After the “PayPal” move…what are “stable currencies”?

Financial transaction giant PayPal enters stable cryptocurrency ranks; On Monday, it announced a stable currency in US dollars in an attempt to improve trust in digital currencies in payments and exchanges.

The move allows the company’s millions of customers to benefit from the wide range of benefits offered by “stable currencies” that differ significantly from traditional cryptocurrencies, particularly the new “PayPal” currency pegged to the dollar.

The stablecoin is backed by dollar deposits and short-term U.S. Treasury notes, and will be issued by Paxos Trust, the company said.

A stablecoin (designed to protect against extreme volatility, which makes it difficult to use digital assets as a payment or store of value) will gradually become available to the company’s US customers, the company announced.

So what are stablecoins? What are its main benefits and risks? How does it differ from well-known traditional cryptocurrencies?

What are Stablecoins?

A stablecoin is a type of cryptocurrency (cryptocurrency) that is designed to maintain its stability of value against a fixed asset such as a fiat currency, an index, or metals.

These coins represent a mechanism to deal with the extreme volatility and fluctuations experienced by traditional digital currencies like Bitcoin.

Standard digital currencies typically rely on equations and technologies such as (blockchain) to verify financial transactions and maintain transparency.

But the key difference is that its value is closely linked to a traditional currency unit such as the US dollar or the euro, or to a commodity index such as gold. This interdependence is usually done through some mechanism that ensures the maintenance of balance between supply and demand for the fixed currency.

The main goal of this type of stable digital currency is to provide a means of digital commerce that combines the advantages of digital technology and ease of use with the stability of financial value, making it a very attractive option for people and companies without exposure to extreme price fluctuations associated with digital currencies such as money transfers or store value.

Although stable digital currencies aim to provide stability in value and improve the trading experience and digital exchanges, they face certain disadvantages and risks, including security risks, as well as challenges in the availability of financial deposits. Digital currency, legal challenges and regulatory limitations and the role of governments and regulators, and the complexity of issuance and management procedures.

Despite these challenges, stable digital currencies still represent a step towards creating a digital financial system that combines technology and financial stability, and over time some of these issues can be overcome and the infrastructure for this type of currency can be improved.

More sustainable investment instruments

Mazen Salhab, chief market strategist for the Middle East and North Africa region at BDSwiss, told “Economy Sky News Arabia” in an exclusive report that a stablecoin is a cryptocurrency that has value linked to or controlled by financial assets or other traditional assets. Coins and financial instruments, this represents the real difference. Between them and traditional cryptocurrencies, cryptocurrencies are based on multiple equations on the blockchain.

And he adds, “Stable currencies are collateralized by special reserves to protect their value, so they are not subject to drastic fluctuations.” It is not subject to speculation and market trading like cryptocurrencies, which does not create traders. Or speculators, and even companies, can use them in daily transactions and calculate the true value due to the volatility of their value.

The chief market strategist for the Middle East and North Africa region at BDSwiss adds: “PayPal’s launch for financial transactions is a stable currency linked to a very stable real balance, which enables the company’s millions of users to benefit greatly from its features. These currencies.”

Regarding the failure of some stable currencies to maintain parity with the dollar and their collapse, he says: “Stable currencies are under the watchful eye of monetary authorities and lawmakers, and their value has reached about $128 billion..but they are also subject to market fluctuations..in this case the loss of value (for a few months It may not be a complete loss of value of the coin, as has happened to some coins before (in light of their impact on the collapse of Silicon Valley banking), but what has happened is that there has been heavy selling that puts pressure on those coins at the time, because confidence in the banking system is collapsing.

Salhab believes that “Cryptocurrencies in general are high-risk investment instruments, as well as stable and dollar-linked currencies are not fully guaranteed (..) There are exaggerations in depicting the level of their guarantee, because they are linked, for example, to the dollar, but the dollar also loses, so stable currencies from losing Not far away.

Peer-to-peer currencies face broader challenges in keeping pace with the U.S. dollar, and these challenges intensified during the U.S. banking crisis last March, which shook some of their ties to the dollar.

Important among the most popular stablecoins is the Tether (USDT) coin, which first appeared in 2014 and is fully backed by cash reserves and short-term treasury bonds, and this was witnessed during the US regional banking crisis in March. – A wider collapse after the collapse of Silicon Valley Bank.

Among the stablecoins is the USDC currency, which has been unable to maintain its peg with the dollar since the Silicon Valley crisis, finally hitting its lowest level in two years. Also stablecoins are DAI, Binance and others.

Historical development of currency

It is worth noting here that there is a historical growth in forms of currencies from traditional currencies to digital currencies as continuous technological and economic development leads to the development of new forms of currencies and digital assets.

In this context, financial market expert Dr. Hosam Al-Qaish talks about the difference between traditional currencies (paper and coins), centralized electronic currencies and cryptographically based digital currencies in exclusive reports to “Economy Sky News Arabia”. Fixed digital currencies pegged to the dollar or assets are different.

• Conventional Currency (Banknotes and Coins): Includes coins and metallic banknotes that are used as a medium of exchange and store of value. These currencies represent units of trade finance issued by central banks and governments, and have a fixed or flexible exchange rate determined based on a number of factors.
• Centralized cryptocurrencies: Centralized cryptocurrencies include units of value that are stored and traded online and can be used for electronic payments and transfers. Unlike traditional currencies, these coins are issued by private companies or platforms.
• Crypto-based digital currencies: They are digital currencies that rely on encryption techniques to maintain a percentage of security (the most famous of which is Bitcoin).
• Stable Digital Currencies: These digital currencies represent another development of digital currencies, and they aim to provide stability in value by linking them to traditional assets such as the US dollar or Euro, and are used to avoid the price fluctuations seen with traditional digital currencies. Coins.

Here, asset-linked digital currencies are referred to as a second type of stable digital currency, and these digital currencies represent ownership rights or shares in real assets outside the world of digital currencies, such as real estate or commodities. These assets are represented by tokens on blockchain networks.

Al-Qaish points out that digital currencies are divided into two main areas (cryptocurrencies and fixed currencies pegged to the dollar) to (cryptocurrency), whose price is determined based on guesswork, so its prices usually (in between) fluctuate greatly. (rises and falls) over the course of the year This represents high risk, and many central banks prefer to avoid dealing with it. Because it is Mudaba that determines their price.

In contrast, the second type of digital currency is stable currency, which typically enjoys a form of stability because it is linked to a currency or basket of currencies, thus exhibiting relative price stability, and is used as part of electronic payment facilitation operations. , and to some extent can be considered as an alternative to “bank cards”, it is believed that because it is encrypted, difficult to hack, and some governments are very compatible with it, and some central banks encourage it, unlike other cryptocurrencies there are speculative factors and wider risk.