🔎 How Stable are Stablecoins?
Myanmar has adopted a stablecoin as currency. But the coin is steeped in controversy. Why?
If you have a crypto investor friend, you've probably heard them say that cryptocurrencies are the future of money. And now it seems even countries are taking this advice pretty seriously.
El Salvador became the first country to legally adopt Bitcoin as a legal tender and now Myanmar is following in its steps.
Myanmar is Tethered
Myanmar's shadow government, the National Unity Government, has adopted Tether (USDT) as its official currency.Â
Wait, what's a shadow government?
Myanmar is currently facing political turmoil. Earlier this year, the country's military overthrew the elected government and took control because they did not like the party that won the election.
So, the actual elected officials (those who haven't been detained) have formed a shadow government to oppose the military government that has taken over.
But because of all this hoopla, Myanmar's currency has declined. And the shadow government needs quick funds to gain momentum and reclaim its position. This is where Tether comes in.
What is Tether?
Tether or USDT is a stablecoin, which is a cryptocurrency that is, you guessed it, stable. It is mined by the Tether company on the Ethereum blockchain.
Think about it, what is one of the biggest criticisms of cryptocurrencies? That they are volatile. This is exactly the problem that stablecoins wish to solve. But how?
You see, stablecoins are pegged to another commodity, usually a fiat currency. So, they derive their value from this commodity backing them. This ensures that their price doesn't fluctuate too much.
For instance, USDT is backed by the US dollar. So, the price of one USDT is usually $1. There are some fluctuations sometimes, but usually USDT maintains its price point. Why not just use dollars then?
Because Tether gives you benefits that other cryptos have. It is mostly unregulated and allows much faster transactions.Â
And this is exactly what Myanmar's shadow government wants right now! Plus, the official military government has banned all cryptos, so this is also the shadow government's way of showing them that they can do whatever they please.
So, with USDT, the Myanmar government has a stable cryptocurrency which sounds ironic. But doesn't Tether seem too good to be true? That's probably because it is.
The Tether Problem
You see, over the past few years, the stablecoin has been steeped in controversy. Why? To understand that, first, let's understand how Tether works.
Unlike Bitcoin, which anyone around the world can mine, USDT can only be mined by the Tether company. But the only way the company can mine USDT is by having an equal amount in dollar reserves.
Now, the crypto currently has a market cap of over $76 billion! Enough cash to make it one of the top 50 US banks. And this is where people's suspicions rose.Â
Soon, many noticed that Tether was mining large quantities of USDT at random. And people began questioning if Tether actually has enough cash reserves to back all its coins in circulation.Â
Umm, what happens if it doesn't? What happens if a large number of people want to cash in their USDT?Â
If Tether doesn't have enough money in reserves, it will not be able to pay off holders and will have to liquidate assets. This could have a major impact on the entire economy, the same way that a bank's failure does.Â
Many firmly believe that Tether is a massive Ponzi scheme (here's our explainer on Ponzi schemes)!Â
They think it is a scam to artificially increase Bitcoin prices. They think Tether mines coins whenever Bitcoin falls. It then uses those coins to buy large quantities of Bitcoin and again raise its price.Â
All of this chatter garnered the attention of regulators. They forced Tether to publish audits of its reserves. And turns out the sceptics were right.
Tether revealed that it did not have money equivalent to its coins in circulation in its reserves. The company said most of its reserves had been converted to commercial papers (debt instruments that are like bonds). For this, it was fined $41 million. New York also banned the company from operating in the state.
But Tether is still going strong. It is the fourth largest crypto in the world right now. Wondering why it is still so popular?Â
Mainly because a lot of banks do not conduct businesses with crypto exchanges. So, for a lot of people, Tether is their only source of buying crypto. They convert their money into USDT and then use it to buy crypto. And they are continuing to do so, which could pose a huge risk to the economy in case Tether ever fails.
So, regulators are looking at ways to regulate not just Tether but also other stablecoins. However, many experts believe that introducing central bank digital currencies is the only way to end the run of these stablecoins.
What does the future hold for Tether and other stablecoins? Will they manage to retain people's trust?
Only time will tell…
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Everyday the articles are running around cryptocurrency. So please keep on adding some more topics as your USP was topics on different fields rather than only one topic discussion done on breaking news channels..