Stablecoins

News: Finance Minister highlighted that India may not legalize private cryptocurrencies but must “prepare to engage” with stablecoins to avoid exclusion from global financial shifts.

About Stablecoins

• Stablecoins are a type of cryptocurrency designed to maintain a stable value by pegging to fiat currencies, commodities, or financial instruments.
• They are created to reduce price fluctuations and provide a more reliable medium of exchange.
• Depegging: When a stablecoin falls below its target value for an extended time, it’s called depegging.
• Types of Stablecoins:
  • Fiat-backed Stablecoins: These are supported by traditional government-issued currencies such as the US dollar.
    • To ensure trust, issuers are expected to hold equivalent reserves, which are safeguarded by independent custodians under regular monitoring.
    • Example: Tether (USDT), USD Coin (USDC), and Stasis Euro (EURS)
  • Commodity-backed Stablecoins: These stablecoins are pegged to tangible assets like gold, silver, oil, or even real estate.
    • Example: Pax Gold (PAXG), Tether Gold (XAUT) and Kinesis Silver (KAG).
  • Crypto-backed Stablecoins: These coins are backed by cryptocurrencies.
    • They are often overcollateralized to account for crypto’s volatility.
    • Examples: Dai (DAI), Falcons USD (FAH), and USD Bancor (USDB)
  • Algorithmic Stablecoins: These coins use smart contracts and algorithms to automatically adjust supply and demand in order to maintain price stability.
    • Example: Ampleforth (AMPL)
• Usage: It acts as a bridge between traditional finance and the crypto world by enabling payments, remittances, and trading without volatility risks.
• Centralization and decentralised issuance: Some stablecoins are issued by private companies, while others are decentralized.
  • Stability often depends on whether a trusted institution manages issuance and redemption.
• Risks: They can face issues like inadequate reserves, lack of transparency, or systemic risks if widely adopted without regulation.