Layman’s Field Guide to Digital Assets: What Are Stablecoins? – Volume 1

For an asset class with a market capitalization of over $300 billion dollars, Stablecoins oddly do not have a unified definition. Depending on the perspective of the speaker, you may receive a wildly different tones on the utility, or lack thereof, for Stablecoins. For example, below are three quotes from an economist, a politician, and a Governor of the Fed.

• Paul Krugman opined that “stablecoins don’t serve any clearly useful function”

• Elizabeth Warren says “[stablecoins] could ultimately crash our whole economy”

• Fed Governor Chris Waller wrote “[stablecoins] have benefits in payments and by serving as a safe asset on a variety of new trading platforms.”

These quotes illuminate more on the speaker than on the asset class and frankly are not particularly insightful, although we do appreciate Senator Warren’s belief in the growth of Stablecoins! In the first volume of a series of educational posts regarding digital assets, we will define and discuss digital assets in a language relatable to those who are not niche hobbyists, or professionals in the fintech space. With this in mind…

What Are Stablecoins?

At Stablecoin Transaction Advisory Group (STAG), we define Stablecoins as:

A digital token issued on a blockchain backed 1:1 by cash or short-term government securities, redeemable at any time.

This definition can be broken down into three key characteristics: (i) backed 1:1 with cash and cash equivalent assets, (ii) issued on a blockchain, and (iii) redeemable on command. Let’s dive into these three characteristics in more depth.

Backed 1:1 with Cash and Cash Equivalents

Unlike other cryptocurrencies who experience rapid changes in price, Stablecoins maintain a 1:1 peg to the currency they are issued in (in most cases, USD). Stablecoins achieve this consistent pricing through their issuers, who are responsible for maintaining the 1:1 reserve of cash backing each individual token. Over time, the digital asset ecosystem has matured and institutionalized, providing increasing levels of internal control and security over assets. In the modern era, Stablecoin Issuers (or custodians of funds) are often audited quarterly by reputable accounting firms.

Digital Token Issued on a Blockchain

Stablecoins are issued on a blockchain, allowing them to be transmitted more efficiently than legacy payment rails. The word blockchain has become a bit of a cliché, and we will save the specifics for another day. Functionally, blockchains can be viewed as just another rail which payments can travel on. Stablecoins are issued on a variety of blockchains, and come in competing flavors (read: fast, slow, expensive, cheap), with markets largely segmented via geography. As your business adopts Stablecoins, these nuances will be important to ensure customer satisfaction.

Redeemable At Any Time

Key to the maintenance of a 1:1 transfer value between USD and Stablecoins is the markets reliance on the issuers. The issuers, like NYSE listed Circle Internet Group, provide transparent reporting to investors and users to maintain confidence in the Stablecoin. Given the design of blockchains, these tokens can be swapped back and forward into cash instantaneously, 24/7/365. This extreme liquidity provides safety to the investors and represents a meaningful step forward to unlock capital efficiencies.

Conclusion:

Although a new technology, Stablecoins are a small step forward in the backend plumbing of financial payments. Critically, these digital assets are simply a representation of USD on a blockchain that can be transferred anywhere in the world, or redeemed back into cash, without legacy banking restrictions such as wire cut-off times.

In future publications, we will discuss the uses of Stablecoins, and their disruption on the payment industry, and trickle-down impacts to various industries such as manufacturing, financial services, and importing/exporting.

For any questions on payments, treasury, Stablecoins or digital assets, please reach out to Jake Souleyrette at Soul@stabletxn.com.