Stablecoins are by far one of the most exciting use cases of blockchain. A stablecoin is “a cryptoasset that aims to maintain a stable value relative to a specified asset, or a pool or basket of assets” (a definition by the Financial Stability Board). Stablecoins are broadly divided into two categories:
1. Asset-backed stablecoins like Tether (USDT), backed by fiat (the US dollar). Other assets include commodities as well as virtual assets.
2. Algorithmic stablecoins like the notorious Terra (UST/LUNA). Algo stables, in crypto lingo, deploy an algorithm or protocol “which acts as the “central bank”, increasing or decreasing supply in accordance with the rules of the algorithm, which may be by reference to relevant third-party data feeds (known as oracles), and the rules of which may be changed by the applicable (usually decentralised) governance process” (“Stablecoins”, Blockchain: Legal & Regulatory Guidance by The Law Society).
In mid-May bear market for crypto was already alarmingly on. After the Terra’s (UST/LUNA) collapse, more and more experts, writers and observers started raising questions like “Algorithmic stablecoins: why it always goes wrong?”, “Is there any future for algorithmic stablecoins?”, “Is it the fault of a single project or is it about the whole class of assets – algorithmic stablecoins?”, and so on.
The observers are right on what to expect sooner rather than later:
- Rising distrust in crypto market and over-speculation over similar projects. Even so, a time of crisis is a good time for validating the success rate of different approaches and strategies (both for issuers and investors).
- Heightened alarm, tightened scrutiny. SEC, (US Securities and Exchange Commission), for example, is investigating the UST dramatic state of affairs, Тether is more and more on target now, and the EU is called on for a more proactive rather than defensive approach to the crypto sector.
- Mode on: Regulation. Increased market risks always call for changes in regulation or an entire novel one.
In the (algorithmic) stablecoins’ case, this needs to be perceived as a good thing for increasing legal certainty in the financial system and most importantly for investors. A regulated stablecoin is to bring in more price stability for investors.
By no means, however, stablecoins are a complex legal and regulatory challenge, especially thanks to their great potential for a variety of purposes and use cases.
As the crypto market continues to be bearish, there is a lot to weigh in still. There is also “philosophical calm” to it all – the blockchain continuum is experimental and there is a lot more left to get it right, if ever.
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