While Bitcoin's price volatility grabs headlines, financial companies are increasingly investing in stablecoins – cryptocurrencies designed to maintain a fixed value, typically pegged to the US dollar. Stablecoins are gaining traction as payment methods due to their stability and efficiency in transactions, particularly for cross-border payments and remittances. Visa, PayPal, Stripe, and other major players are exploring their potential, while issuers find lucrative opportunities in investing reserves backing stablecoins in short-term US Treasuries.
Greg Newman, senior wealth advisor and portfolio manager of Newman Group at ScotiaMcLeod and Greg Taylor, chief investment officer at Purpose Investment, discus
This sub-sector of the digital-asset space has proven to be a lucrative business, now that issuers are able to invest reserves backing stablecoins in short-term US Treasuries with attractive yields. And unlike Bitcoin and other tokens prone to price volatility, use of stablecoins as actual currencies in transactions is gaining popularity around the world.
The European Union’s Markets in Cryptoassets rules require all stablecoins listed on centralized exchanges to be issued by an entity with a so-called e-money license. Circle Internet Financial Ltd., Tether’s main competitor, received such a permit in July. Tether has yet to apply for one, meaning the token risks being delisted by exchanges. Several crypto exchanges operating in the EU have already delisted USDT.
Because stablecoins are running on blockchains, it reduces the transaction costs and improves overall efficiency to move money, added Ilag. Of course, stablecoins are not without risks. TerraUSD, which was an algorithmic stablecoin that used a parallel floating-rate currency, Luna, to keep its fixed $1 value, failed in spectacular fashion in 2022. Its collapse set up a broader selloff that wiped $200 billion from crypto’s total market value. Several digital-asset companies later also went bankrupt partly because of Terra’s blowup.
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