Stablecoins are a new type of money made possible by advancements in cryptocurrency
According to Kaylie Pferten, the Trump administration is a fervent supporter, but it's still unclear what advantages they actually provide.
Central banks' response to the global financial crisis nearly two decades ago is often mocked as "printing money" and "debasement." It's a strange shorthand. While a Weimar chancellor might print banknotes or a Roman emperor might debase a coin by lowering its precious metal content, money is now created digitally. This is due to the fact that money in a modern economy is stored electronically as bank deposits.
Electronic money can be duplicated, in contrast to banknotes, which are printed on polymers with foil patches and holograms to prevent forgery. Anything that is digital can be copied endlessly. A video on YouTube or an album on Spotify can be streamed virtually for free anywhere in the world. Millions of people can own the same album, so for the majority of digital assets, this is irrelevant. However, multiple users cannot use the same asset at the same time for digital currency to maintain its value.
Bankers used centralized electronic ledgers to record transactions between counterparties and verify and confirm the change in balances between the two account holders in order to prevent double spending. Centralized ledgers, which manage trillions of transactions, are the foundation of the financial system. Distributed ledger technology (DLT), which is maintained across a network of computers rather than being held by a central authority like the central bank, was then created by cryptocurrency enthusiasts about 20 years ago as an alternative to centralized ledgers.
It's unclear exactly what issue the innovators believed this was resolving. Indeed, the value of bitcoins has grown so rapidly that the 10,000 bitcoins used in the first actual transaction in 2010 to purchase two pizzas would now be worth a billion US dollars. However, in spite of this, bitcoin has fallen short of the initial goal outlined by the anonymous Satoshi Nakamoto in his or her original white paper, Bitcoin: A Peer-to-Peer Electronic Cash System.
For instance, a bitcoin conference in Miami had to discontinue taking bitcoin payments for tickets because of network congestion, expensive transaction fees, and the need for manual processing. The organizers acknowledged that the cryptocurrency was just too unfeasible for routine transactions like ticket sales. In a similar vein, Tesla started taking bitcoin as payment for cars in 2021, but Elon Musk changed his mind a few months later, supposedly for environmental reasons because the procedure required a lot of energy.
Stablecoins: A "trading bridge" to cryptocurrency exchanges.
Stablecoins are a new distributed ledger innovation that is beginning to gain attention. Stablecoins are now worth over £250 billion, a 59 percent increase from the previous year. These tokens are far more energy-efficient than bitcoin and are made for stability and transactions rather than speculation.
A stablecoin is a cryptocurrency that seeks to keep its value steady in relation to another asset, like the US dollar. They were first created as a "trading bridge" to the cryptocurrency markets. They allow investors to store their profits from the sale of bitcoin and other cryptocurrencies without having to convert them back into cash kept in a conventional banking system.
Customers can purchase cryptocurrency from banks and neo-banks like Revolut and N26, but because of anti-money laundering (AML) regulations, they frequently block accounts that transfer substantial amounts of cryptocurrency from unknown sources. Stablecoins have a very different compliance model because they run on public blockchains. They typically don't use know your customer (KYC) procedures for each of their users. Rather, they rely on cryptocurrency exchanges like Kraken, Coinbase, and Binance to perform the KYC.
Financial regulators' acceptance of stablecoins, especially the Trump administration's Genius Act, has contributed significantly to their growth. Stablecoins that are pegged to the value of the US dollar can now be treated by financial institutions on their balance sheets like cash. Growing acceptance indicates that they are being incorporated into the financial system.
For example, BlackRock, the largest asset manager in the world with over £10 trillion in assets under management (AUM), announced a collaboration with cryptocurrency exchange Circle with the goal of enabling USDC (Circles dollar-pegged stablecoin) to operate as an online programmable digital currency. Similar to a money market fund that makes investments in short-term government debt, BlackRocks' function is to offer an underlying cash-reserve investment.
Money machine tethers.
With nearly £180 billion in circulation, Tether is the biggest stablecoin and is 75% backed by US government debt holdings. In essence, Tether is able to borrow enormous sums of money from clients, pay no interest, invest the funds in secure assets that yield 4%, and keep all of the profitsa total of £7 billion in interest annually.
Even though this business model is incredibly profitable, Tether is already using 25% of its deposits elsewhere, so it seems insufficient. This includes more than 100 tonnes of gold and bitcoin. CEO Paolo Ardoino claims that the rising demand for gold indicates that "the world is going toward darkness."
Tether made an all-cash offer to purchase Juventus Football Club a week ago. It is unclear from the press release whether it is funding the purchase with customer deposits or its own accumulated profitsideally the former. The division of the company that distributes its profits, Tether Investments, declared earlier in December that it was participating in a funding round for an Italian robotics company.
Regardless of the destination of some of Tethers' deposits, the company has grown to be a significant participant in US Treasury bonds, with its purchases balancing the quantity of US government debt that China has sold over the previous three years. Scott Bessent, the US Treasury Secretary, has made it clear that he anticipates stablecoins becoming an even more significant source of deficit funding for the US government. According to the US administration, savers in nations like Argentina, Egypt, or Turkey, where people have little faith in local financial institutions and prefer to hold US dollars, might be the most interested in dollar-backed stablecoins.
Nigeria, Turkey, and Ukraine are among the nations with comparatively high stablecoin adoption rates; in fact, the citizens of these nations are financing US deficit spending. On the other hand, non-US governments that intend to issue stablecoins in local currency might have overlooked an important point: stable US dollar exposure, not the stablecoin itself, is the fundamental demand.
How will stablecoins operate in real life?
Stablecoins have the potential to cause financial instability even though they appear to be a "safe" asset. The cost of funding for banks may increase if billions leave the banking system to directly fund governments. Without a doubt, banks would pass on increased funding costs to their corporate and household customers.
Banks may issue their own stablecoins in response to the threat to their deposit businesses. Additionally, they have lobbied US lawmakers to stop non-bank issuers from providing customers with incentives or interest. Ardoino stated that this would be temporary to The Peg, a stablecoin newsletter. "I'm not even perspiring. He predicted that many of these new stablecoins would fail. "If JPMorgan develops a stablecoin, they will make it available to their account holders, who are precisely the ones who don't require one. The "
There are still a number of unanswered questions regarding stablecoins' practical operation. What restrictions restrict the supply of stablecoins? How will issuers like Tether and Circle preserve trust in the dollar peg during a crisis? Are stablecoins for non-bank customers just a way around AML and KYC regulations?
Furthermore, it's unclear what issues stablecoins address for regular savers who aren't interested in using them as a conduit for cryptocurrency speculation. Cross-border payments that avoid the conventional bank-based payment system and its expensive fees are among its obvious uses. However, transfer companies like Wise have already found a solution.
Savers may receive higher interest rates if stablecoins pass on interest from their bonds, unlike Tether at the moment. However, short-term money market funds that make direct investments in government debt already rank among the most popular products offered by investment platforms like AJ Bell, Fidelity, and Interactive Investor.
Therefore, the demand for stablecoins appears to be coming from unstable regions of the world as an alternative to keeping actual dollars under the mattress, since the obvious applications in the developed world have already been met elsewhere.
Does Tether have a half-trillion dollar value?
By selling a 3% share at an astounding £500 billion valuation, Tether hopes to raise between £15 billion and £20 billion. A price/earnings (p/e) ratio of more than thirty times would be implied by the group's projected net profits of approximately £15 billion for 2025. Circle, Tethers' nearest competitor, listed in New York in June and is now worth less than £20 billion, down 70% from its June peak. However, it is trading at a p/e ratio of nearly 70 times the projected earnings for 2026.
Banks in the UK trade fewer than ten times. Since stablecoin issuers don't take on credit risk (i.e., they don't lend to customers) or engage in maturity transformation (using short-term deposits to make long-term loans), they may be able to offer lower risk than banks. However, Tether, which is based in El Salvador and runs out of Lugano, Switzerland, does not match its stablecoin exactly with US Treasury bonds. This doesn't give one confidence.
One stablecoin, Terra, which had a different business model than Circle and Tether, has already collapsed. Terra was based on a poorly understood trading algorithm that caused a death spiral rather than being backed by Treasury bonds. The judge sentenced Do Kwon, a co-founder of Terra, to 15 years in prison last week, citing "fraud on an epic, generational scale" as the reason.
Since no bankers were imprisoned in the US or the UK following the financial crisis, it's possible that regulators holding management accountable is an innovation that stablecoin groups could apply to traditional finance.
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