Stablecoins are a class of cryptocurrencies that are pegged to a stable value, such as the US dollar. The market capitalization of stablecoins has ballooned into the hundreds of billions of dollars, and with it comes the noise surrounding this relatively new asset class. Since the stablecoin industry is still in its infancy, we would like to explain how these innovative products work, the benefits they offer compared to existing payment rails, and how they differentiate among the stablecoins currently on the market. There is a misunderstanding.
Here, we address seven of the biggest misconceptions about stablecoins and get to the bottom of the truth about these digital assets and how they work.
Myth #1: All dollar-backed stablecoins are the same
There are many stablecoins on the market, and their practices may vary from issuer to issuer. Each stablecoin is slightly different and must be evaluated individually. Most importantly, there is a clear difference between regulated and unregulated stablecoins.
For example, PayPal USD (PYUSD) is the largest regulated stablecoin. It is issued by Paxos Trust Company, which is supervised by the New York Department of Financial Services (NYDFS), the primary prudential regulator. This makes PYUSD different from other popular stablecoins on the market. USDT is issued by Tether, an offshore company with no regulatory oversight, and Circle, the USDC issuer, has no major prudential regulator in the United States and relies on money transmitter licenses . I will work there.
Prudentially regulated, Paxos is required by law to back PYUSD only with US dollars and dollar equivalents at all times. NYDFS also ensures that Paxos adheres to strict risk management standards. Extending tokens to new blockchains requires prior approval from regulators, which also protects the interests of consumers.
Myth #2: Stablecoins are unreliable because they are not fully backed by the US dollar.
Carefully regulated stablecoins (such as those issued by Paxos) must by law always be fully backed by actual tangible assets, i.e. cash dollars and/or an equivalent interest in U.S. Treasury securities. Prudential regulators (NYDFS in New York, MAS in Singapore, and FSRA in Abu Dhabi) actively monitor the issuance and backing of stablecoins issued by Paxos. In contrast, unregulated stablecoins have different practices and standards regarding dollar backing. The main difference is that these issuers are not subject to prudential regulation and are therefore not required by law to follow any particular practices. This poses a risk to the user.
Myth #3: Stablecoins create new dollars
Issuing a fully backed stablecoin where only customers can control their own funds will not increase the total money supply. Stablecoins are simply digital representations of money that is already in supply. Stablecoin issuers hold reserves of dollars in their bank accounts to back these digital representations. Regulated stablecoin issuers like Paxos do not have the authority to use, lend, or subdivide their reserves. This limit ensures that the assets backing the stablecoin are committed to maintaining their value and can be redeemed at any time. This is quite different from the risky business of banks shredding dollars through loans. This increases the money supply.
Myth #4: Stablecoins are slow
Thanks to advances in cryptography, blockchain is faster, cheaper, less error-prone, and harder to hack than traditional payment infrastructure. As a result, more people have access to their money more reliably and at a lower cost, without the delays caused by long wait times for checks and bank transfers to clear. This benefits the economy by increasing the frequency of transactions and the economic activity (velocity) of each dollar, ensuring that fewer customer dollars are consumed in fees. We expect that as stablecoins become more widely adopted, they will become even faster and easier to use for everyday payments.
Myth #5: People can easily lose money on stablecoins due to issuer practices
Again, this varies by publisher as not all publishers are the same. For example, Paxos Trust Company is a NYDFS-regulated limited purpose trust, meaning it is required by law to hold its stablecoin reserves in a segregated account that is insulated from bankruptcy. By keeping customer reserves in a bankruptcy-secure account, you can ensure that these funds are not used for other purposes, such as lending. The underlying assets remain intact and are solely dedicated to backing the stablecoin. Regulated companies have certain standards for how quickly they must return dollars to customers upon redemption. However, unregulated issuers have no expectations regarding customer protection or redemption.
Myth #6: There are currently no use cases for stablecoins.
The value proposition of stablecoins is not theoretical. The total capitalization of the stablecoin market will exceed $160 billion as of mid-2024. Stablecoin markets are widely used to finance cryptocurrency transactions, but they are also used for real-world payments. For example, PayPal USD (PYUSD), a stablecoin launched by PayPal in 2023 using Paxos infrastructure, helps reduce friction in digital payments, send money to friends and family, and facilitate remittances and international payments. was designed with the purpose of
Myth #7: Stablecoins are vectors for financial crime
Stablecoins powered by blockchain technology represent a new model for monitoring, identifying, and preventing financial crimes. Blockchain technology enables the tracking of transaction activity from one wallet to another, and when combined with blockchain analytics technology, has proven to be an important tool for law enforcement agencies and can enhance compliance efforts. Masu. Blockchain technology also allows stablecoin issuers to remotely freeze and seize tokens if required by law. This can never be done with physical dollar bills associated with illegal activities.
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If you would like to learn more about how to separate fact from fiction when it comes to stablecoins, please contact us (email protected).
