Financial technology company Circle has announced its plans to launch a new cryptocoin backed by the U.S. dollar, which it expects to emerge as a faster and better digital avatar of the fiat currency. (See also, What Is Circle X and Why Should Cryptocurrency Exchange Coinbase be Worried?)

Cryptocurrency Offers a Solution to Volatility

The cryptocurrency will be pegged to the dollar and will work as a dollar that operates on a blockchain. It is being launched as a solution to one of the major challenges of the present day blockchain-based cryptocurrencies: Volatility.

Consider the wide swings in the world’s most popular cryptocurrency, bitcoin, which surged in 2017 to hit a record high of more than $19,600, and then again losing nearly two-thirds of its value over the next two months to levels of $6,680. Such extreme volatility makes cryptocurrencies incapable of being used as a mode of payment and as a storage medium for monetary value, as users don’t know what their money will be worth the next day. A currency which can be used for the above two purposes needs to maintain limited volatility, usually capped to the level of existing inflation. Dollar backed cryptocurrencies are a solution.

Pegging against the dollar will mean that Circle’s cryptocurrency will have a stable valuation. Such cryptocoins belong to a new breed of cryptocoins called stablecoins, which are pegged to a fiat currency, another cryptocurrency, or have controlled circulation depending upon the demand and supply. (For more, see Is Stablecoin the Answer to All Cryptocurrency Problems?)

Circle's U.S. dollar coin will compete against other similar dollar-pegged cryptocoins such as Tether (USDT) and TrueUSD. It will be required to maintain a reserve of one U.S. dollar each for every U.S. dollar cryptocoin issued, making it safe from speculative volatility.

The newly launch cryptocoin will act as a bridge between the unregulated crypto world and the regulated bank-based financial system, according to Jeremy Allaire, CEO of Circle. "When I look at the convergence of traditional finance and the crypto space, it's begging for that. There are a number of banks who are excited about it and will support it," Allaire said.

The company has future plans to add tokens for the euro and British pound.

The USD Coin project is being developed by an organization called CENTRE, which will provide independent oversight of Circle's offering. The cryptocoin will run on an Ethereum-based blockchain, though Circle will remain open about porting to other better platforms in the future, if deemed necessary. "Ethereum is the best bet but it's not necessarily the end game," Allaire said. "For now it's specifically on Ethereum."

The Goldman Sachs Group (GS)-backed start-up is one of the most well-funded companies operating in the digital currencies space. Chinese company Baidu is also an investor in Circle. The company also secured a $110 million strategic investment from Bitmain, a noted cryptocurrency mining company. Other investors include Breyer Capital, Tusk Ventures, IDG Capital, Pantera, and Blockchain Capital. The recent funding has now raised Circle’s valuation to around $3 billion. Earlier in March, Circle acquired Poloniex, a digital asset trading service that allows cryptocurrency-to-cryptocurrency exchanges, to expand its offerings. (For more, see Cryptocurrency Exchange Poloniex Merges With Payment App Maker Circle.)

Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns no cryptocurrencies.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.