What exactly is the stablecoin that is the topic of heated discussion around the world?

In recent years, stablecoins have entered a rapid rise phase, attracting widespread attention from international public opinion. Many well-known companies and institutions are accelerating their layout in the stablecoin market. What exactly is a stablecoin? What role can it play? Who are the issuers? In this issue of "Xinhua Net International Highlights," we connect with Liu Ying, a researcher at the Renmin University of China’s Chongyang Institute for Financial Studies, to listen to her detailed interpretation.

1 What is a stablecoin? Where is the "stability"?

Liu Ying: A stablecoin is a special type of cryptocurrency. The so-called special refers to the assets it is anchored to, which can be fiat currencies or gold. Of course, fiat currencies can include the US dollar, Chinese yuan, Hong Kong dollar, and other currencies, as well as algorithmically anchored stablecoins of several types. The core design goal of stablecoins is to maintain currency value stability by anchoring to specific assets and using specific mechanisms, serving as a measure of value and medium of exchange in a highly volatile cryptocurrency market.

Stablecoins are designed to solve the problem of extreme volatility in cryptocurrency prices, which is their essence. Because the price of cryptocurrencies like Bitcoin often surges and plummets, there can be controversies at times. Stablecoins have developed under such a background. We also understand stablecoins as a bridge or link connecting the centralized real world and the decentralized crypto world.

Where exactly is the stability of stablecoins? I think it mainly reflects in three aspects:

First, stabilize the value. It achieves this through a 1:1 fiat currency, such as USDC issued by Circle, which is 1:1. (The issuer) must deposit $200,000 as reserve assets to issue 200,000 stablecoins. Since it is pegged to the US dollar or US Treasuries, its price is relatively stable. Of course, stability refers to the corresponding fiat currency or some related assets, while the price fluctuations of the fiat currency itself or the bonds, including the fluctuations of gold prices, are actually beyond the control of the stablecoin itself.

The second is stability in technology. Because stablecoins operate on public chains, the transactions implemented by stablecoins on the blockchain are immutable and settle in real-time, thus possessing stable characteristics that are traceable, queryable, and unmodifiable.

Thirdly, stability in regulation. Whether in Europe, the United States, Japan, South Korea, or Hong Kong, there are regulatory laws and regulations in place, some of which have been introduced or are currently being introduced. With a 100% reserve of cash, bonds, or assets, along with regular audits to maintain transparency, these factors can ensure the stability and reliability of stablecoins, protecting the interests of investors. Therefore, stability in these aspects.

In summary, the stability of stablecoins is essentially achieved through the collateralization of fiat assets, over-collateralized crypto asset guarantees, or algorithmic adjustments to anchor prices and ensure redemption credibility within a regulatory framework. Its core value lies in providing a safe haven for the crypto economy or serving as an efficient payment tool.

In reality, we need to be vigilant, for example, whether the reserved assets are sufficient, whether they are transparent, and the differences in regulation. Investors should certainly pay attention to the qualifications of the issuer and reserve audit reports, among other things.

2 What functions do stablecoins have?

Liu Ying: In fact, stablecoins have been around for more than a decade now, and their uses are quite broad, whether in traditional cryptocurrency markets or in the real world. More importantly, they utilize the functions of currency, including the five major functions: measure of value, means of payment, means of circulation, means of storage, and world currency.

Currently, the most commonly applied feature is cross-border payment settlement. Therefore, one of its application scenarios is cryptocurrency trading, such as providing a stable haven for trading assets with significant price volatility like Bitcoin.

Another major use is cross-border payment settlement. Because stablecoins are point-to-point transactions on the blockchain, their costs are low and efficiency is very high, compressing transfer times from the traditional 3-5 days to a few minutes or even seconds. Regardless of the transfer amount, the fees are generally very low, while traditional fees can be very high. Therefore, its low cost and high efficiency bring about a high turnover of funds, especially for large e-commerce platforms, including banks.

We see many large retailers, including e-commerce companies, flocking into the stablecoin market to apply for stablecoin issuance licenses. Moreover, now large banks, including credit card companies, are also rushing into the stablecoin market, even forming joint ventures with stablecoin companies to accelerate their layout. In some high-inflation countries, many small and medium-sized enterprises or individuals are purchasing stablecoins to hedge against inflation.

3 Who are the issuers of stablecoins? **

Liu Ying: There are several major categories of issuers for stablecoins:

The first category is companies that develop stablecoins. For example, Circle, which issues USDC, is actually seeking to integrate and develop with traditional finance. We see that at the beginning of June, its stock price rose by 168% on its first day of trading on the NYSE. Then there is Tether, which issues USDT, profiting by purchasing U.S. Treasury bonds. This company, with just over 100 employees, is expected to have a net profit of over 14 billion dollars in 2024, which is quite profitable. Its purpose of issuance is to make money through stablecoins, because people who buy stablecoins pay it the same amount, whether in U.S. dollars, Hong Kong dollars, or other currencies. On one hand, it exists here, and on the other hand, it can use that money to buy U.S. Treasury bonds or other assets to invest and profit. This part of the profit is actually very high, so it invests and profits through the cash corresponding to the stablecoins.

The second category is large e-commerce. Whether it is traditional retailers, modern retailers, or e-commerce, for example, JD.com has actually participated in testing the Hong Kong Dollar/US Dollar stablecoin. There are also traditional large retailers whose purpose of issuing stablecoins is to facilitate transactions, settle payments, reduce cross-border payment costs, speed up the time for funds to arrive, and invest for profit using stablecoins.

The third category is licensed financial institutions, including but not limited to Standard Chartered Bank in Hong Kong and major banks in Europe and the United States. They earn revenue from payment settlement through the issuance of stablecoins. This revenue is not traditional interest margin income but rather income from intermediary services, profiting through transfer settlements and investments. Although their core motivations vary, they all aim to earn income from reserve assets, expand their share in the payment market, and build decentralized financial infrastructure, among other objectives. Their goal, of course, is to make money by issuing stablecoins, using the funds from selling stablecoins to invest and profit from either U.S. Treasury bonds or other assets.