The crypto world is currently debating the nature of stablecoins, and their difference with cryptocurrencies like Bitcoin and Ethereum.
The fight between the Securities Exchange Commission (SEC) and crypto exchange Binance is stuck on definitions. Today’s debate is whether or not a stablecoin can be defined as a virtual asset, comparable to Bitcoin, Ethereum, and other virtual tokens.
A stablecoin is, by definition, stable. Its purpose is to solve the main issue with Bitcoin and similar cryptocurrencies: the inherent volatility in their prices. Cryptocurrencies, originally born to represent an alternative to exchange-traded assets on stock markets, have actually become a virtual version of them.
Bitcoin, for example, is the world’s most famous cryptocurrency but is also infamous for its volatility. Will it break the $30,000 mark? Will it remain stable above $25,000? Will it plunge like it did in 2022? Many crypto traders attempt to find a logic to these movements, often with little to no success.
Stablecoins, on the other hand, are virtual tokens tied to a real-life currency like the US dollar or the euro. They provide a safer asset to crypto traders, similar to how gold is a safe investment for traditional investors.
There are three different types of stablecoins:
- Fiat-collateralized stablecoins: they are the “classic” types of stablecoins, with real-life currency reserves serving as collaterals;
- Crypto-collateralized stablecoins: they use cryptocurrencies as collaterals. Given the volatile nature of cryptocurrencies, they are overcollateralized, i.e. the cryptocurrencies held in reserves exceed the value of the stablecoin issued;
- Algorithmic stablecoins: they keep a stable supply of coins through an algorithmic formula, thereby ensuring their value.
Are stablecoins securities?
In any case, the question remains: are stablecoins exchange securities like a stock or a CFD? This is the core of the dispute, as the SEC is trying to determine whether crypto exchanges Binance and Coinbase have committed a violation.
The SEC launched an investigation into their practices, claiming that crypto tokens are securities and any exchange must have a regular broker license to trade them.
On Friday, issuer Circle expressed his view as to why stablecoins should not be considered securities. “Payment stablecoins, on their own, do not have the essential features of an investment contract,” Circle’s statement reads.
According to commodities regulator Heath Tarbert, stablecoins holders do not expect a return on their assets, as they would with regular securities.
Binance and Coinbase are the world’s largest crypto exchanges, with the latter mostly operating in the United States. Following the disastrous collapse of FTX, the US government pushed for more regulation in the crypto world. And stablecoins might fall under the target as well.
