But can we measure how much incumbent firms try to shape regulations in their favor? Or how much market power leads to political power?

A run on the stablecoin could therefore spill over into the traditional financial system by creating stress on these underlying assets, it said.A Stigler Center webinar explores how businesses lobby and compete for political power and whether mergers and industry concentration affect lobbying.įirms compete in markets, and markets are affected by regulators. In its stability report, the Fed warned that stablecoins are vulnerable to investor runs because they are backed by assets that can lose value or become illiquid in times of market stress. While regulators globally are trying to establish rules for the cryptocurrency market, some have highlighted stablecoins as a particular risk to financial stability - for example, if too many people tried to cash out their stablecoins at once. Tether sought to reassure investors, saying on its website that holders were still able to redeem their tokens at the 1:1 rate. In theory, asset-backed stablecoins should hold firm despite this.īut Tether also broke away from its dollar peg for the first time since 2020 on Thursday, dropping to as low as 95 cents. TerraUSD's price crashed to as low as 30 cents. TerraUSD's stability mechanism stopped working this week when investors lost faith in Luna, amid a broader downturn in cryptocurrency markets. Instead, its value was supposed to be maintained by a complex mechanism involving swapping TerraUSD coins with a free-floating cryptocurrency called Luna to control supply. Meanwhile TerraUSD is an algorithmic stablecoin. The companies say that one of their stablecoins can always be exchanged for one dollar.Īsset-backed stablecoins have come under pressure in recent years to be transparent about what is in their reserves and whether they have sufficient dollars to back up all the digital coins in circulation. Major stablecoins such as Tether, USD Coin and Binance USD are reserve-backed: they say that they hold enough dollar-denominated assets to maintain an exchange rate of 1:1. There are two main types of stablecoin: those which are backed by reserves comprising assets, such as fiat currency, bonds, commercial paper, or even other crypto tokens, and those which are algorithmic, or 'decentralised'. The stablecoin Tether in particular is used for trade in and around China and South America, he said. Federal Reservewarned stablecoins are increasingly used to facilitate leveraged trading in other cryptocurrencies.įrom 2018 onwards, stablecoins have increasingly been used in international trade and as a way to avoid capital controls, says Joseph Edwards, head of financial strategy at crypto firm Solrise. In its biannual financial stability report on Tuesday, the U.S. While data on the specific uses of stablecoins is hard to come by, they play a crucial role for cryptocurrency traders, allowing them to hedge against spikes in bitcoin's price or to store idle cash without transferring it back into fiat currency. The No.2 stablecoin, USD Coin, has a market cap of $49 billion, according to CoinMarketCap data. The largest stablecoin, Tether, has a market cap of around $80 billion, having surged from just $4.1 billion at the start of 2020. Stablecoins have a market cap of around $170 billion, making them a relatively small part of the overall cryptocurrency market, which is currently worth around $1.2 trillion, according to CoinMarketCap data.īut they have surged in popularity in recent years. They attempt to maintain a constant exchange rate with fiat currencies, for example through a 1:1 U.S. Stablecoins are cryptocurrencies designed to be protected from the wild volatility that makes it difficult to use digital assets for payments or as a store of value.

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