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Stablecoin Volatility Calls for Regulation


Many Cryptocurrencies have had fair volatility which has enabled their values to rise and fall within a short period. That is why many new investors consider Stablecoins as a sensible measure to invest their money. As their name implies, they are meant to be a stable and safe bet.

Currently, this isn’t the case. One popular coin known as Terra has dwindled over some days and dramatically dropped and has not recovered yet. Before the crash, the coin had a value of over US$18.7 billion and was topping the charts but it is currently at US$7 billion. This has caused many investors to become worried.

This event has shown that the effect of the volatility in the stablecoin arena could destabilize the industry therefore it should not be underestimated. In theory, stable coins are meant to offer the same transactional benefits as established coins but with a predictable stable worth.

A lot of stablecoins are backed by different commodities and assets and involve the stablecoin buying an equivalent amount of any commodity/asset to keep their value stable. In the case that the underlying asset value increases or decreases, the value of the stablecoin should remain compatible with whatever supports it.

However, there are algorithmic stablecoins such as Terra and they work differently. Terra holds no commodity or asset and instead holds its value through an algorithm meant to hold the balance between the partner coin (an established cryptocurrency) and the stablecoin.

Terra is attached to Luna which has seen its value drop drastically in recent times. As the value of both Luna and Terra is dropping seriously the algorithm cannot hold the balance leading to the fluctuation and recent fall.

Other stablecoins with asset backings do not suffer this issue due to the standing value of the holding asset but they have their issues.

Besides this, crypto trading in general has enjoyed so much popularity in recent years. This is due to various platforms, including Yuan Pay Group, which have helped people achieved financial freedom when they engage in crypto trading.

How can such an issue be resolved
This issue represented here has undermined the main purpose of these coins i.e., they will be stable. People who buy them do so because they want to use them as a regular financial services platform and enjoy the numerous benefits attached or they wanted to shield themselves against volatility.

But Terra investors have seen their investment shelved in half and as it has not still stabilized many people are worried. This is why there needs to be a change in approach with these stablecoins worldwide. While there has been plenty of talk of regulation around the US and the UK, not much action has been taken.

If there is no regulation on these stablecoins soon, it will be difficult to advocate for the use of these coins in the future as many customers would be exposed to the risk involved with this type of investment.

It’s time for the sector to be regulated as it’s now very essential to ban excessive risky practices and to offer customer protection if the stablecoin realizes its potential. The potential of this technology is something that many believe could revolutionize global trade and economics, expediting transactions, reducing costs, and enhancing transparency.

The ability to innovate in this sector should not come at people’s expense. It will be a test of both a stablecoin’s stability and of the entire stablecoin sector if withdrawals persist. A struggling stablecoin is bad news for the entire sector. However, two or three struggles could have catastrophic consequences.

Bottom Line
Something has to be done before these stablecoins put the industry in jeopardy. Regulatory agencies need to look into them to ensure they are genuine and not just an avenue to scam people.

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Source: Information, Drawings and Images
All article information is sourced and available for review from referenced locations.

– Information and Images supplied.

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