What Are Stablecoins?

Date:
Publish Date Jul 11 2022

Circle was founded on a belief that blockchains and digital currency will rewire the global economic system, creating a fundamentally more open, inclusive, efficient and integrated world economy. We envision a global economy where people and businesses everywhere can more freely connect and transact with each other, through a system that has the reach and accessibility of the internet and knows no borders or boundaries. We believe such a system can raise prosperity for people and companies everywhere.

What are Stablecoins?

Stablecoins are digital assets that are designed to maintain a stable value relative to a national

currency or other reference assets1. Several stablecoins are available within the digital asset ecosystem today, each taking a different approach to transparency and the composition of their reserve backings.

Types of Stablecoins

Fiat-backed

Fiat-backed stablecoins are backed by fiat currency, commonly U.S. dollars, in reserve accounts, and may sometimes be backed in part by fiat-equivalent government obligations. The value of fiat and government obligations held in reserve should be equal to the combined value of circulating stablecoins from a given issuer.

When fiat-backed stablecoins are distributed in return for the underlying sovereign currency and deposited into a reserve with the issuer, they are likely able to maintain their asset peg (again, typically to the U.S. dollar).

Basket-backed

Some stablecoins like Tether are backed by a combination of cash and other assets, typically both digital assets like cryptocurrencies and traditional financial assets. For example, as of the date of this writing, Tether stablecoins are backed by corporate bonds, precious metals, secured loans, commercial paper and other investments including digital tokens, in addition to cash holdings. These stablecoins can carry an increased risk of becoming undercollateralized because their backing is at risk of losing value. During periods of market volatility, basket-backed stablecoins may not be able to redeem all outstanding stablecoins for fiat dollars.

Crypto-backed

Some crypto-backed stablecoins, like MakerDAO’s DAI, are backed by overcollateralized crypto loans, so, according to the issuer, each DAI stablecoin is supported by more than one dollar in market value of various cryptocurrencies. While crypto-backed stablecoins have become popular among independent digital asset traders and within some crypto-focused applications, they are subject to the risk of becoming undercollateralized based on the value of the underlying crypto assets, which can be volatile.

Stablecoin Use Cases

Stablecoins have multiple use cases, for financial institutions, companies and retail consumers. For financial organizations like family offices, stablecoins offer a gateway to the world of digital assets. With USDC, those institutions can interact with digital asset exchanges to buy and sell cryptocurrencies or other tokenized assets such as stocks, typically at a fraction of the cost required to conduct similar activities using traditional financial infrastructure.

Stablecoins are also increasingly being integrated into payment systems around the world, and many financial institutions are already leveraging the efficiency and extensibility of cost-effective, near-instant payments for their internal operations and to gain experience in the world of digital assets.

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1President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency Report on Stablecoins (Nov. 1, 2021), https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf, (accessed June 7, 2022)