What is a stablecoin?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
A stablecoin is a crypto asset designed to track the value of a fiat currency such as the US dollar. People use it to step out of volatile assets and to move value. Whether the peg actually holds depends on the issuer's reserves and the mechanism behind it.
Key points
- Crypto assets designed to track a fiat currency
- Backed by reserves, or governed by an algorithm
- Pegs have broken in practice, more than once
- Japan regulates them as electronic payment instruments
Definition
A crypto asset engineered to hold a stable value against a reference asset, maintained either by holding reserves or by algorithmically adjusting supply.
The common design is reserve-backed: the issuer holds cash and short-term government debt matching the tokens outstanding. Treating one token as one dollar rests on that issuer managing the reserves properly and honouring redemptions, so published reserve attestations are worth checking.
Algorithmic designs instead tried to hold the peg by adjusting supply, with no reserves behind them. In 2022 a major algorithmic stablecoin failed to hold its peg and lost substantially all of its value. The word 'stable' is a design goal, not a guarantee.
In Japan, amendments to the Payment Services Act effective in 2023 classify fiat-referenced stablecoins as electronic payment instruments, with licensing requirements for issuers and intermediaries. The set of stablecoins legally available domestically is narrower than what circulates abroad.
Watch out for
- · Nothing legally guarantees the dollar value, and pegs have broken before
- · Reserve composition and audit quality vary enormously between issuers
- · A stablecoin widely used abroad may not be available or usable in Japan