The general view on how stablecoin operates.
From a layman’s perspective, a stablecoin is also a digital asset like a cryptocurrency. But, stablecoins are normally pegged to a more concrete asset or fiat currency, which is generally US Dollar.
When the market crash occurred in May, Terra’s USD and its sister token crashed devastatingly, losing almost 99% of their value. Both the digital assets started trading at under $1. Since then a lot of crypto analysts, critiques have questioned the credibility of stablecoins that are pegged to another asset’s value.
Response by Banks around the globe to Terra’s disaster.
From the reports coming across from Central Banks around the world, it is noticed that, many of the banks have officially created their own Central Bank Digital Currency (CBDC). These tokens are either used by the consumers of the bank or is used by the bank itself within its financial system.
The banks have resorted to this method to avoid the disastrous failure of other stable coins such as Tether and USDC. Even these stablecoin tokens are at the risk of crash, as their value is also pegged to US Dollar.
Private regulation to be more appropriate than State regulation for stablecoins.
According to Phillip Lowe, the regulation of the stablecoin tokens should be undertaken by private institutions rather than state. He believes that, the private regulation will help the stablecoins to hold their value more significantly, also provide them with ample opportunities to develop and grow within the market. The innovations and designing features for these tokens can be taken to another level under privatized regulation, he says.
He also added that, the state has to believe in the stablecoin approach and back it as if it is backing regular bank deposits.
The market crash’s staggering effect on stablecoin tokens.
The crypto market crash that occurred in May surely dented a lot of trust among the netizens in regards to stablecoin tokens. The crash of Terra’s USD was not at all good to witness in the market. Since then, there is a lot of doubt among the investors in terms of stablecoin tokens.
Writer’s Analysis:
I believe that, regulation is the need of the hour for any kind of digital asset be it stablecoin, cryptocurrency or NFT. The two main reasons for a good regulation are to curb the crimes against digital assets and monitor them so that they don’t plummet and fall aggressively. The privatized regulation can definitely provide ample opportunities for the stablecoin to grow, but it also posses the risk of monopolistic control in the hands of central banks.