors. Stablecoins
While the TerraUSD collapse has spelled trouble for Bitcoin and other cryptocurrencies, the chaos is somewhat contained in the stablecoin sector.

Trade Association Directory

Moreover, the regulation allows issuers to invest their reserves in ‘high quality liquid asset(s)’ (HQLA), relying on secondary regulation to identify them exactly. Crucially, the designation as HQLA entails a large degree of discretion and is prone to mistakes; for instance, AAA Mortgage -backed securities were and to an extent still are considered HQLA. On the liability side, the regulation entrusts the holders of stablecoins with a general and absolute right to redeem their coins with no fee.

Digital signs (tokens) (hereinafter referred to as “tokens”) are not legal tender and are not required to be accepted as a means of payment. Stablecoins are a relatively new and fast-evolving area of the crypto space, exploding from almost nothing In 2017 to the billions of value they capture today. Perhaps because of such concerns, other varieties of stablecoin have aimed to solve the problem in different ways. With the blockchain technology we have today, we can send digital dollars anywhere in the world, almost instantly and for fractions of a penny – without middlemen, and using only a mobile phone. is a global cryptocurrency exchange platform that currently does not operate in the US, still you are welcome to browse and find out more. It’s why merchants can use stablecoins to accept payments at much lesser cost, and efficiently relay value among themselves anywhere in the world. It’s how you send money to someone on the run in a war zone – or the other side of the globe. It’s how value could flow more efficiently and more effectively than ever before between all the locations and places of the world. Following the collapse of the Terra blockchain, the government proposed additional safeguards to protect consumers against such outcomes.