What exactly is the stablecoin that is hotly discussed around the world?

In recent years, stablecoins have entered a stage of rapid growth,and have attracted widespread attention from the international community.Many well-known companies and institutionshave accelerated their layout in the stablecoin market.What exactly is a stablecoin?What role can it play?Who are the issuers?This issue of "Xinhuanet International Highlights" connectswith Liu Ying, a researcher at the Chongyang Institute for Financial Studies at Renmin University of China,to hear her detailed interpretation.

1 What is a stablecoin? Where is the "stability"?

Liu Ying: Stablecoin is a special kind of cryptocurrency. The so-called special is actually the asset it is anchored to, which may be legal tender or gold. Of course, legal tender may be USD, RMB, HKD and other currencies, and there are also several types of stablecoins anchored by algorithms. The core design goal of stablecoins is to maintain the stability of the currency value by anchoring specific assets and adopting specific mechanisms, and to serve as a value scale and transaction medium in the crypto market where prices fluctuate violently.

Stablecoin is to solve the problem of drastic price fluctuations of cryptocurrency, which is its origin. Because the price of cryptocurrency such as Bitcoin often soars and plummets, and sometimes there are disputes. Stablecoins were developed under such a background. We also understand stablecoins as a bridge or link between the centralized real world and the decentralized crypto world.

Where is the stability of stablecoins? I think it is mainly reflected in three aspects:

First, it is stable in value.It uses 1:1 legal currency, such as USDC issued by Circle, which is 1:1. (The issuer) wants to issue 200,000 stablecoins, and must first deposit 200,000 US dollars as reserve assets. Because it is anchored to the US dollar or US bonds, its price is relatively stable. Of course, stability refers to the corresponding legal currency or some related assets, and the fluctuations in the price of the legal currency itself or the bonds themselves, including the fluctuations in the price of gold itself, the fluctuations in the prices of these corresponding assets, are actually beyond the control of stablecoins themselves.

Second, it is stable in technology. Because stablecoins run on the public chain, the transactions realized by stablecoins on the blockchain cannot be tampered with, and they are settled in real time, so they have the characteristics of traceability, queryability, and unmodifiable stability.

Third, stability is in supervision. Whether it is Europe, the United States, Japan, South Korea or Hong Kong, China, there are regulatory laws and regulations, which have been issued or are being issued. Since there is 100% cash or bond or asset reserves, and there are regular audits to maintain transparency, these can keep stablecoins stable and reliable and protect the interests of investors. So it is stable in these aspects.

In short, the stability of stablecoins is essentially to achieve price anchoring through the mortgage of legal assets, excess crypto asset guarantees or algorithmic regulation, and to achieve credit for redemption under the regulatory framework. Its core value lies in providing a safe haven or an efficient payment tool for the crypto economy.

In reality, we must be vigilant, for example, whether the reserve assets are sufficient, whether they are transparent enough, and the differences in supervision. Investors should of course pay attention to the qualifications of the issuer and the reserve audit report.

2 What are the functions of stablecoins?

Liu Ying: In fact, stablecoins have been around for more than ten years, and their uses are relatively wide. Whether it is used in the traditional crypto market or in the real world, more stablecoins, that is, the functions of currency, are used, including the five major functions of value scale, means of payment, means of circulation, means of storage, and world currency.

Currently, the most widely used function is cross-border payment and settlement, so its several application scenarios, on the one hand, is the transaction of cryptocurrency, such as providing a stable safe haven for asset transactions with large price fluctuations such as Bitcoin.

Another major use is cross-border payment settlement. Because stablecoins are peer-to-peer transactions on the chain, they are low-cost and highly efficient. The transfer time is compressed from the traditional 3-5 days to a few minutes or even seconds. Regardless of the amount of the transfer, the handling fee is basically very low, while the traditional fee would be very high. Therefore, its low cost and high efficiency bring about a high turnover rate of funds, especially for large e-commerce companies, including banks.

We have seen many large retailers, including e-commerce companies, flocking to the stablecoin market and applying for stablecoin issuance licenses. Not only that, now large banks, including credit card companies, are also flocking to the stablecoin market, and even forming joint ventures with stablecoin companies to accelerate their layout. In some countries with high inflation, there are also many small and medium-sized enterprises or individuals who buy stablecoins to hedge against inflation.

3 Who are the issuers of stablecoins? Liu Ying: There are several categories of stablecoin issuers: The first category is companies that develop stablecoins. For example, Circle, which issues USDC, is actually seeking to integrate with traditional finance. We saw that its stock price rose by 168% on its first day of listing on the New York Stock Exchange in early June. Then there is Tether, which issues USDT. It makes profits by buying US bonds. The company with more than 100 people will have a net profit of more than 14 billion US dollars in 2024, which is actually quite profitable. The purpose of its issuance is to make money through stablecoins, because people who buy stablecoins will pay it with the same amount, whether it is US dollars, Hong Kong dollars or other currencies. On the one hand, it exists here, and on the other hand, it can use this money to buy US bonds or other assets to invest and make profits. This part of the profit is actually very high, so it invests and makes profits through the cash corresponding to stablecoins.

The second category is large e-commerce. Whether it is a traditional retailer, a modern retailer or an e-commerce company, for example, JD.com actually participated in testing the stable currency of Hong Kong dollar/US dollar. There are also traditional large retailers, which issue stablecoins for transactions and settlements, to reduce their cross-border payment costs, to speed up the time for payment to arrive, and to use stablecoins for investment and profit.

The third category is licensed financial institutions, including but not limited to Standard Chartered Bank in Hong Kong, and large banks in Europe and the United States. They earn payment and settlement income through the issuance of stablecoins. This income is not the traditional interest rate spread income, but an income from intermediary business, which makes profits through transfer settlement and investment. Although their core motivations are different, they all have various goals such as earning income from reserve assets, expanding the share of the payment market, and building a decentralized financial infrastructure. Its purpose is of course to make money by issuing stablecoins, and to make profits by investing the money from selling stablecoins in US bonds or other assets.