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Are Stablecoins Going To Be Replaced By Fiat Digital Currencies?

By Andy HechtCryptocurrencyJan 27, 2022 06:03AM ET
www.investing.com/analysis/will-stablecoins-be-replaced-by-fiat-digital-currencies-200615917
Are Stablecoins Going To Be Replaced By Fiat Digital Currencies?
By Andy Hecht   |  Jan 27, 2022 06:03AM ET
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  • China will be first to digitize
  • The US is behind the digital curve
  • Tether: third leading cryptocurrency
  • No reason why money is not yet digital
  • Snail-like government pace vs lightning-fast tech

A stablecoin is a cryptocurrency that attempts to offer price stability because it's pegged to reserve assets. While Bitcoin and Ethereum are the two leading cryptocurrencies, they experience substantial price volatility.

Stablecoins that tie their market value to an external reference reduce price variance. As such they've become popular as digital currency assets.

Fiat-collateralized stable coins reflect the value of currencies like the US dollar, the euro, yen and others. They can also reflect the value of other stable assets such as gold, oil or other instruments. The collateral determines the suitable number of crypto tokens issued.

Crypto-collateralized stablecoins are backed by other cryptocurrencies. Since cryptos have high price variance, they tend to be over-collateralized. A larger number of cryptocurrency tokens can be maintained as a reserve for issuing fewer stablecoins.

Non-collateralized or algorithmic stablecoins do not use any reserve but include a working mechanism, like a central bank, to achieve a stable price. When needed, some use a consensus mechanism to increase or decrease the token supply.

The US dollar is the world’s reserve currency, and Tether (USDT)—which is the leading stablecoin by market cap—is pegged to the USD. As the financial world moves toward embracing fintech, government-issued digital currencies are on the horizon and could replace stablecoins pegged to currencies like the US dollar.

China Will Be First To Digitize

China is well on its way to a digital yuan. Over the past six months, the digital fiat currency in the world’s most populous country notched $8.3 billion in transactions. Meanwhile, according to the People’s Bank of China, cumulative digital yuan transactions have reached 87.57 billion yuan, or $13.68 billion.

China began the testing phase of its digital currency in 2020. The number of individual digital yuan users has grown to 261 million as of the end of 2021, an impressive increase of more than 240 million users since the end of June 2021.

Testing continues with users selected by lottery. However, it will not be long before the digital Chinese currency is available to the general public.

The US Is Behind The Digital Curve

Last week, the Fed released a long-awaited study on issuing a central bank digital currency. The 40-page paper examined the many issues and opinions on a digital dollar. Fed Governor Lael Brainard emerged as the leading advocate for the project, while some of her colleagues were skeptical.

One of the primary differences between the Fed’s dollar and other digital token transactions: current digital money is a liability for commercial banks whereas a Central Bank Digital Currency, or CBDC, would be a Fed liability. The study listed 22 different items for public feedback, with a 120-day comment period. The report took no position on whether the central bank will support a digital dollar.

The bottom line is that the US is far behind the curve regarding fintech and a digital US currency.

Tether: Third Leading Cryptocurrency

Tether is the unofficial US digital currency despite not having the blessing of the central bank, the US government or any financial institutions. Its stature comes from Tether’s position as the third leading cryptocurrency out of 17,105—a figure that's still rising.

Tether is pegged to the US dollar and was trading at $1.0008 on Jan. 27 with an approximate market cap of $78.23 billion. USDT is a stable coin as the price does not vary far from the US dollar.

Tether/USD Chart.
Tether/USD Chart.

Source: CoinMarketCap

The chart shows that aside from some temporary blips in 2017-2019 that took USDT as high as $1.0779 in December 2017 and as low as $0.9136 in April 2017, it has been steady at the $1 level since April 2020.

Although Tether has become the unsanctioned digital US dollar, the market is hungry for a digital currency issued by the government.

No Reason Why Money Is Not Yet Digital

While the Fed continues to study and debate a digital US dollar and has invited comments on the subject, the evolution of the fintech revolution is proceeding with or without the central bank.

Cryptocurrencies remain an area of contention for regulators because they take control of the money supply away from government and return it to individuals, as only bids and offers in the marketplace establish the currency values. The volatility of cryptocurrencies has created a speculative frenzy that presents government officials and central bankers with convenient reasons to oppose the crypto revolution.

However, there is widespread agreement that blockchain technology is the future since it increases transaction speed and record-keeping efficiencies. As such, there's absolutely no reason, many proponents say, why the US, the world’s leading economy and home to the global reserve currency, is not further down the path towards a digital dollar.

Snail-Like Government Pace Vs. Lightning-Fast Tech

Government agencies and central banks move at a glacial pace, while technological advances occur at the speed of light. Technology is already changing the world of finance, but governments with political agendas are not keeping up.

China, the world’s most populous country with the second-leading global economy, is nipping at the US’s heels for the leadership role. The Chinese are at least two years ahead of the US when it comes to embracing fintech. By the time the US and Europe get around to planning for digital dollars and euros, the digital yuan will likely be in use by more than 1 billion Chinese citizens.

The following nine countries have already created a central bank digital currency:

  • The Bahamas
  • Nigeria
  • Antigua and Barbuda
  • Grenada
  • Saint Kitts and Nevis
  • Saint Lucia
  • Dominica
  • Montserrat
  • China

While the Fed and European Central Bank continue studying and debating digital currencies, the delay is causing both governmental financial institutions to fall farther and farther behind.

Digital fiat currencies are likely to eventually replace some stablecoins such as Tether (USDT). However, at the Fed's current pace, it looks like USDT will be around for quite some time.

Are Stablecoins Going To Be Replaced By Fiat Digital Currencies?
 

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Are Stablecoins Going To Be Replaced By Fiat Digital Currencies?

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Mohd Izhar Muslim
Mohd Izhar Muslim Jan 27, 2022 6:42PM ET
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Thanks 👍
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shohal
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Bac Tinh Jan 27, 2022 8:08AM ET
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one long marketing ploy
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