Why there’s so much excitement around a crypto called stablecoin : NPR

If you haven’t heard of stablecoins yet — chances are you will soon.

There is perhaps no hotter segment in the cryptocurrency world at the moment than stablecoins. Companies like Amazon or Walmart are considering adopting them, while big banks such as JPMorgan Chase and Citigroup are exploring launching their own stablecoins, according to The Wall Street Journal.

What’s more, Congress is on the verge of adopting legislation this week that would provide a formal framework for the sector, effectively making stablecoins part of U.S. regulations.

There’s a reason behind the excitement. As a concept, stablecoins are pretty groundbreaking in the world of money.

A key vision behind stablecoins is that people and companies should be able to transfer money as digital currency anywhere in the world instantaneously, regardless of borders, without onerous banks or money transfer companies, that take time and charge fees, getting in the way.

But as detractors point out, there are real risks to stablecoins. Unlike the money we know, stablecoins are still new and regulations are still evolving. The relatively recent set of rules and its ease of use have also attracted shady actors like drug dealers and ransomware hackers.

So what are stablecoins? Here are three things to know.

The appeal: A safer cryptocurrency

Unlike other types of cryptocurrencies, stablecoins have a secret weapon that are meant to make them far safer.

That’s because as the name implies, each stablecoin is meant to be stable. This is how it works: If you buy a stablecoin that’s worth $1, the issuer that provided you with that stablecoin has to keep $1 in reserve, so that when you want to cash it you can get paid back promptly. (Dollars are primarily used to back stablecoins, but euros or some other asset of value like gold can also be used).

NPR’s Planet Money — and others — have perhaps the neatest analogy.

Stablecoins are like the chips you get in a casino. Say you pay the cashier $100 and you get $100 in chips to gamble. Once you are done, you return whatever chips you have gained — or have left — and get the corresponding amount from the casino.

The issuer should be able to pay you back, just like you trust the casino will have the money when you go to cash in your chips.

It’s probably the reason why stablecoins today are mainly used to buy and trade other cryptocurrencies such as bitcoin, because of the ease with which they can be converted to cash.