Big news for the crypto industry
Singapore’s financial regulator has reportedly said it had finalised rules for a type of digital currency called ‘stablecoin’, placing it among some of first the regulators worldwide to do so.
Stablecoins are a type of digital currency designed to hold a constant value against a fiat currency. Many claim to be backed by a reserve of real-world assets, such as cash or government bonds.
Reserves that back stabelcoins must be held in low-risk and highly-liquid assets. They must equal or exceed the value of the stablecoin in circulation at all times, the rules say. The stablecoin market is valued at around $125 billion, with two tokens – Tether’s USDT and Circle’s USDC – dominating roughly 90% of the market cap value. Stablecoins are broadly unregulated around the world.
The Monetary Authority of Singapore’s (MAS) framework requirement
- Reserves that back stabelcoins must be held in low-risk and highly-liquid assets. They must equal or exceed the value of the stablecoin in circulation at all times
- Stablecoin issuers must return the par value of the digital currency to holders within five business days of a redemption request.
- Issuers must also provide ‘appropriate disclosures‘ to users, including the audit results of reserves.
These rules will apply to stablecoins that are issued in Singapore and mimic the value of the Singapore dollar, or of any G10 currencies, such as the U.S. dollar.
Last year, the collapse of a so-called algorithmic stablecoin named UST put this type of stablecoin in the crosshairs of regulators. Unlike USDT and USDC, UST was governed by an algorithm and did not have real-world assets like bonds in its reserves.
Singapore’s stablecoin framework puts it among one of the first jurisdictions to have such rules. In June, the U.K. passed a law that gives regulators the ability to oversee stablecoins, though there are no concrete rules yet. Hong Kong is meanwhile undergoing a public consultation on stablecoins and seeks to introduce regulation next year.
What is a stablecoin
A stablecoin is a type of cryptocurrency that tries to maintain a stable value by being pegged to another asset, such as a fiat currency, a commodity, or another cryptocurrency. Stablecoins aim to offer the benefits of cryptocurrencies, such as decentralisation, security, and transparency, without the drawbacks of high volatility and price fluctuations.
Stablecoins can be used for payments, remittances, trading, and storing value. However, stablecoins also face some challenges and risks, such as regulatory uncertainty, technical issues, and trust issues.
There are different ways to create and manage stablecoins, depending on the mechanism used to stabilize their value.
Main types of stablecoins
- Fiat-backed: These stablecoins are backed by a reserve of fiat currency, such as the US dollar or the euro, held by a third-party entity. The stablecoin issuer promises to redeem the stablecoin for the fiat currency at a fixed ratio. Examples of fiat-backed stablecoins are Tether (USDT), USD Coin (USDC), and TrueUSD (TUSD).
- Commodity-backed: These stablecoins are backed by a reserve of physical commodities, such as gold, silver, or oil, held by a third-party entity. The stablecoin issuer promises to redeem the stablecoin for the commodity at a fixed ratio. Examples of commodity-backed stablecoins are Paxos Gold (PAXG), Tether Gold (XAUT), and Digix Gold (DGX).
- Crypto-backed: These stablecoins are backed by a reserve of other cryptocurrencies, such as Bitcoin or Ethereum, held in a smart contract. The stablecoin issuer uses over-collateralization or algorithmic adjustments to maintain the stability of the stablecoin. Examples of crypto-backed stablecoins are Dai (DAI), sUSD (SUSD), and BitUSD (BITUSD).
- Algorithmic: These stablecoins are not backed by any reserve, but instead use an algorithm to control the supply and demand of the stablecoin. The algorithm adjusts the supply of the stablecoin according to the market conditions and the target price. Examples of algorithmic stablecoins are Basis Cash (BAC), Empty Set Dollar (ESD), and TerraUSD (UST).
What is ‘crypto’
Crypto has attracted a lot of attention in recent years. Crypto is short for cryptocurrency, which is a digital or virtual currency that uses cryptography to secure and verify transactions. Crypto can also refer to the underlying technology that powers cryptocurrencies, such as blockchain.
Some examples of popular cryptocurrencies are Bitcoin, Ethereum, Ripple ( XRP)and Cardano (ADA).
Cryptocurrencies have many advantages over traditional currencies, such as decentralisation, transparency, anonymity, and lower fees. However, they also face some challenges, such as volatility, regulation, security, and scalability. Crypto enthusiasts believe that cryptocurrencies have the potential to revolutionise the world of finance and beyond.
Some examples of popular stablecoins are Tether, USD Coin and Binance USD.