Stablecoins such as Tether are cryptocurrencies whose value is pegged to physical real world currencies. Their value should fluctuate in the same way as their linked currency. This should make a stablecoin relatively stable (the clue is in the name). There is a lower risk to investing in stablecoin than a virtual currency such as Ethereum but also a reduction of possible gains. An attractive use of stablecoin is as a currency to buy and sell goods on the Blockchain. If prices are set within a more fluid cryptocurrency these might change significantly in ‘hard’ currency equivalents from day to day. This tempts buyers to hold out for a better exchange rate and leaves sellers uncertain as to how much real income a sale will net. In stablecoin the exchange rate is unlikely to fluctuate greatly from day to day so prices will be relatively stable.
The stablecoin needs a reserve of actual currency or (more risky) an alternative cryptocurrency or (riskier still) an algorithm that buys and sells investments to fund its activities and pay out withdrawals. This is the same model as a bank branch having some actual funds in currency or gold but also relying on its loans and investments. As with a bank there are risks including the equivalent of a run on the bank. Unlike a bank the regulatory procedures to protect investors are not in place. In May 2020 the value of algorithm based stablecoin Terra/LUNA dropped from rough parity with the US$ to under 0.03$. This loss impacted on other virtual currencies which had invested in each other and Terra/LUNA as a means of stabilising their own value.
The EU passed the Markets in Crypto-Assets Regulation (MiCA) bill in October 2022. This might be expected to become law in 2024. It aims to put rules in place for the Blockchain crypto environment including the position of stablecoin. Stablecoin currencies will be required to maintain sufficient cash or other liquid assets to prevent runs on the currency. There will also be a daily cap on the value of transactions at $200 million.
The UK is encouraging the use of stablecoins as a recognised form of payment. It is likely that the UK will extend existing laws relating to payment instruments to stablecoin allowing regulation of the field.
Neither of these legislations will come into force imminently and they could differ in their final forms. When legal support for stablecoins does come into force it will depend on their geographical location. Any legal recourse from within an investor’s country will be constrained by International law.