Stablecoins: a new era of money and payment systems Acuity Knowledge Partners

Fiat-collateralized stablecoin payments stablecoins, such as Tether (USDT) and USD Coin (USDC), are backed by traditional fiat currencies like the US dollar, which are held in reserve by the stablecoin issuers. Stablecoins were invented to fill this need and provide an important addition to the cryptocurrency marketplace. Stablecoins were created to provide stability, long-term purchasing power and the predictability of a fiat currency alongside the utility benefits of cryptocurrencies. These utility benefits may include fast and straightforward international money transfers without the expensive fees charged by banks.

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Further, Ripple plans to issue RLUSD via a New York Trust license through its acquisition of Standard Custody, a more robust strategy compared to issuance via a money transfer license (MTL). The NY DFS’ guidance on stablecoin issuance requires issuers like Ripple to maintain reserves of at least 100% of the nominal value of outstanding stablecoins in low-risk, highly liquid assets. This helps Anti-Money Laundering (AML) ensure that RLUSD’s reserves are managed with the highest levels of oversight and transparency. While Ripple’s enterprise blockchain solutions have expanded to serve broader financial use cases like asset tokenization and custody, cross-border payments was Ripple’s first use case for blockchain technology. Companies like Ripple have partnered with banks to use XRP XRP as a bridge currency for cross-border payments, demonstrating the growing adoption of crypto-based solutions in international finance. Key concerns include anti-money laundering and know-your-customer compliance, especially for decentralized stablecoins.

Adoption of Stablecoin Payments in Business

“In an ecosystem like cryptocurrencies, where volatility is typically high, this is an important property,” says Paul Brody, principal and global blockchain leader at EY. “If you want to take advantage of blockchain technology without exposing yourself to the volatility in crypto prices, this is the way to do it.” The future of stablecoin payments is bright, with ongoing innovations and increasing adoption promising to transform how we conduct financial https://www.xcritical.com/ transactions. Unlike traditional banking methods that can take days to process cross-border transactions, stablecoin payments operate around the clock, facilitating almost instantaneous transaction settlements. Algorithmic stablecoins use algorithms and smart contracts to maintain their value by automatically adjusting their supply based on market demand. However, these stablecoins come with specific risks, including the volatility of the collateral and potential liquidation risks if the value of the backing assets drops significantly.

Types of Stablecoins and Their Use Cases

The stabilization mechanisms for on-chain collateralized stablecoins rely on market participants’ beliefs in the stablecoins’ long-run pegs, as do the ones for off-chain collateralized stablecoins. However, on-chain collateralized stablecoin introduce an additional weakness, as the collateral is another cryptocurrency whose value can fluctuate significantly relative to the USD. Hence, on-chain collateralized stablecoins might experience more frequent and pronounced runs.

Stablecoins are cryptocurrencies whose value is pegged, or tied, to that of another currency, commodity, or financial instrument. Stablecoins aim to provide an alternative to the high volatility of the most popular cryptocurrencies, including Bitcoin (BTC), which has made crypto investments less suitable for everyday transactions. Stablecoins tend to be significantly less volatile than other cryptocurrencies, but they are still susceptible to de-pegging or peg failures, which can cause volatility. For example, algorithmic stablecoins use an algorithm to get as close as possible to their desired peg value and adjust as needed with the market.

• This supports the broader DeFi ecosystem by providing stable pair trading and arbitrage opportunities.
• In periods of uncertainty or crisis, the lack of demand for a digital asset can cause it to lose tremendous value in a short amount of time.
• A stablecoin is a type of digital currency designed to make transacting with crypto more practical.
• Among traditional fiat currencies, daily moves of even 1% in forex trading are relatively rare.
• WASHINGTON — Today, the President’s Working Group on Financial Markets (PWG), joined by the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), released a report on stablecoins.

As the US Federal Reserve recently noted, there are still risks inherent in the stablecoin structure, which at times have caused the tokens to “de-peg” from the US Dollar — undermining the main stablecoin value proposition. This has occurred in secondary markets during periods of monetary stress, most notably during the Silicon Valley Bank crisis. Stablecoins are cryptocurrencies designed to maintain a stable value relative to a specific asset or basket of assets. Unlike traditional cryptocurrencies such as bitcoin or ethereum, which can experience significant price fluctuations, stablecoins aim to provide a consistent store of value and medium of exchange.

Built In strives to maintain accuracy in all its editorial coverage, but it is not intended to be a substitute for financial or legal advice. Few bottlenecks across the payments landscape have been more intractable than that of cross-border payments. Circle has long advocated for legislation that protects consumers, supports responsible innovation, and advances U.S. economic growth and national security. As I noted in my written remarks to congress before the House Financial Services Committee’s Subcommittee on Digital Assets, Financial Technology and Inclusion.

There was a hyper-inflationary loop created in LUNA’s supply but eventually, LUNA and UST lost all value, with UST investors losing c.USD45bn in a few days. In 2020, Bank Frick in Liechtenstein tested SWIFT for Circle’s stablecoin, mainly to enable faster processing of USD payments. In March 2022, ANZ delivered A$DC (AUD stablecoin) to a private wealth management firm for digital assets via digital asset investment platform Zerocap, further highlighting the growing use of stablecoins. Stablecoins could also facilitate more credit provision by banks and financial institutions.

Stablecoins have become a popular option for consumers wanting to own cryptocurrencies but who also desire the stability and predictability of fiat currencies. As of writing this article, the stablecoin market is worth nearly 140 billion U.S. dollars. The stablecoin with the highest market capitalization value is Tether, which is pegged to the U.S. dollar as its fiat-backed currency. Stablecoin payments can represent a 50% or more cost reduction to PSPs and merchants compared to traditional payment methods.

That means an algorithmic stablecoin are also reliant on independent investors, which can introduce other forms of risk. Ripple USD is built with regulatory compliance as a defining feature, bringing with it an opportunity for developers, payment providers, exchanges and others to benefit from the stability and transparency Ripple is uniquely able to provide. With over a decade of experience at the intersection of crypto and finance, and a proven track record working with regulators and policymakers across the globe, Ripple is accelerating the digital asset economy with RLUSD.

Morgan Payments and solve business challenges, help those businesses grow, and make the fans at the end really happy and excited and energized about what they just went through. I’ve seen people coming in and just seeing them smile all the way from buying a drink, getting sweets, getting a personalized hat. It’s a fantastic showcase of the products, the integration, the solutions, the speed of how fast our products can recognize your face, how quickly it processes the payment.

The US Treasury continues to assess the risk of money laundering and terrorist financing via National Risk Assessments while the EU has proposed laws to ensure the traceability of crypto transactions. Consistent regulations across the board and swift implementation of rules set by the Financial Action Task Force (FATF) to prevent illicit activity are also vital to remediate these issues. Many stablecoins are built on blockchain platforms that support smart contracts, which support programmable functionality and automation. This type of programmability allows developers to create innovative financial applications and services, such as decentralized exchanges (DEXs), lending platforms, and yield farming protocols — and stablecoins are the foundation.

This stabilization mechanism works in the opposite direction as well, causing a loss rather than a capital gain for stablecoin holders. Within Ripple Payments, the digital asset XRP is a vital bridge asset for more complex currency flows, particularly in long-tail corridors with lower liquidity. Stablecoins offer a bridge between traditional finance and the cryptocurrency world, providing stability, fast transactions and lower fees. They enable efficient cross-border payments, e-commerce transactions, remittances and power various DeFi applications. While stablecoins offer numerous benefits, they also present significant risks and challenges.

Examples include Decentralized USD (USDD) and Terra Classic USD (USTC) (formerly Terra USD). She indicated the launch is in direct response to growing demand for USD-denominated stablecoins, especially in regions like APAC, the EU and Australia. With stablecoin supply on the rise—currently boasting a market cap of ~$170 billion and with projections of nearly $3 trillion within the next five years—Ripple sees an opening to meet the diverse needs of its global payments customers. RLUSD is a type of stablecoin designed specifically for enterprise use cases like payments. With a focus on stability, efficiency and transparency, RLUSD is poised to enhance Ripple’s cross-border payments solution and meet the growing demand for USD-denominated transactions. Automated market makers like Curve Finance specialize in stablecoin liquidity pools, enabling efficient swaps between different stablecoins.