When Bank of America (BAC) launched its BankAmericard experiment in 1958, few could have predicted that this bank’s plastic rectangle would eventually process trillions in global transactions. The early years were rocky by some accounts, the program was hemorrhaging millions. Yet, within a decade, the concept had spread nationwide. And by the 1990s, the network we now know as Visa (V) was facilitating over $1 trillion in annual volume……..Continue reading….
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Source: InvestorPlace
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Critics:
While most stablecoins are non-interest bearing and therefore do not provide interest returns to the holder, some issuers and service providers began offering yield-bearing stablecoins in an attempt to gain market share. The reason most stablecoins with centralized issuers do not provide interest return is because that would potentially make them financial securities, thus falling under regulatory regime.
Both the US’s GENIUS Act and Hong Kong’s Stablecoin Bill explicitly prohibit the provision of yield-bearing stablecoins by regulated issuers. Research suggests that by providing interest return on stablecoin, holders of stablecoins would be less likely to sell, thus reducing the risk of a run on stablecoins. While issuers may not directly provide interest return, decentralized financial platforms are another possible avenue for earning interests.
By providing stablecoins for liquidity on decentralized platforms, holders of stablecoins can get a share of the fees paid by liquidity takers. This process is known as “yield farming”. Contrary to popular belief, yield farming is not risk free, because the holders are engaged in lending activity. In the case of the TerraUSD, initially to drive adoption, the Anchor protocol was created to offer a yield of 19.5% to depositors of the stablecoin, a rate much higher than the return on US Treasuries.
Thus, a large amount of the stablecoin is locked in the Anchor protocol. Subsequently when the price of TerraUSD began to crash. The holders are unable to cash out of their position and are left holding the bag. The value of a fiat-backed stablecoin is based on the value of the backing currency, which is supposedly held by a third party custodian.
The issuer defends the peg of the stablecoin by holding mostly fiat-denominated short-term assets, such as treasury bonds, high-quality commercial paper, repurchase agreements and bank deposits. Therefore, the structure of fiat-backed stablecoins closely resembles that of money market funds (MMFs), and are exposed to similar risk of large-scale redemption requests causing negative fire-sale contagion effects on the financial system.
As of August 2025, nearly 99% of fiat-backed stablecoins are pegged to the US dollars. Major examples of US dollar pegged stablecoins are Tether’s USDT, Circle’s USDC, and Binance’s BUSD. For Euro pegged stablecoins, major examples would include Circle’s EURC, EUR Tether and Stasis EUR. Cryptocurrency-backed stablecoins are stablecoins using other cryptocurrencies as collateral.
The reason such stablecoins are created is that by utilizing smart contracts, they allow a decentralized network to track the price of US dollar as closely as possible. Another use case of cryptocurrency-backed stablecoins is to convert a cryptocurrency into ERC20 compatible standard to enable trading on another blockchain. Major examples of cryptocurrency-backed stablecoins are DAI and Wrapped Bitcoin (WBTC).
Commodity-backed stablecoins are stablecoins that claim to be backed by commodities. Examples are PAX Gold and Tether Gold. Algorithmic stablecoins, sometimes called seigniorage-style stablecoin, are stablecoins with no reserve assets or only partial reserve assets. They utilize algorithms that match supply and demand to maintain a stable value. The European Central Bank suggests that algorithmic stablecoins should be treated as unbacked crypto-assets.
Some major examples of algorithmic stablecoins are Celo Dollar, Tron’s USDD and Kava’s USDX. The main advantage of stablecoins is they provide convenience for investors in cryptocurrencies, allowing investors to park their money while buying and selling other more volatile cryptocurrencies. Stablecoins are used for cross-border payments, especially for cross-border remittance to less developed countries.
Cross-border payments are traditionally associated with high transaction costs, prolonged processing times, and limited access for unbanked populations. Since stablecoins can be sent using a smartphone, it can facilitate faster cross-border transactions for individuals with limited access to financial institutions. Stablecoins are being used in countries with hyperinflation, such as Argentina, Turkey, and Venezuela. Due to monetary policies of these countries, average citizens are often unable to obtain foreign currencies through formal financial services.
Since some stablecoins could maintain a relatively steady value against specific assets such as the US dollar, they are used as a hedge against hyperinflation. Research have shown that the price of fiat-backed stablecoins can dip below the value of the pegged currency due to limited participation in the primary market and sell pressure in the secondary market.
Since fiat-backed stablecoins are structurally similar to money market funds, they pose similar contagion risk, in which a large amount of redemption caused the selling of underlying assets, further pushing down the price of the underlying assets and creating more demand for redemption. Reserved-backed stablecoins require a third party custodian to hold the reserve assets to maintain price stability.
The concentration of reserve deposit create a counterpart risk in which the custodian may fail in the case of a bank run. In March 2023, the price of Circle’s USDC de-pegged temporarily during the banking crisis in the United States in which Signature Bank, Silvergate Bank, and Silicon Valley Bank collapsed. Tether’s USDT is currently the world’s largest market capitalization stablecoin. Tether initially claimed their stablecoin is fully backed by fiat currency.
However, in October 2021, it failed to produce audits for reserves used to collateralize the quantity of minted USDT stablecoin. Tether were fined $41 million by the Commodity Futures Trading Commission for deceiving consumers. The CFTC found that Tether only had enough fiat reserves to guarantee their stablecoin for 27.6% of the time during 2016 to 2018.
Since then, Tether began issuing assurance reports on USDT backing, although some speculation persists regarding the use of Chinese commercial paper for reserves. As at March 2025, Tether had never completed an audit by an accounting firm.
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