Stablecoins: The steady side of cryptocurrency

JOHANNESBURG – Cryptocurrency has shaken up the financial world over the past decade, offering a new way to transfer, store and invest money. From Bitcoin to Ethereum, these digital assets are known for their volatility. Prices can skyrocket or crash in a matter of hours. But one type of cryptocurrency is built differently: the stablecoin.

So what exactly is a stablecoin and why does it matter?

Think of a stablecoin as a digital version of a traditional currency like the US dollar. They are designed to maintain a steady price. Most stablecoins are “pegged” to a real-world asset such as the US dollar, euro or even gold. For example, one USDC (a popular stablecoin) is backed by one US dollar held in reserve by the issuing company.

This stability makes stablecoins especially useful. In contrast to Bitcoin or Ethereum, which are often treated more like investments or stores of value, stablecoins can function more like everyday money. People use them for everything from cross-border remittances to everyday transactions. They are a key tool in the world of decentralised finance, where users borrow, lend and earn interest without traditional banks.

But how do they stay stable?

There are different types of stablecoins. The most common are fiat-backed stablecoins, which are supported by reserves of traditional currency held in bank accounts. Others use cryptocurrency as collateral, locking up digital assets to maintain their value. A more complex and controversial type is the algorithmic stablecoin, which uses software and smart contracts to manage supply and demand. But these have a history of failure, including high-profile collapses.

Stablecoins now play a vital role in the global crypto ecosystem. They facilitate fast and low-cost transactions, especially in regions where local currencies are unstable or where access to US dollars is limited. For people in countries facing inflation or capital controls, stablecoins offer a lifeline to financial stability.

However, their rise hasn’t gone unnoticed by regulators. Since stablecoins act like digital cash but aren’t issued by central banks, governments around the world are concerned about their potential impact on financial stability, money laundering and consumer protection. Discussions continue about how to regulate these digital assets without stifling innovation.

As crypto continues to evolve, stablecoins are proving to be more than just a niche product. They may be the bridge between the fast-moving world of digital finance and the stability of traditional money.