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Stablecoins: the driving force behind DeFi

Stablecoins form the backbone of crypto, especially in decentralised finance (DeFi), where their daily transacted value is frequently higher than Bitcoin. But what is a stablecoin? Are they decentralized? And what is its relationship with central bank digital currencies (CBDCs)?

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A stablecoin is a crypto designed to have a relatively stable price to the asset it is pegged to. Stablecoins are usually pegged to a commodity, currency, or crypto asset, or have their supply regulated by an algorithm. Our moderator and former BBC World News presenter, Nisha Pillai, talks to Kelly Chia, Deputy Head Research Asia at Julius Baer, and Esteban Polidura, Head of Advisory and Products for the Americas at Julius Baer, about the potential impacts of the stablecoins.

There are different types of stablecoins. Fiat-backed stablecoins currently dominate the market but algorithmic stablecoins are catching up strongly due to the appeal of their decentralised nature and higher yields. What are the different types of stablecoins? Which drivers will influence the market environment for stablecoins in the future? Our Think Tank Podcast explains.

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A new cycle of innovation is underway

High regulatory attention is paid to stablecoins as they challenge sovereign-issued money and the control that comes with it. Another risk for today’s leading stablecoins is that they are issued by private, centralised entities that can be subject to all the usual bad corporate behaviour like fraud. “Risks also are around the private companies issuing these tokens as they are fallible to the usual bad corporate behaviours of poor execution, bad strategy, and outright fraud”, says Kelly Chia, Deputy Head Research Asia at Julius Baer, during this conversation.

Shaping the future of finance

The different central banks and government agencies all around the world believe a wide-ranging regulation is necessary to protect consumers and investors, safeguard national security, provide financial stability, foster competitiveness, and combat the growing menace of cybercrime. “We expect regulators to create a more level playing field between the largely unregulated world of DeFi and the highly regulated one of traditional finance. Meeting these goals may accelerate the adoption of stablecoins and other cryptocurrencies in the financial system, in our view”, says Esteban Polidura, Julius Baer’s Head of Advisory & Products for the Americas.

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