What are Stablecoins & Counter-Party Risk?


So-called “Stablecoins” have emerged in the Cryptocurrency space; while mass adoption has been a dream of HODLers and Traders alike, the volatility of Cryptocurrency has always been a barrier to that adoption. Stablecoins are intended to deal with that volatility by having the Cryptocurrency backed by a fiat currency, in the case of USDT and TUSD, that currency being the United States Dollar (USD).

The Wikipedia entry for Stablecoin defines this type of Cryptocurrency as Any cryptocurrency pegged to a stable asset, such as gold or fiat currencies.

Why would an investor want to invest in a Stablecoin? Currently, Crypto is in a bear market and with prices down, the promise of a currency that will not the see fluctuations that currencies like Bitcoin, Ethereum, Litecoin experience are an enticing prospect.

I recently received an invite to have a look at hbus.com an exchange that includes traditional Cryptocurrency pairs (BTC, ETH) and Stablecoin pairs (USDT, TUSD). Seems like a legitimate platform, but I wanted to see if any wallets outside of the exchange supported TUSD. I checked Exodus.io’s wallet Exodus Eden and found a listing for TUSD. What drew my attention was there was a note under the listing about Counterparty Risk.

So what is Counterparty Risk and how does it relate to Stablecoins?

According to Investopedia.com, Counter Party Risk is defined:

Counterparty risk is the risk to each party of a contract that the counterparty will not live up to its contractual obligations. Counterparty risk is a risk to both parties and should be considered when evaluating a contract.

Read more: Counterparty Risk

Other Stablecoins that could be said to have this Counterparty risk is the Petro of Venezuela which is pegged to the New Bolivar and the country’s supply of oil.

The Exodus support page notes: Digital assets that are tied to real-world commodities or Government-issued fiat currencies are good examples of assets that carry counterparty risk. These assets are dependent upon a company holding enough of a given currency or commodity to “back” the digital currency in circulation. The risk inherent to such a model is that the company issuing the digital asset may not actually own or control the real-world asset to back the digital counterpart.

So the question that investors will need to ask themselves is are Stablecoins any better than a credit card? Is the reward of a moon shot worth the risk of having currency tied so close to the fiat world. Considering the whole point of Cryptocurrency is not to be involved with fiat, does it make sense for investors to bother with Stablecoins but we may have to deal at some point with Stablecoins if mass adoptions is ever likely to happen. Stay Tuned.

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