TAKEAWAYS
Stablecoins are the lifeblood of the crypto ecosystem. They enable the crypto world to function, such as for the transfer of assets, collateralisation, market making and payments.
Stablecoins are a key innovation in cryptocurrency, combining the stability of fiat currencies with the advantages of digital assets.
This article, presented in two parts, examines their mechanisms, uses, challenges, and future prospects, highlighting their technology, regulatory concerns, and influence on global finance.
Definition and purpose
Stablecoins are digital assets designed to maintain a stable value by pegging to a reserve asset such as fiat currency, commodity, or algorithmic mechanisms. Their primary purpose is to mitigate the volatility inherent in traditional cryptocurrencies like Bitcoin and Ethereum.
Stablecoins employ several mechanisms to ensure that their value remains stable and predictable. Pegging strategies are central to this, involving direct or indirect linkage to an underlying reserve asset, such as fiat currency or commodities, to retain value consistency. To reinforce trust and reliability, periodic and transparent reserve audits are conducted, providing assurance that the pegged value is fully backed by the stated assets. Additionally, smart contracts play a pivotal role by automating complex adjustments in the supply of the stablecoin.
As of 19 December 2024, the total market capitalisation of stablecoins is estimated to exceed USD12 billion.
Fiat-collateralised stablecoins dominate the stablecoin market, typically accounting for over 90% of the total stablecoin market capitalisation. Tether (USDT) and USD Coin (USDC) are currently the largest stablecoins by market value, both pegged primarily to the USD, and they occupy the majority share of the stablecoin market.
USDT (Market capitalisation: USD140 billion as of 19 December 2024)
Tether is a blockchain-enabled platform designed to facilitate the use of fiat currencies in a digital manner. Tether works to disrupt the conventional financial system via a more modern approach to money. Tether has made headway by giving customers the ability to transact with traditional currencies across the blockchain, without the inherent volatility and complexity typically associated with a digital currency. As the first blockchain-enabled platform to facilitate the digital use of traditional currencies (a familiar, stable accounting unit), Tether has democratised cross-border transactions across the blockchain.
Tether was founded in 2014 by a group of Bitcoin enthusiasts and early adopters, including Brock Pierce, Reeve Collins, and Craig Sellars. Later, in 2015, Tether was purchased by new owners based in Hong Kong, who also owned the Bitfinex crypto centralised exchange. Among the key figures involved with Tether after its acquisition are Giancarlo Devasini, who serves as Chief Financial Officer, and Jean-Louis van der Velde, who was Chief Executive Officer until Paolo Ardoino took over the role in December 2023.
USDT does not have its own blockchain; instead, it operates as a second-layer token on top of other cryptocurrencies’ blockchains – Bitcoin, Ethereum, EOS, Tron, Algorand, Bitcoin Cash and OMG – and is secured by their respective hashing algorithms.
USDC(Market capitalisation: USD42 billion as of 19 December 2024)
USDC is a stablecoin that is pegged to the USD on a 1:1 basis. Every unit of this cryptocurrency in circulation is backed by USD1 that is held in reserve, in a mix of cash and short-term US treasury bonds. Centre Consortium, which is behind this asset, says USDC is issued by regulated financial institutions.
Centre Consortium has two founding members. One of them is the peer-to-peer payment services company Circle, while the other is the Coinbase cryptocurrency exchange. Other crypto ventures can join the consortium.
In 2020, Circle Consortium and Coinbase collectively announced a major upgrade to USDC’s protocol and smart contract. The goal of these enhancements is to make it easier for USDC to be used for everyday payments, commerce and peer-to-peer transactions.
All of the USDCs in circulation are actually ERC-20 tokens, which can be found on the Ethereum blockchain. One of the biggest advantages here is how they can then be integrated with Ethereum-based applications. As mentioned earlier, security and confidence in this stablecoin is delivered by proving that USDs are being held safely in reserve.
Part 2 of this article looks at the stablecoin companies in Singapore, their use cases, and the regulatory and risk landscape.
Chan Wei Xiang, CA (Singapore), is Chief Growth Officer, SOAS.