There has been an explosion of stablecoins (or cryptocurrencies that trade at parity with fiat currencies) in the cryptocurrency ecosystem in the last month. Now a new alliance backed by two of the biggest players in the ecosystem plans to connect the stablecoins with fiat currencies. North America’s largest cryptocurrency exchange Coinbase and Goldman Sachs-backed fintech company Circle announced the CENTRE consortium today to “speed up” adoption of stablecoins backed by fiat currencies.
In a press release, Circle’s co-founders said that their vision was that of an “open global financial system built on crypto rails and blockchain infrastructure.” This vision, according to them, “requires industry leaders to collaborate to build interoperable protocols and standards.”
Problems With The Current Stablecoin Ecosystem
Stablecoins are expected to fulfill the promise of bitcoin as a medium for daily transaction. Typically, they are backed by fiat currencies, such as the US dollar, in a bank account. This strategy enables quick redemption in case of volatility and reassures investors about the stability of cryptocurrency markets.
But such coins have come under a cloud of suspicion this year after reports surfaced that Tether, the most famous example of such a stablecoin, may not have sufficient dollars backing its trading volume. The stablecoin, which shares the same management company as well-known cryptocurrency exchange Bitfinex, has failed to provide evidence of its reserves and refused to submit to a comprehensive public audit. The recent breaking of its peg to the US dollar and subsequent volatility in the prices of stablecoins across exchanges have further multiplied investor fears about stablecoins.
Circle, which bought cryptocurrency exchange Poloniex earlier this year, also has a stablecoin called USD Coin (USDC). Like Tether, it is backed by the US dollar and will begin trading on Coinbase as of today. “We see USDC as a major step towards a more open financial system. The advantage of a blockchain-based digital dollar – like USDC – is that it is easier to program, send, use in apps, and store locally than traditional US dollars,” Coinbase stated. Unlike Tether, however, USDC will be regulated and has promised to submit itself to public audits.
The stablecoin’s price jumped slightly before returning to stability during the recent decline in stablecoin prices. (But that might also be due to the fact that trading volumes for the coin are fairly low since it began trading only on Oct 8).
CENTRE’s fix to problems in the current ecosystem is to have stablecoins that adhere to a uniform approach that is compliant with existing regulations. For example, members of its consortium should have Anti-Money Laundering (AML) and Know Your Customer (KYC) practices in place and will have to submit to regular public audits for their reserves. The idea is to have an ecosystem that eases the flow of stablecoins between smart contracts, thereby making daily transactions possible between different contracts. To that end, interoperable standards and protocols will help developers integrate CENTRE into their respective stablecoins.
Investing in cryptocurrencies and other 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 other 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 0.21 bitcoin and 1 Litecoin.