In the dynamic world of cryptocurrency, stablecoins have emerged as a promising bridge between traditional finance and the novel crypto market. A new paper from the Bank for International Settlements delves into this growing sector, questioning the ‘stability’ of stablecoins—a key selling point that distinguishes them from their more volatile counterparts.
Stablecoins, designed to be immune to the wild price swings typical of cryptocurrencies like Bitcoin and Ethereum, are pegged to more stable assets such as fiat currencies, commodities, or other cryptocurrencies. However, despite the variety of backings and the scale of operations, no stablecoin has consistently maintained its value against its pegged asset.
The paper categorises stablecoins into four main types, each backed by different assets ranging from fiat currency to commodities and other cryptoassets. The paper suggest that while these digital currencies are less volatile compared to traditional cryptocurrencies, they fall short of being completely stable. This inconsistency holds true across all sizes and types of stablecoin.
The paper points out that there is no solid assurance that stablecoin issuers can redeem the full value of these coins on demand for users. This lack of reliability challenges the idea of stablecoins as a safe store of value and a dependable medium of exchange in everyday transactions.
Furthermore, the paper sheds light on significant information voids within the stablecoin market. There is a pressing need for more data to understand the full spectrum of stablecoin usage and the profile of their users. This gap in knowledge raises concerns about the potential risks that stablecoins pose to the efficiency of payment systems and financial stability at large.
As stablecoins continue to grow in popularity, the findings of this paper underscore the necessity for more transparency and data. Only with a deeper understanding of the mechanisms and risks involved can stablecoins truly fulfil their promise as a stable and trustworthy element of the financial ecosystem.
