Stablecoins, by their very name, seek to separate themselves from the better known, more volatile sibling cryptoassets like bitcoin, and their supporters hail them as the cure to the price instability that can undermine the future of cryptocurrency. But what are stablecoins? Are they stable? How do they operate? And the million dollar question: are they regulated?
Not all stablecoins are the same. They use different solutions to attempt to solve the one shared problem of price volatility. The varying approaches include the backing of a single fiat currency, the backing of a basket of fiat currencies, the backing of another single cryptocurrency or a diverse collection of cryptoassets.
An issuer might look to peg the value to a fiat currency or to issue an interest or right to the holder that is directly linked to the value of the fiat currency held. And the attempted stability solutions don’t end there; stablecoins may be backed with other types of assets or commodities, such as gold, or not backed by anything other than algorithms that control the supply of the stablecoins and peg their value by increasing and decreasing supply.
Facebook’s controversial virtual currency proposal, Libra, was a form of stablecoin backed by a basket of government securities and deposits in dollars and euros. It was arguably the global nature of Libra, and the reaction of governments and regulators to what could be seen as a real threat to the traditional currency status quo, that resulted in Facebook reconsidering its approach.
The diversity of stablecoins means that their stability rather depends on their structure and performance; in practice, the FCA (the UK regulator) doesn’t wish to label them stablecoins for fear of imputing a generic stability by virtue of the name.
Regulators are an important consideration, as Facebook discovered, and any business or contemplated venture that involves stablecoin will need bespoke advice on whether they are within the regulatory perimeter and whether/how their proposition can fly. This is because it will depend on a case by case basis whether the stablecoins and their application within the context of the business will be fall to be regulated and, if so, which regulations/laws bite.
There may also be tax and financial hygiene considerations meaning that early advice is the right advice; conducting regulated business without authorisation is a criminal offence, no matter how novel the venture to be regulated.