By Tom White By Tom White | June 24, 2024 | Presented By,
While the cryptocurrency market is renowned for its volatility, stablecoins have offered investors a place to find more secure ground. A crypto tied to a reserve asset (a fiat currency, commodity, or some other asset of stalwart value), stablecoins are designed to keep a relatively reliable value over time. This makes them attractive to investors who want crypto's decentralized or anonymized nature without the exciting fluctuations. You might think Bitcoin's recent designation as an exchange-traded fund might push it into this territory, but look at a Bitcoin chart price today and see for yourself how stable it seems.
What Makes a Stablecoin Work
Stablecoins generally come in three different types. Some use fiat currencies as collateral, and others use other cryptocurrencies (usually spread across many currencies, so they're back against the crypto market as a whole). The somewhat more complicated "algorithmic stablecoins" are backed by smart contracts running algorithms to control supply and keep their value steady.
The whole point is that the stablecoin's value remains relatively unchanged, allowing it to be used for hedging, remittance, and all kinds of decentralized finance activity, all with the speed and anonymity that crypto is known for. Add in the benefits of blockchain tech and the ability to conduct long-term stable business without involving fiat currencies, and you've got one of the most essential tools in the global decentralized market.
Unfortunately, this has also helped them to avoid national sanctions, and now you can probably guess where the problems begin.
Stablecoins and the Geopolitical Fallout
Crypto has become a big enough deal to be used as a tool in geopolitical conflicts. With the current global economic situation, the tools provided by stablecoins, and an increasingly world-spanning DeFi network, more than a few experts probably saw this coming.
What's Going to Change?
This depends on sanctions and how much authorities can do to affect it. Crypto regulations are still fledgling and have focused on consumer protection, preventing money laundering, and ensuring the value of fiat currencies against cryptocurrencies. Meanwhile, technological advancements surrounding stablecoins continue to enhance their efficiency, scalability, and versatility.
A solution might lie in actions similar to the Bitcoin ETF designation. Stablecoins are a valuable DeFi loophole because they aren't directly tied to the kinds of central banks and financial systems that international regulations were built around. If nations want to enhance rules, they should start by granting stablecoins official designations and making room for them in legal frameworks that have so far ignored them.
When Will This Happen?
Change is already happening, as crypto always reacts and changes when used for significant, impactful purposes like this. Keep an eye on your favorite fiat-backed stablecoins and what the crypto market does when news like this breaks. You might see something interesting.
The future of stablecoins is likely to involve increasing integration with traditional financial systems. As regulators understand the potential of this new asset class, a more stable and transparent regulatory environment is expected to emerge. This will pave the way for the wider adoption of stablecoins, which could have a profound impact on the global financial system.
Photography by: Courtesy of Pexels