Stablecoins: What are they?
Stablecoins are a class of cryptocurrencies that attempt to provide price stability. With stablecoins, users can have the best of both worlds—instant payments and security or privacy of cryptocurrencies along with the stability of fiat currencies without volatility.
There are two primary factors that contribute to the price stability of fiat currencies: the reserves that back them and timely market actions by the controlling authorities, like the central banks. The valuations of fiat currencies are not affected by wild swings, as their values are pegged to an underlying asset, like gold or foreign reserves, which act as collateral.
The controlling authorities manage demand and supply of fiat currency in order to maintain price stability even when a fiat currency’s valuations change dramatically. The majority of cryptocurrencies lack both of these key features-they do not have a reserve to back their valuations, and they do not have a central authority to control their prices when needed.
A member of the European Central Bank (ECB) executive board has described the danger of stablecoins issued by Big Tech firms to the global financial system.
As Big Tech firms have a massive footprint, the assets backing stablecoins will increase to the point that traditional banks’ funding becomes more scarce and therefore more expensive, Panetta said in a speech Friday.
Due to the increase in deposits being held by Big Tech, banks may be forced to turn to more expensive short-term funding sources.
“Without proper regulation, these developments could amplify international shocks and undermine financial resilience globally,” Panetta said. “We could see risk-biased technological change, whereby the digitalization of finance favors business models that are riskier for the global economy.”
CBDCs are therefore an “anchor of stability” for digital finance. He pointed out that central banks are developing CBDCs that can be used alongside cash by consumers and companies.