What is Stablecoin? A Simple Guide to Understanding How it Works 

Stablecoins have become increasingly popular. It’s the new hot topic, especially for cross-border transactions, as this technology it has been changing the way money moves. 

In this post, we’ll help you understand the basics about this type of cryptocurrency. We’ll also dive into the opportunities and challenges that it brings to the money transfer industry and its impact on people sending remittances back home. 

Key Takeaways

▪ Stablecoins are digital currencies designed to maintain a steady value by being pegged to assets or managed by algorithms. 

▪ There are four main types: fiat-backed, crypto-backed, commodity-backed, and algorithmic stablecoins. 

▪ They make cross-border payments and remittances faster, cheaper, and more secure by using blockchain technology. 

▪ Stablecoins enable quick payroll for global gig workers and protect savings in unstable economies. 

▪ Regulation is evolving; users should choose regulated providers for safer transactions. 

▪ As adoption and regulation grow, stablecoins are set to play a bigger role in global money transfers. 

What Are Stablecoins? Definition & Types

Traditional cryptocurrency, like bitcoin, is very volatile. Its value fluctuates easily because it does not rely on authorities like governments and banks to stabilize it. That’s why it’s traditionally used as investments and for speculation. 

However, stablecoin is a cryptocurrency that is tied to an asset in order to maintain a steady value. Unlike cryptocurrencies, its job is to be predictable. 

These are the four main types of stablecoins: 

▪ Fiat-backed stablecoins: The value of these stablecoins is pegged to a government-issued currency, which is also known as fiat money, like the euro or the pound sterling. For example, a stablecoin linked to the US dollar like the USDC will always have the same value, with 1 USDC being equal to $1 USD. 

▪ Crypto-backed stablecoins: Other cryptocurrencies act as backup for the stability of these stablecoins. Since this is riskier, they accumulate more cryptocurrency than they’re worth as a collateral to protect their value in case of big fluctuations. For instance, it might cost you $150 USD’s worth of a cryptocurrency to create $100 USD in crypto-backed stablecoin. This is mainly for people who do not want to depend on one institution to hold reserves and wish for more flexibility and freedom. 

▪ Commodity-backed stablecoins: These stablecoins are linked to assets like gold, silver, or oil. For example, PAXG is a stablecoin backed by gold, with each coin being equivalent to a certain amount of gold. Overall, they offer better protection against rising prices and give you a safety anchor based on real items. 

▪ Algorithmic stablecoins: The value of these stablecoins is kept steady by softwares and algorithms. The system automatically creates more coins when the price is too high and removes coins when the price is too low. Their big advantage is that they don’t rely on banks or stored assets, which makes them flexible and independent of traditional finance. However, this is also riskier. Indeed, their stability depends entirely on the algorithm working correctly and that’s not always the case. 

In short, stablecoins combine stability with the speed of cryptocurrency, eliminating the need for physical storage. So, now that we’ve established what they are and how they work, let’s dive into what their benefits are and when to use them. 

Stablecoins in the Money Transfer Industry

This cryptocurrency has practical applications that could impact the way you store and move money. Stablecoin benefits individuals, businesses, and entire economies. 

Fostering Financial Inclusion 

Stablecoins eliminate some of the traditional barriers to access financial services. Because they are stored in digital wallets, anyone with a mobile phone can hold them and conduct transactions without needing a traditional bank account. 

Cross-Border Payments and Remittances 

Thanks to stablecoins, sending money across borders is becoming faster and cheaper. That is because they move through blockchains, digital networks where transactions are recorded. Because no payment processor is needed to approve transfers, stablecoins can move directly from one wallet to another. It is easy and secure, as each wallet owner has a confidential key needed to authorize transactions. The transfers are therefore able to be settled quickly, safely, and at low cost. 

Payroll for Global Gig Workers

The global gig economy depends on fast and efficient payments around the world. Stablecoin payments allow workers to receive their salary easily, regardless of geographic location. They can also reduce currency conversion costs, eliminate delays from traditional banking, and provide workers with more predictable income. 

Savings in Volatile Economies

In countries suffering from high inflation or economic instability, stablecoins offer a way to store money without losing purchasing power. People can convert local currency into a stablecoin pegged to a stronger asset or foreign currency, helping them protect their savings and plan for the future. 

The Potential and Challenges on the Road Ahead

The rise of stablecoins opens doors for expanding financial access, lowering transaction costs, and enabling new business models. Because of this, companies and institutions are exploring their different possible applications in the financial industry. They are even slowly being integrated in traditional financial systems, expanding the use-cases for stablecoin. 

Governments are slowly starting to implement rules that help protect customers. Since this technology is relatively new, it is not as regulated and safe as money transfer operators.  

Recent legislation, such as the GENIUS Act in the United States, has established a framework for stablecoin regulation. Under the GENIUS Act, stablecoin issuers must be licensed and are required to maintain strict reserves with U.S. dollars or other approved assets, as well as undergo audits and comply with anti-money laundering (AML) and know-your-customer (KYC) protocols. 

If you plan on acquiring stablecoins, it is recommended that you make sure to go though a company that is properly regulated. 

The Future of Stablecoins in Money Transfers

Stablecoins are changing how money moves around the world. They make sending money faster, cheaper, and more inclusive. As more people and companies use stablecoins and rules become clearer, they are poised to become an even bigger part of global payments. 

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