Europe's central bank is concerned about possible runs on stablecoins
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The European central bank has decided to warn everyone about the risk of so-called “stablecoin runs”. In a traditional finance business, banks are responsible to satisfy the customer's service. During the times when people are rapidly withdrawing their money, the probability of default increases.The banks said that there are a number of events that are responsible for stablecoin. Major stablecoin runs could also change the “fixed value” of it. In case of that, they will be responsible to cover all the losses customers will have. This will include the exchange rate fluctuations losses too.If this will happen, the massive negative impact will affect the entire global financial system.Stablecoin market has been growing rapidly in 2020, if stablecoin will lose its power, this will be a shock to the crypto market. Tether (USDT) is the largest stablecoin on the market right now, it contains over $42 billion trading value on a daily basis. This is twice as big as Bitcoin publishing time.
Why is stablecoin so important for the financial market?
It’s a new class of cryptocurrency that offers the price which doesn’t change while the market is changing all the time. Stablecoins have gained the best things from immediate processing and assurance of privacy of payments, and volatility-free solid costs of fiat currencies. Stablecoins are the currencies that are like the US dollar. Stablecoin’s price is connected with backing. It is the most popular cryptocurrency in the market. What makes other cryptocurrencies less attractive? Well, they are unstable. Ideally, a crypto coin should keep its buying value and should own the lowest reasonable inflation rate.
Price stability of the USDT
The price stability is mostly coming from the controlling authorities like central banks. Even when the fiat currencies are moving dramatically, the stablecoin manages to maintain price stability. For example, the person won’t choose Bitcoin in order to make a simple purchase is they know that the price might get twice as big in one month. Stablecoins are used mostly for everyday transactions, and that is why they are so popular. Currently, most cryptocurrencies are pegged to bitcoin. As most Forex and cryptocurrency traders know, bitcoin is prone to major value fluctuations. This affects the prices of other cryptocurrencies too. This is the most popular reason why people criticize bitcoin trading. On the other hand, there are stablecoins which promise us to solve this problem. Tether (USDT) is an example of a stablecoin. Most of the time, one stablecoin is equivalent to the $1. That is why stablecoin is entering the mainstream of the market.
The truth is that price stability is needed in the financial market, that is why any cryptocurrency is having an ambition for a mass utility. For anyone who is fearing to trade with bitcoins, there is another way to try themselves in the currency trading industry. Trading is the most common way to get involved with cryptocurrencies. Stablecoins are the currencies that are as stable as gold and oil. Compared to it, bitcoin and other altcoins are the risks for traders. The good side of trading with stablecoins is that one can save themselves from the large price swings and losses. The reward is also attractive there, that is why this is a great way for the traders to start trading from the beginning. One of the most popular social media websites, Facebook, has also joined stablecoin games with its coin Libra. There are also ways to start trade without money of your own or even making a deposit. In an attempt to prevail over the risk of losing money and to stay safe, it is undoubtedly better to start trading with a free account and then already think about trading with currencies or money.
Blockchain smart contracts
Most of the cryptocurrencies are using blockchain technology. It is a decentralized public ledger managed by a peer-to-peer network. So every transaction is safe and secure. In blockchain technology, there are also “smart contracts”, which means that they use blockchain in order to process the small transactions. They are kind of middlemen before the complex transactions. They also have the ability to support the deals automatically. They are gaining attention from financial institutions since these institutions are embracing certain currencies.
What traders should know
The qualities that stablecoins are having are very appealing for the leading investors. Transparency – the fact that anyone can view the history of the transactions made since the data is stored on public ledgers. Volatility – The fact that the entire foundation of the idea is built on providing the owner with financial stability. Affordability – Lower transaction fees with no need of paying a cut in the bank. Efficiency – No holding periods. There are things that are very important for investors and traders. Digital securities and everything stablecoins can ensure the investor or a trader are making these cryptocurrencies outstanding.
Uses and limitations
If you are still wondering what is the point of having them if you can just own a dollar, well, the fact that financial regulations across the world are putting stablecoins under the microscope is giving some clue about how important they are. It can be a store of value, it can work as a borderless payment system, you are your own boss, it is working outside of the banking system, you can transfer without having to have a third party. In other words, there are main gains one can have if they own stablecoins. People are in need to have some familiar, comfortable, and safe portion of the wealth in their life. It has some potential to displace the retail banking industry and have some impact on the global financial system. The only thing that the regulators are worried about is what if the stablecoin will be adopted by a significant scale. It will cause problems like hacks of private passwords, the collapse of the trust in these currencies, lack of compliance, organized crimes, and money laundering. And surely some of these fears are certainly legit.
Article Produced By
Giorgi Mikhelidze
Giorgi is a Georgian-born financial enthusiast that has been following the development of the Blockchain industry for 3 years now. His experience in trading cryptocurrencies on various platforms give him the insight to analyze various news and events happening in Crypto sphere.
https://cryptodaily.co.uk/2020/09/europes-bank-runs-stablecoins
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