Stablecoins: Why This Hot Cryptocurrency Faces Challenges | WSJ

(gentle music) – [Narrator] Bitcoin has
become a popular mainstream investment, but it's also
known for its volatility. – You don't know if in a week's time the value will be 20%
lower, 10% lower, 10% higher – [Narrator] Its value fluctuates so much that few people would use
it to buy everyday goods, such as shampoo or a plane ticket. Some crypto entrepreneurs say there's one way to
change that, stablecoins. – Dia, this is a really interesting one. – USD Coin or USDC. – [Narrator] Stablecoins are different from other cryptocurrencies
in that they are pegged to assets like the US dollar or gold, which is meant to make them more stable. They've grown particularly
popular among traders online. In just a year as Bitcoin hit new records the market value of
stablecoins has grown tenfold.

Facebook has announced plans
to launch its own stablecoin and Visa said it would create
a stablecoin credit card. But a probe of one stablecoin exposed some potential risks with this system. – It's Tether.
(cash register bell rings) – [Narrator] The New York Attorney General had accused Tether, the
most popular stablecoin of lying about the cash reserves it uses to guarantee its dollar peg. Tether did not deny nor admit wrongdoing as part of the 2019 settlement, but agreed to release quarterly statements detailing its reserves. So can stablecoins accelerate the adoption of cryptocurrencies in our daily lives and will they change the
way we pay for goods? According to its creators, Bitcoin was meant to allow direct payments without ever going through banks. But so far it's been
accepted by few companies with very few high-profile
exceptions like Tesla. Market analysts found that Bitcoin's price has at times jumped or crashed
by as much as $6,000 in a day but that hasn't been the
case for stablecoins.

In the past year, the
value of top stablecoins has fluctuated by as much as
four cents to their $1 pegs. – You can have reasonable assurance that in three months
time or six months time or one week's time it'll still
be worth a hundred dollars. And that's what was missing in crypto before stablecoins came along. – [Narrator] Alex Kern is an analyst who researches stablecoins
and other cryptocurrencies. He says the first stablecoins were created as early as 2014. – The 24-hour trading volumes
is often over 90 billion. Bitcoin is a little over 50 billion. So it trades more often than Bitcoin. – [Narrator] Tether was
pegged to the US dollar and more than 200 other
stablecoins followed. Some pegged to the Euro
or to the Korean won others to commodities
like gold, silver, or oil or a combination of different assets. On top of stability
stablecoins like Tether have another key advantage, speed. Because this is digital money transactions go through
in a matter of seconds, faster than the three
days it usually takes to wire US dollars or euros
using traditional banks.

Stablecoins are also faster than Bitcoin because the payments are centralized and managed by the
company that created them. For example, Tether
transactions are managed by the Tether platform. While Bitcoin payments are processed by a vast decentralized
network of people called miners who are spread out all over the world. – It's instantaneous,
there's no settlement process that needs to occur. – [Narrator] Only a handful
of e-commerce websites accept stablecoins at the moment. But crypto traders have
quickly adopted stablecoins like Tether to buy and sell
cryptocurrencies online. That's because stablecoins don't run on normal banking hours. Compared to stocks that have
to be traded in locations like New York or Hong Kong
during specific hours, cryptocurrencies are
traded 24 hours a day, seven days a week, all across the globe. Plus academics who study
the role of cryptocurrencies say some banks have been wary to interact with crypto exchanges due
to the lack of oversight in the industry and concerns
that they could be exposed to illicit activities
like laundering, money or funding terrorism. Binance one of the largest
cryptocurrency exchanges in the world said it is committed to creating a compliance safe, and reliable trading environment.

And it asks users to follow all local laws on money laundering and
counter-terrorism financing. In 2019, the New York Attorney General accused the companies
managing the stablecoin Tether also called USDT of making
false statements to investors about the cash reserves of its currency, an essential component
of what makes it stable and secure for investors. The crypto community
online discussed the probe and Tethers dollar backing. – If you go to their
website right here it says, "Every Tether is always 100%
backed by our reserves." – Which sounds very much
as if one US dollar went in and a Tether was printed
in return, it's so simple.

– [Narrator] The investigation
found that in 2017 and 2018 Bitfinex a cryptocurrency
exchange that has common ownership with the company that controls Tether relied on the third party company named Crypto Capital
Corporation to handle deposits and withdrawals on
Bitfinex's trading platform. The New York Attorney General's office said that Crypto Capital
Corporation failed to process some of these orders and Bitfinex lost access to $850 million of its customers' money. Crypto Capital said it couldn't process Bitfinex transactions because
in 2018 it's bank accounts in the US, Poland, Portugal,
and the United Kingdom were frozen without justification. – Naturally this significantly
delayed fear withdrawals from Bitfinex for its users
which started to suspect something was up. – [Narrator] The New York
Attorney General's office said Bitfinex tapped into
Tethers dollar reserves to cover up the losses and afterwards lied to
its customers when it said its currency was fully backed
by US dollars at all times. During the course of the
New York Attorney General's investigation Tether said it held 74% of the necessary reserves, which some investors
considered to be enough to make the digital currency secure. – This is perfectly
common in modern banking in which only a fraction
of bank deposits are backed by actual cash on hand.

– [Narrator] As part of the settlement with the New York Attorney
General's office Bitfinex and Tether Limited paid
$18.5 million in penalties and stopped trading
activity with New Yorkers. – This is finally coming to an end. – [Narrator] Bitfinex and
Tether said the amount of money they agreed to pay should be viewed as a
measure of their desire to put the matter behind them. The firms did not admit
or deny any wrongdoing. Industry insider say this
investigation should be a warning to all companies that created stablecoins and to expect the stablecoin industry to be more tightly regulated
in the coming years. Some companies are already
looking towards a future of using reliable virtual
money as payments. Visa announced a stablecoin
based credit card and said that making its digital
currency strategy secure, private and trusted is a key priority. Facebook's new cryptocurrency project Diem aims to create stablecoins backed to different fee out currencies.

Diem says the system is being
built with security in mind. Some countries are also working
on what financial analysts call the next iteration of stablecoins, which will be a digital currency pegged to the national currency and
controlled by central banks. But before this type of digital money truly goes mainstream Kern says, "Its creators and issuers
are going to have to convince regulators and
users that their technology will keep their money safe." – It's going to be very
important for people to trust the entity that's
issuing the stablecoin. And the one that has
the most trusted people over a period of time will be the one that becomes
the most heavily used.

(gentle music).

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