US lawmakers are aiming to regulate them as soon as possible as Treasury Secretary Yellen urged them to regulate as quickly as possible.
Why so suddenly the US Treasury targeted stablecoin rather than cryptocurrencies like Bitcoin?
The simple answer is stablecoin threatens US Treasury printing authority.
Let me explain step by step why stablecoin is a great invention after Bitcoin and it grows out of control that regulators are worried about fiat currency domination.
What is stablecoin?
Stablecoin is created to resolve volatility of crypto currencies, particularly Bitcoin which its prices fluctuate up and down too widely that increase investment risks and it is not feasible to become a fiat currency as its designed digital cash claimed to be.
Stablecoin then issued a 1:1 ratio to fiat currency US dollar so as to protect from market fluctuations or risks.
By using assets back stablecoin valuation, one can issue many coins to flatten out its valuation to keep at $1 as long as valuation is accurately predicted.
There are 5 categories of stablecoins:
Fiat-collateralized stablecoins: cryptos that back by fiat currency
Commodity-collateralized stablecoins: cryptos that back by commodity such as gold, silver or others precious metals alike
Crypto-collateralized stablecoins: cryptos that back by cryptos such as Bitcoin and Ethereum or others alike
Non-collateralized stablecoins: it is algorithmically calculated to track and control crypto supply in order to keep up the price
Mix-collateralized stablecoins: it is mixed with previous 4 types of stablecoins
What is money?
Money has to be a store of value, a unit of account and a medium of exchange.
Bitcoin met all three requirements but it cannot be a money as the definition suggested because there is a more stringent criteria to become a medium of exchange so called NQA or no-questions-asked principle.
What is the NQA principle?
It means when both parties transact payment from one side to the other, they must agree that the money be accepted at par or at fixed value not more and not less.
Bitcoin fails the test because once you send your Bitcoin to the other party, the valuation has already changed.
Stablecoin seems to work because it stables at $1 from one party to another? Not quite correct. It is stable because it artificially brings valuation to $1 but it is still fluctuating that you may not realize it did.
Why is the NQA principle a problem?
One can take advantage of the party who sent you $1 as face value but as an insider, he may have more information about the price fluctuation and you may get less than $1 of money.
Then the system may have broken to be unilateral favor from one party rather than another. Whoever knows this transaction may refuse to use it as a medium of exchange.
Companies who create stablecoins may have to reveal what assets back by, however, may still cannot resolve the NQA principle issue.
Let’s take a look at the fiat system.
Fiat currency backed by banknotes issued by the Federal Reserve (in theory).
When the Fed Reserve issues bonds or debts to its balance sheet, it can then ask the Treasury to issue cashes (printing press).
Those debts are issued as cash loans to banks to purchase to exchange their reserves cash while banks take those credits to do 3 things: deposit taking, commercial leading and payments.
Stablecoin companies did the same thing: take your deposit money, making leading stablecoin to you with high interest rate returns (because it is risky in their mind) and then give you payments or other debts leverage they did to pay off their debt interests.
So stablecoin companies are banks then?
Not quite yet, because cryptocurrencies are decentralized and not involved by any third party. There is no Fed Reserve for stablecoin companies to back stablecoin banknotes.
The problem will emerge when there is a financial crisis, all debts leverage may liquidate results of much larger devaluation of stablecoins. Then 1:1 ratios may not be able to stay and customers will lose money and demand to return $1 worth of every stablecoins they owned but companies may not be able to pay off but go bankrupt and cannot ever pay off debts.
Even worse, stablecoins did leverage through many untrackable debts that are unable to disclose to consumers and companies have power to print as much as coins they can during the good year without any control or regulations restriction.
That printing power is the same as the Treasury did! That is why the Treasury freakout about as they have a monopoly on printing money only in the nation and now they have competitors.
However, the point is not about who controls the power of printing but to avoid the 2008 crisis and stablecoin may create similar untraceable debts that create debt blackholes to suck everyone into without returning anything back.
Therefore, stablecoin may be stable in the short term but may not persist in the long term.
Edited for typos and broken links.
Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose cryptocurrencies are mentioned in this article. This information is only for educational purposes.