The lack of volatility and the sense of security has made many to believe the stable coin to be a super cryptocurrency solving many of the problems faced by cryptocurrencies. The key distinction of the stable coin from other cryptocurrencies is that their value stays the same, and hence the price is not decided by the market. This usually means that a company owns and manages the asset as well as the currency. But once the price is fixed and the structure is centralized, the possibility of manipulation opens up. Once it’s centralized, a cryptocurrency essentially loses its transparency especially when the underlying asset is managed by one company. This is exactly what happened with Tether.
One of the major problems a crypto business faces is to find a bank that will service them. This is due to many reasons, one of which is due to the fact that the US strictly enforces many of its restrictions like KYC (Know Your Customer) needs for crypto exchanges even overseas. US authorities are able to enforce this by using the threat of cutting them from the US financial market. Access to financial markets in the US is very important for many international banks, especially the ones in Hong Kong. This tricky situation has made it hard for companies like Bitfinex to find banking partners, and as a result of this, the company has not been able to access basic banking services. This has led them to look for an unorthodox solution, basic liquidity crunch. Recently, this has led them to trouble with the New York attorney general office.
Realcoin was established in 2014 but changed its name to its current name of Tether in 2015. Soon Tether forged a close relationship with Bitfinex, a Honk Kong-based exchange and in January of 2015, the exchange enabled trading of Tether. As mentioned before, getting the bank to process transactions for a crypto business is hard enough, this has lead to Bitfinex, like many other exchanges, using Tether as a de facto dollar. Instead of using banking to transfer funds to customers, exchanges deposit Tether into the wallet of users which they can later redeem for as many dollars as they wish. This has facilitated easier withdrawal as this method avoids banks, but this lead many to believe that Tether holds an equivalent amount of dollars in its reserves. As we have already mentioned, Bitfinex has issues finding banking services. Recently, Bitfinex used $850 million dollars from their Tether reserves. This happened as a result of Bitfinex being unable to recover the same amount from a payment partner, Crypto capital, a Panamanian firm. If Bitfinex had access to basic banking services, they would have been easily been able to cover this amount without the use of Tether’s cash reserve. Many suspect that this is not the first time Bitfinex has done this, which has lead investors to lose confidence in Tether.
Today, banks are facing a tough reality. Low profitability in the era of low interest rates as more and more of the traditional avenues of investments are returning lower profits year over year. This problem is compounded by the fact that even at high growth markets like the US(Q1 2019), inflation is not picking up. This has led to many institutional investors looking for new types of investments with high risk and high return. And there is an opportunity for crypto to fill this space, already many institutional investors have stepped into this new market, especially pension funds. And where money flows, banks follow. This can solve the problem faced by many crypto companies. One way to go about this is by making more regulations and more sensible avenues of investments in crypto like STO. While ICOs brought in a huge amount of money and talent into the crypto market, it’s not sensible for a big bank to invest in a project without receiving ownership or some kind of tangible rights.This is exactly the reason why STOs can be attractive towards banks and other big investors.
As this incident has shown there is no silver bullet to any problems, stablecoins will certainly be part of the crypto landscape. For obvious reasons, stablecoins can provide solutions to many problems, but it will not solve all problems. The future of crypto will be a mix of many solutions like stable coin, lightning networks, etc. It’s not easy to replace the entire banking system with just one coin or one solution, as it was originally intended by the creation of cryptocurrency by Satoshi Nakamoto.
Follow us on Twitter, Facebook, Steemit, and join our Telegram channel for the latest blockchain and cryptocurrency news
Instant Crypto Credit Lines™ from only 5.9% APR. Earn up to 8% interest per year on your Stablecoins, USD, EUR & GBP. $100 million custodial insurance.
This post may contain promotional links that help us fund the site. When you click on the links, we receive a commission - but the prices do not change for you! :)
Disclaimer: The authors of this website may have invested in crypto currencies themselves. They are not financial advisors and only express their opinions. Anyone considering investing in crypto currencies should be well informed about these high-risk assets.
Trading with financial products, especially with CFDs involves a high level of risk and is therefore not suitable for security-conscious investors. CFDs are complex instruments and carry a high risk of losing money quickly through leverage. Be aware that most private Investors lose money, if they decide to trade CFDs. Any type of trading and speculation in financial products that can produce an unusually high return is also associated with increased risk to lose money. Note that past gains are no guarantee of positive results in the future.
You might also like
More from Crypto
Amidst all the great news coming from the Ethereum camp, prominent crypto analyst and fund manager Adam Cochran recently posted …
The second largest crypto-asset in the world is progressing rapidly to establish itself as the cornerstone of the new decentralized …