CRYPTOCURRENCY

  • The US is discussing launching a formal review into whether Tether and other stablecoins threaten financial stability.
  • The first stablecoin, created in 2014, was Tether.

Important points:

  • A stablecoin is a type of cryptocurrency that is typically pegged to an existing government-backed currency.
  • A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers.
  • Stablecoins hold a bundle of assets in reserve, usually short-term securities such as cash, government debt or commercial paper.
  • Stablecoins are useful because they allow people to transact more seamlessly in cryptocurrencies that function as investments, such as Bitcoin.
  • They form a bridge between old-world money and new-world crypto aslo they promise to function like perfectly safe holdings.

Risks:

  • While stablecoins have the potential to enhance the efficiency of the provision of financial services, they may also generate risks to financial stability, particularly if they are adopted at a significant scale.
  • They are not transparent or auditable by everyone and are operated just like non-bank financial intermediaries that provide services similar to traditional commercial banks, but outside normal banking regulation.
  • International coordination of regulatory efforts across diverse economies, jurisdictions, legal systems, and different levels of economic development and needs is another regulatory challenge.
  • There is not (yet) a uniform regulatory approach of regulators worldwide relating to stablecoins.

Way Forward

  • Stablecoins do not stand for a uniform category but represent a variety of crypto instruments that can vary significantly in legal, technical, functional and economic terms.
  • So, in order to be effective in limiting risks and not disturbing innovations the stablecoin industry must work together with the regulators to come up with a framework that helps put them at ease while protecting this nascent industry from overregulation.

SOURCE: THE HINDU,THE ECONOMIC TIMES ,MINT

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