What are stablecoins?
A stable coin is literally a 'digital asset with a stable value', meaning a digital asset whose price remains the same with little change . Stablecoins with minimal price fluctuations are not purchased for the purpose of earning profits from price fluctuations, but are a 'key digital asset' used in digital asset exchanges around the world It has value when you want to maintain a stable digital asset position with no price fluctuations in that it provides a means to
Types of stablecoins
Stablecoins come in various forms and types depending on the algorithm that keeps the value stable and the value the stablecoin collaterals. For example, stablecoins peg prices to 'gold' or peg prices to currencies or indices of various countries. Currently, the most commonly used stablecoin in the market is a dollar-based stablecoin whose value is fixed to the world's key currency, the 'dollar' .
Typical ways to keep value stable include:
1) Fiat-backed stablecoins
It is a stablecoin that deposits fiat currency in a financial institution such as a bank and issues a stablecoin corresponding to the value . Since fiat currency of the same value as the issued stablecoin is deposited , the value of the stablecoin is maintained 1:1 with the deposited fiat currency . Examples of these stablecoins include Tether and USD Coin.
2) Digital asset collateralized stablecoin
It is a stablecoin that entrusts a digital asset with a significant value in the market as collateral and issues a stablecoin equal to the market value. Unlike legal currency collateralized stablecoins , this method guarantees transparency in that it uses a decentralized system, but it also has a disadvantage in that it requires a high collateral ratio, which reduces efficiency .
3) Algorithm-based stablecoins
It is a stablecoin that maintains the stability of its value by continuously controlling supply and demand . Examples are BASIS and TERRA. Reliability is of the utmost importance for this type of stablecoin, but there is a limit that the moment the market's trust is broken, the value will fluctuate rapidly and may even converge to zero.
In addition, various stablecoin projects are being tried. There are projects that have applied methods such as mixing 2 and 3 or mixing 1 and 2.
First, looking at Iron, which is a mixture of 2 and 3, we used an algorithm that burns a digital asset called Titan, which consists of 75% USDCoin and the remaining 25% controls the stability of the iron.
Next, let's look at Wault's mix of 1's and 2's. The value is guaranteed in the form of storing 90% of Tether and 10% of the platform digital asset, Walt Swap (WEX), purchased and stored.
Stablecoin Related Issues
Tether and USD Coin, which have the largest share in the stablecoin market, do not disclose how they hold their reserves, so transparency issues have always followed.
In May 2021, Tether disclosed its holdings for the first time. As of March 31, 2021, cash and cash equivalents accounted for 76%, of which 65% were commercial paper, 24% trust paper, and 3.87% real cash. The remaining reserves were 12.55% for secured loans, 10% for funds and precious metals, and 1.64% for other investments. However , despite this announcement, Tether still faces doubts about its transparency .
Meanwhile, Circle, the issuer of USD Coin, has previously made up a reserve portfolio with various types of assets such as cash, government bonds, deposits, commercial paper, and corporate bonds, and announced that the ratio of cash and cash equivalents is 61%. There is a transparency issue because the detailed specifications for this are still not disclosed. Accordingly, Circle Company is trying to resolve the issue of transparency by announcing that it will form a reserve exclusively in dollars and government bonds in August 2021 to accommodate institutional rights.
Despite the fact that stablecoins are already widely used in the market, the eyes of governments and organizations around the world are not good.
In September 2020, the EU published legislation on stablecoins and digital assets . The EU divided stablecoins into Type A and Type B based on the number of fiat currencies. Type A is a type issued by mixing several fiat currencies and digital assets, and requires approval from the authorities before issuance. On the other hand, type B is a stablecoin for a single fiat currency, which requires approval from a bank or digital asset operator and granting of a claim for redemption, and must be able to be redeemed for fiat currency at any time.
In July 2021, the U.S. Treasury Department Janet Yellen directed the establishment of a stablecoin regulatory framework, and in November the U.S. Presidential Working Group on Financial Markets (PWG) published a Stablecoin Investigation Report. In addition to the U.S. Department of the Treasury, other agencies including the OCC and the Securities and Exchange Commission (SEC) participated in the report, including recommendations on stablecoins.
In addition, in October 2021, the Payment and Settlement and Market Infrastructure Commission (CPMI)-IOSCO (International Securities Supervisory Organization) published a report 'Application of Financial Market Infrastructure Principles for Stablecoins' . As a member of the CPMI-IOSCO Steering Group, the Bank of Korea participated in the discussion of writing the report, and has announced that if this guideline is adopted as an international standard, it will be used as a standard for evaluating the stablecoin system.