Stablecoin – Fast, Secure, Flexible and Stable?

Stablecoin, a hot topic, is a key item that has gained a substantial amount of traction lately. What exactly is stablecoin? How are they used, what makes them valuable and what kind of regulations, if any, surround this phenomenon? Let’s take a moment to dig into the topic of stablecoin.

What is Stablecoin?

The first thing to understand is that stablecoin is a cryptocurrency that was created to do exactly what the name implies: stay stable. This is done by each stablecoin being backed by another form of currency. First, there is a stablecoin backed by fiat money, or currency that is government issued, like the U.S. dollar. Then, there are crypto-backed stablecoins, which use something like Bitcoin or Ethereum to back the stablecoin’s value. In these instances, the cryptocurrency-to-stablecoin value is usually over-estimated due to the volatile nature of cryptocurrencies. Some applications that use this method can request that the stablecoin holder has 150 percent of a cryptocurrency for every one stablecoin they have. The next type of stablecoin is known as algorithmic stablecoin. These stablecoin are digital assets that utilize algorithms to balance their value by trying to keep a stable circulating supply in the market, attempting to match the supply demand. Lastly, there are tokenized deposits. These are stablecoins that remain within the institution or are used in a closed network of regulated financial institutions.

How is Stablecoin Utilized?

Now that we have a base knowledge of what a stablecoin is, the next logical step is to talk about how we use it. With stablecoin, there are six ways someone can leverage this currency, though there are many more.

1. Payments and remittances: Cheaper and faster cross-border transfers than traditional rails.
2. Liquidity management: Instant settlement for asset transfers across platforms.
3. On/off ramps for more volatile digital asset trades: Buying cryptocurrency like Bitcoin and Ethereum, for example.
4. Automated payouts: Payroll, benefits, etc.
5. Consumer-facing products: When accepted as a form of payment.
6. Financial institutions: Credit unions can utilize tokenized deposits for internal efficiency, instant 24/7 internal transfers and secure interbank settlements.

How Safe is it Really?

If stablecoin operates like another form of currency, there must be regulations surrounding it, right? The answer is yes. This year, two notable things happened. In the U.S., the GENIUS Act was passed, which defines fiat-backed stablecoins as digital money, not investments. This places stablecoins under much heavier audits and compliance rules. In Europe, the MiCA regulation went live, setting the standards for stablecoin very high. This means higher regulations on licensing, backing and transparency of value. The NCUA recently published a draft ruling regarding the GENIUS Act as it pertains to credit unions and is in the comment phase.

The End, or Perhaps, the Beginning?

With the confidence that stablecoin provides, people can begin their journey into cryptocurrency. In an economy where traditional currency is extremely volatile, stablecoin gives individuals a way to secure their money or make global payments more safely. This begs the question: Why not stablecoin? The first thing to address is the elephant in the room: there is no insurance for stablecoins. Therefore, if your stablecoins are lost or stolen, you may not get any of them back. Additionally, there is still the issue of collateralization. While this is not as high of a risk for stablecoins backed by fiat currency, stablecoins backed by cryptocurrency or algorithmic styles, are far more susceptible. If they lose their value, so will your stablecoin.

In short, stablecoin is a much more stable form of digital currency that provides a fast, flexible, secure and readily available form of payment. This is quickly becoming an asset that has the potential to affect how banking operates, and it would be beneficial to stay in the know so that we can be prepared for whatever may come.

James DellaRosa is the business analyst in Vizo Financial's product strategy department. As such, his responsibilities are expansive. He assists our project management office by acting as a liaison between our business units and our internal development team. In addition, he looks for existing product and services to determine if they can help the Corporate better service our members and/or if credit unions can utilize them to better service their own fields of membership.