A Committee of nations has been debating whether to consider cryptocurrencies as an alternative to traditional finance, including as a payment medium. As a result, most countries have conducted extensive research on blockchain technology and cryptocurrencies.
China led the charge with its issuance of the digital Yuan two years ago, one of several countries experimenting with Central bank digital currency (CBDC).
As a result, other nations followed suit to test their own trial digital currencies, and it has proven to be a fantastic experience during the testing phase.
However, there are also countries that have decided to go all out to adhere to and adopt the development and instituting the Bitcoin standard and cryptocurrencies as their legal tender. These countries include the following but it is not limited to El-Salvador, Paraguay, and Venezuela.
The same is also applicable to some countries that have decided to also test the waters of these digital assets by a form of legalization of cryptocurrencies alongside their standard traditional currencies.
The most critical cryptocurrency in a review that is attracting lawmakers from various countries with a high level of concern with the traditional financial models is the case of stablecoins.
What are stablecoins?
Stablecoins are cryptocurrencies developed using blockchain technology to create value that is tied, pegged to that of another currency, commodity, or financial instrument. Stablecoins are used predominantly as a means of exchange for other currencies or assets within the crypto markets.
Some of the most popular stablecoins by market capitalization in the crypto market and ecosystem include the following Tether (USDT), USD Coin (USDC), and Binance USD (BUSD). There are many other stablecoins that also hold an important place in the market today.
By implication, most stablecoins aim to provide an alternative to the very high volatility of the popular cryptocurrencies which include Bitcoin (BTC), Ethereum (ETH), Litecoin(LTC) and so much more. This has made investors lose confidence in such investments such that they are less suitable for wide use in transactions.
The simplicity of the comparison of stablecoin to traditional financial instruments like the Dollar thus gives the stablecoins so much relevance.
Types of stablecoins?
There are different types of stablecoins which include but are not limited to the following:
- Fiat-collateralized stablecoins: This type of stablecoins tends to maintain a reserve of a fiat currency (or currencies) such as the U.S. dollar, as collateral assuring the stablecoin’s value. There are other types of collateral-backed currencies which can be in the form of Gold, Silver, and so on.
These kinds of currencies are regulated and often audited by independent bodies to ensure the safety of the funds of the users.
- Crypto-collateralized stablecoins: These types of stablecoins are backed by the use of other cryptocurrencies. Because the reserve cryptocurrency may also be prone to high volatility, such stablecoins would require a level of over-collateralizing, that is, the value of cryptocurrency held in reserves exceeds the value of the stablecoins issued.
A typical example is MakerDAO’s Dai (DAI) stablecoin which is pegged to the U.S. dollar but backed by Ethereum (ETH) and other cryptocurrencies worth 150% of the DAI stablecoin in circulation. This is a form of over-collateralizing of the crypto to mark up the potential of a fluctuation in price.
Can stablecoins be legalized?
In order for a stablecoin to have a status of a legal tender, the currency must remain relatively stable, with an assurance to those who accept it, that it will retain its purchasing power in the short term thereby granting it some level of stability.
What is the Japanese stance on stablecoin?
Japan is among the world power with an insight into crypto and can be attributed to countries desiring the adoption of cryptocurrency by strategic use of organization-based as well as retail investors.
Just recently, the Japanese parliament approved the legislative bill offering a legal position to stablecoins to be used within its jurisdiction while categorizing them under the digital currency, as reported by Bloomberg news on the 3rd June 2022.
It was also reported that this law would enable some certified banks to issue these stablecoins to investors, especially for those investors who are involved in overseas transactions.
However, it was also stated that the law would be in full effect from 2023 to ensure that all the required legislations are properly followed by participating banks and financial institutions.
Indeed this would set a good precedent for other countries to follow and gradually transition from the traditional system of finance to a more digital form of finance.