Stablecoins might not be the most exciting cryptocurrency, but they may be among the most important. Although everyone wants to buy hot cryptos like Bitcoin and Ethereum, it’s hard to find a place to keep your cash without worrying about massive price swings. Bitcoin can swing in price by ten percent or more each day, and altcoins even more. For institutional investors, stablecoins offer a solution to crypto market volatility.
However, governments are flirting with the idea of regulating stablecoins. Just recently, the Bank of England said that in the future, any commercial or retail payments with stablecoins will need to be regulated. Is this going to be the future of stablecoins? Here’s why that may (or may not) be the case.
What are stablecoins?
Stablecoins are a type of cryptocurrency that’s pegged to a non-crypto asset, typically a type of fiat currency like the U.S. dollar (Tether) or the Chinese yuan (digital yuan). However, there are also stablecoins pegged to non-fiat assets, like gold or silver.
For institutional investors worried about price volatility, having part of their portfolio invested in stablecoins mitigates big price swings in the crypto market. Since they’re pegged to a real-life asset, stablecoins are isolated from general crypto market movement on any given day. In the non-crypto world, portfolio managers often have a portion of their assets invested in government-issued bonds or other stable assets. Stablecoins provide a similar degree of stability in the otherwise turbulent crypto market.
Why stablecoins could be regulated
The Bank of England said that stablecoins, especially those pegged to fiat currencies, could end up being used in lieu of the fiat in question. Most governments worry about losing control over their currency, and that cryptocurrencies could become more popular than the country's legal tender. Stablecoins exacerbate this problem, as they allow people to buy or sell a digitized (and unofficial) version of a nation's fiat currency, separate from the nation’s central banking system.
To be clear, the Bank of England's statements relate to a situation where stablecoins become used widely for commercial payments. To this date, we haven’t seen this happen. While some companies accept Bitcoin and Dogecoin, stablecoins aren’t seen as a way to buy or sell goods and services. If that does happen, however, you can expect governments to start cracking down.
Will governments issue stablecoins instead?
One way governments could tackle this issue is by sanctioning their own stablecoins instead. We've already seen this in China, with the Chinese Communist Party testing its digital yuan in certain Chinese cities. If successful, this test could lead to a wider rollout throughout the billion-plus population.
Centralized cryptocurrencies, especially those run by the government, are unpopular among crypto investors. Many of the earliest Bitcoin fans were attracted to crypto because of its libertarian ideals, and that government intervention would be “corrupting” the original vision of people like Satoshi Nakamoto. However, it seems inevitable that governments will start moving into the stablecoin market soon. The Fed is already considering issuing a digital dollar and digital wallets to every American citizen.
These new officially sanctioned stablecoins will likely replace their predecessors. Although current-generation stablecoins like Tether won’t be regulated anytime soon, they could be replaced within the next 5–10 years.