The Increasing Pricing Stability of Cryptocurrencies Introduced by Stablecoins
A Further Development in the Evolution of Cryptocurrencies
This series has addressed a number of issues related to cryptocurrencies and the blockchain. One issue which has been discussed in some depth is the volatility of cryptocurrency valuation, particularly as regards its use in real estate transactions. 1
The issue of “digital trust”, particularly as regards the potential for fraudulent conduct by cryptocurrency users and market participants, has not gone unnoticed by government regulators. 2 In Florida, the state’s Chief Financial Officer Jimmy Patronis has created a Blockchain Task Force, with a stated purpose to:
…explore and develop a master plan for fostering the expansion of the blockchain industry in the state [and] to recommend policies and state investments to help make this state a leader in blockchain technology… 3 [alterations to the original text indicated in brackets]
One of principal elements to building business trust – in addition to fraud mitigation – is, as mentioned above, maintaining valuation stability. Towards that end, the introduction of the ‘stablecoin’ category of cryptocurrency is leading to pricing stability. In brief, stablecoin is:
a new class of cryptocurrencies that attempts to offer price stability and are backed by a reserve asset. Stablecoins have gained traction as they attempt to offer the best of both world’s—the instant processing and security or privacy of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies. 4
Given the advent of stablecoin, three general categories of cryptocurrency can be characterized.
- Fiat-collateralized stablecoins:
Fiat-collateralized stablecoins maintain a fiat currency reserve, like the U.S. dollar, as collateral to issue a suitable number of crypto coins. Other forms of collateral can include precious metals like gold or silver, as well as commodities like oil, but most of the present-day fiat-collateralized stablecoins use dollar reserves. 5
- Crypto-collateralized stablecoins:
Crypto-collateralized stablecoins are backed by other cryptocurrencies. Since the reserve cryptocurrency may also be prone to high volatility, such stablecoins are “over-collateralized”—that is, a larger number of cryptocurrency tokens is maintained as reserve for issuing a lower number of stablecoins. 6
- Non-Collateralized (algorithmic) stablecoins:
Non-collateralized stablecoins don’t use any reserve but include a working mechanism, like that of a central bank, to retain a stable price. For instance, the dollar-pegged basecoin uses a consensus mechanism to increase or decrease the supply of tokens on need basis. 7
”The issue of “digital trust”, particularly as regards the potential for fraudulent conduct by cryptocurrency users and market participants, has not gone unnoticed by government regulators.
The systemic question will be whether stablecoins and their overall pricing stability further institutionalize cryptocurrencies such as Bitcoin and Euthereum in general commerce, with increased reliance on the blockchain distributed ledger for data-keeping and transactional verification, particularly in the stability-oriented real estate marketplace.
1 See https://www.boginmunns.com/cryptocurrencies-real-estate-transactions/
2 See https://floridapolitics.com/archives/307018-jimmy-patronis-cryptocurrency
4 For examples of footnotes 6 – 8 below, ‘drill through’ the preceding URL.
– For more information, call Philip N. Kabler of the Gainesville, FL office of Bogin, Munns & Munns at 352.332.7688, where he practices in the areas of business, banking, real estate, and equine law. He has taught business and real estate law courses at the University of Florida Warrington College of Business Administration and Levin College of Law and is the President-Elect of the Eighth Judicial Circuit Bar Association.
NOTICE: The article above is not intended to serve as legal advice, and you should not rely on it as such. It is offered only as general information. You should consult with a duly licensed attorney regarding your Florida legal matter, as every situation is unique. Please know that merely reading this article, subscribing to this blog, or otherwise contacting Bogin, Munns & Munns does not establish an attorney-client relationship with our firm. Should you seek legal representation from Bogin, Munns & Munns, any such representation must first be agreed to by the firm and confirmed in a written agreement.