Crypto News

Stablecoins – is it really that big of a problem?

Recently there have been lots of talks on governments clamping down on cryptocurrencies and more specifically stablecoins. I found it kind of strange that stablecoins have become such a thorn in the cryptomarkets so I did some research to see what all the hoohaaa is about. And I honestly don’t really think it is that big of a problem. Here are some of my thoughts on stablecoins, especially those big market cap stablecoins dominating the market. Of course I am not saying that the current big 3 stablecoins (USDT, USDC & BUSD) are in anyway really that safe or that their business practices are top notch. But if you ask me, the risk level is just the same as any major cryptocurrency.

The problem with stablecoin is that they are supposed to be pegged to a fiat currency. So it is a one-for-one “exchange rate”. The most common is the US Dollar. So assuming that you are holding one USDT, you can rightfully exchange this USDT for one US Dollar and in all intent and purposes – one USDT is one US Dollar. And the reason is simple – it is much easier for traders and investors to relate to a fiat currency when doing trading at exchanges. However if you were to trade direct fiat currency and crypto pairs, you face some major issues – how to get the fiat currency to and from exchanges? And just imagine the transactions fees that you could incur during each transaction. So someone had a bright idea and decided to create “stablecoins” to solve this issue. Hence most trades now are done via cryptocurrency-stablecoin pairs. If you look at Binance, their most active trading pairs are BTC/USDT and ETH/USDT trading pairs. So yes, stablecoins are important in the cryptosphere. Without them, I am pretty sure we will not see trading volumes like what we now.

So what is the issue now with stablecoins you might ask. Well the problem is how it is backed. I mean USDT is a cryptocurrency. Although by right, you should be able to exchange the USDT for one US Dollar. But in reality, that might not be the case. This is because the company or organization behind the stablecoin might not have the cash reserve to back it up. Just imagine that one day the cryptomarket collapses and everyone wants to convert their stablecoin back to fiat currency – does Tether (the organization behind USDT) have the fiat currency cash to exchange? It is important to note that the market cap for USDT is like 61 billion. Does Tether really hold enough cash to pay out if everyone wants to cash out? This is a typical scenario of a “bank run” – basically everyone runs to the bank to withdraw cash at around the same time causing the lack of funds/cash for the bank.

However the question remains – when will this bank run at Tether (or any other stablecoin) happen and the scenario that it will happen? For such a huge market cap like USDT, USDC or BUSD, the most probably scenario is a complete collapse of the cryptomarket (and I mean really crash big time till all the cryptocurrencies becomes worthless), nobody wants to be holding anything in cryptos and nobody believes in the technology behind crypto and blockchain. This is probably much worse than what most people would face during a “crypto-winter” scenario. And only then will this bank run happen. In fact if you look carefully, the demand of stablecoins will actually increase when the cryptomarket does down. This is because when traders sell, they usually sell for stablecoins and they are also a safer place to hold during a market downturn.

And I ask the simple question – do you trust your country’s local banks? How much cash reserve do they keep and are they able to handle a similar bank run? I wonder why government regulators are so worried about stablecoins when their own banking institutions are not able to handle such a bank run as well. If I am not wrong, US banks are required to keep only 10% of their deposits as reserve. I am not too sure about Singapore’s banks but I honestly don’t think that it is any higher. So it is kind of interesting that governments allow their local banks to keep such a small portion of deposits in reserve but are concerned about stablecoins. Yes Tether’s cash and cash equivalent (whatever that means) in reserve is about 76%, though I am not too sure how “liquid” these cash and cash equivalent are. But how often do you need to go to Tether and ask to get back your cash? Barely right? You would normally use it to exchange for other cryptocurrencies. How often do you need to go to banks to get your cash? I would gather it would be more often. And if any country’s economy were to collapse, I wonder how their banks will handle the bank run that will sure follow? Just look at the list of bank runs that happened to traditional banking institutions. Of course I am not saying that these companies and organizations should not be audited or even regulated to a certain extent. Look at Tether and their ever changing policies we can understand the need. But I am basically saying that the excuse given by our governments seem a bit farfetched to me. In my opinion, their risk level is just the same as other cryptocurrencies.

Oh by the way, I am not a financial advisor. Please do your own research when it comes to investing your own money.

By Admin

Someone who is very keen on small scale investments like crypto, mining and other investments. For the common folk!

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