Stablecoins are a type of cryptocurrency that could maintain a stable value. These are typically pegged to a reserve asset such as fiat currency, say the US dollar a commodity, say gold or through algorithmic mechanisms. The algorithmic mechanism uses smart contracts to control the supply and maintain peg without actual collateral.
In short, stablecoins are blockchain-issued cryptocurrencies designed to mimic the dollar. These are potential contenders in payment system.
Still there is skepticism about this mode of payment. The German regulator BaFin knows what havoc Wirecard caused in Germany. Wirecard AG was a celebrated Fintech company in Germany which collapsed in 2020, after it was discovered that 1.9 billion Euros were missing from its account. Since then, the regulator has become extra-cautious.
A racy technology promises how we pay and disrupt the old system of payment firms. In the past decade, the world is moving towards being cashless. There is easy shopping online. It facilitates fintech companies. There are electronic shuffles of money — A to B. But it also exposes us to online hacks, heists and fraud. Fraud rates are generally low, say 0.1 per cent of card spend. Regulators still face pushbacks since they have to prioritize between safety and speed.
Stablecoins too have similar tradeoffs. By 2030, this market could soar to $ 1.3 trillion. It has speed, low-cost and 24-hour access in cross border payments. Yet faster and cheaper do not necessarily mean safer. Stablecoins’ philosophy is ‘be your own bank’. It also means victims of fraud are less protected. There is risk of stolen funds too. The majority of illicit activity on the blockchain is through stablecoins. Criminals too want to reduce costs and maximize profits.
Stripe Inc, a payment company, is launching stablecoin-funded accounts in over 100 countries, and is partnering with Visa Inc.
Crypto world is ‘Wild West’. Some countries have become cautious, whereas some approve the digital currency as if a meal is ordered at McDonald’s. Tether Holdings is the biggest issuer of stablecoins. It has circulation of $150 billion. It is based in ELSalvador and has yet to be fully audited.
Let there not be another Wirecard to give us a wake-up call.
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