Cryptocurrency is a confusing business with a language all its own, in part because it is a genuinely new way of doing business and in part because it was created in large part by programmers and cryptographers, who should never be allowed to name anything regular people will use.
Cryptocurrencies have a lot of uses as an investment, as a currency for payments, as a store of value, as well as others. Like any investment, its vital to know what you’re talking about, and more importantly what the person trying to sell you something is really saying. And like any other field of finance, industry, art or basically every human endeavor, it has its own lingo, acronyms and definitions.
In this series of articles, we’re creating a number of glossaries for various parts of the crypto industry, which we’ll combine into a larger reference tool. Today, we’re talking about one of the most important and controversial parts of the cryptocurrency industry: Stablecoins, the privately issued currencies that could change the way people pay for goods and services in ways that have central bankers and regulators afraid that they’ll lose control of their economies.
Read more: PYMNTS Cryptocurrency Glossary: The Basics
Algorithmic stablecoin: Also called noncollateralized stablecoins, these tokens maintain their dollar peg by means other than a one-to-one backing reserve of fiat currency or Treasuries. These include smart-contract-controlled arbitrage incentives with a partner coin and overcollateralized reserves of other digital assets (i.e. bitcoin). This backing is far less secure than a fiat reserve — and more susceptible to runs, as the weeklong, $48 billion collapse of the TerraUSD stablecoin in May 2022 demonstrated.
Breaking the buck: When a loss of confidence causes the value of a dollar-pegged stablecoin to drop below one dollar. This will frequently lead to a panic and run.
Collateralized (or reserve-backed) stablecoin: A collateralized stablecoin is backed one-to-one by a reserve of fiat currency and other highly liquid investments. While there was not a lot of clarity about the latter, in the U.S. it’s being defined as short-term Treasuries and will likely be codified that way by 2023. A previously popular backing investment, short-term corporate paper is being phased out as not liquid or secure enough
Commercial paper: Short-term corporate debt that was used by a number of top stablecoins — until they revealed the make-up of their reserves. Commercial paper is on the way out.
Digital asset: A digital asset in crypto is any cryptocurrency, token, stablecoins or even NFTs. More broadly, it’s anything of digital that has value and established ownership
FDIC: The Federal Deposit Insurance Corp. may play a big role in collateralized stablecoins, as the Biden administration is pushing to require that all stablecoin issuers be federally insured banks backed by the FDIC.
Fiat currency: Government-issued currency backed by the issuing government’s physical assets but by that government. The dollar’s backing is the “full faith and credit” of the United States.
Free Banking: Generally, an arrangement in which banks can issue their own currency. In the U.S., the Free Banking Era refers to the time from 1837 to 1863 in which there was no national central bank and weren’t any federally chartered banks. State-chartered banks issued banknotes against silver and gold, but their value varied widely from their face value depending on the reputation of the issuing bank — which failed with alarming regularity. It is widely referred to by stablecoin opponents.
Legal tender: Anything that by law can be used to settle a public or private debt. Generally the national currency, but El Salvador, for example, recognizes the U.S. dollar and bitcoin as legal tender that merchants and other organizations are required to accept.
Libra/Diem: Libra was a global stablecoin project launched by Meta (then Facebook) in 2019. It was to be backed by a basket of fiat currencies and would be usable by anyone, but most notably by Facebook’s 2.3 billion customers around the world. That terrified and enraged central bankers, government regulators and elected officials, who feared it would allow people to bypass national currencies and weaken their ability to control economies during financial crises. It and the other companies that supported it came under immediate attack and many were scared off.
Eventually, the project was scaled back and rebranded Diem. These would be a series of stablecoins backed by and pegged to individual national currencies. That failed as well and the project was abandoned altogether in January 2022.
But it brought stablecoins — and to an extent cryptocurrencies in general — which had until then been mostly a crypto-industry phenomenon, a much higher public profile, with presidents and prime ministers chiming in. It also led to the movement to create central bank digital currencies as a way to fight off stablecoin’s influence.
Minted: When you give a stablecoin issuer a fiat dollar (or other currency) a new stablecoin is minted — created — and can be used like any other. When redeemed for fiat, a coin is burned — destroyed.
Payments stablecoin: The nomenclature for a reserve-backed stablecoin making into several pieces of proposed legislation to regulate stablecoins.
Peg: A peg is a fixed exchange rate between two currencies. So one stablecoin should always equal one dollar exactly.
Redemption rights: Stablecoin owners are — or at least should be — able to redeem one token for one unit of the fiat backing it from the issuer. This will likely be codified into law that requires issuers to do so. Users’ confidence in their ability to redeem on demand is what ensures stablecoins maintain their peg (see above).
Reserve: The account or accounts holding the assets backing a collateralized stablecoin.
Reserve assets: The dollars, treasuries, and anything else backing the peg of a collateralized stablecoin.
Run: When stablecoin owners lose confidence that they will be able to redeem fiat from the issuer on demand, a panic can ensue that works much like a bank run, except that the digital nature of stablecoins means it can happen faster and is harder to control.
Real-time payments: Instantly settled payments. Stablecoins have been presented as a way of providing real-time payments.
Systemic risk: The possibility that the failure of a stablecoin (or other cryptocurrency) could have effects that would cause a contagion crossing over into the traditional economy.
TerraUSD: An algorithmic stablecoin that failed following a weeklong run in May 2022. About $48 billion was lost by investors, igniting a sense of urgency to the push to regulate stablecoins even before other cryptocurrencies.
Tether: The issuer of the largest and oldest stablecoin, USDT. The company’s opacity regarding its backing reserves has led to several large settlements with regulators, as well as speculation about the size and existence of its reserves.
Wallet: A digital wallet is a software app capable of storing, sending and receiving digital assets, including cryptocurrencies and stablecoins. They come in two varieties: continuously online hot wallets that are more convenient but less secure, and offline cold wallets, which must be collected the internet to be used but are otherwise inaccessible by hackers.
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