What are stablecoins?

A stablecoin holding entails a claim on the actor that has issued them (the issuer), in the same way that bank deposits represent a claim on a bank. For this to work as intended, the issuer needs to have sufficient liquid assets to reimburse the holder when it wants to redeem its claim. The fact that banks are subject to supervision and regulation, with explicit requirements to hold sufficient capital and liquidity, helps to ensure that bank deposits entail a credible claim. The credibility of bank deposits is further strengthened by the existence of a government deposit insurance scheme, should the banks fail. Actors in the stablecoin system are also subject to supervision, although this is less extensive than for banks. The issuer is also required to have a reserve of assets at least equal to the value of the stablecoins it has issued, so that they can always be redeemed.

The assets that make up the reserve differ between stablecoins. Most often, they are bank deposits or assets that can be quickly converted into traditional money, such as short-term government bonds. In the EU, such stablecoins are called e-money tokens (EMTs). But reserves can also consist of gold or other crypto assets. Such stablecoins are called asset referenced tokens (ARTs). In addition, there are stablecoins that have no reserve assets, or reserve assets that do not correspond to the value of the stablecoins issued. Instead, the supply is automatically adjusted to try to maintain a stable value. However, these so-called algorithmic stablecoins are not explicitly covered by the EU regulatory framework, which means that the legal situation regarding them is unclear in the EU.

An important difference between stablecoins and traditional money is the degree of centralisation. When a party wants access to stablecoins, it pays the issuer, or a seller of stablecoins on a trading platform, in traditional money and receives stablecoins in exchange. Holdings are stored in a digital wallet and transactions are recorded on a blockchain. Thus, a stablecoin system consists of issuers, trading platforms, wallets and one or more blockchains. Unlike traditional money transactions, there is no central actor involved, such as a central bank or clearing house (an intermediary for payments). Instead, information about the holder and its transactions is spread out. This is particularly true in cases where self-hosting wallets are used.