Stablecoins are at the heart of some of the biggest controversies in the crypto industry today—and yet more of them keep coming. On an almost weekly basis, companies and protocols keep announcing new stablecoin moves. So, what’s behind the boom?

A stablecoin is a type of cryptocurrency intended to have a stable (or relatively stable) price, typically pegged to the value of a government-issued currency like the U.S. dollar. The appeal is clear: enter the cryptocurrency market while avoiding the volatility of Bitcoin. Stablecoins are typically viewed as a bridge to trade into and out of other cryptocurrencies.

The best-known stablecoin is arguably Tether, which once claimed to be backed 100% by U.S. dollars, but now claims to be backed by commercial paper and other assets. But Tether is also one of the most controversial projects in all of crypto precisely because of lingering questions about how Tethers are backed and allegations about how they’re used to prop up the price of Bitcoin. Other well known stablecoins include Circle’s USDC, and the decentralized DAI stablecoin. 

Today, the stablecoin war is largely being fought between two competitors—Tether and Circle. But other key players are also crowding in. 

Tether: the disputed stablecoin king?

Tether is by far the most frequently traded asset in the entire crypto industry—even more than Bitcoin.

Per CoinGecko, Tether’s 24-hour trading volume is $74 billion at the time of writing, over double Bitcoin’s, which comes in second with $34 billion.

Tether (the company) has long claimed that Tethers (the stablecoin) can be redeemed for US dollars. As a result, Tether can be used to purchase other, more volatile cryptocurrencies, and serves as a stable store of value for investors. 

“There is no stablecoin that comes close to Tether’s 24-hour trading volume, which attests to the trust Tether traders have instilled in it,” a Tether spokesperson tells Decrypt. 

But that claim of “trust” lies at the heart of the controversy around Tether. 

Tether Reveals Reserves Breakdown For The First Time Since 2014

In May of this year, Tether released a breakdown of its reserves, which revealed that less than 3% of Tethers are backed by cash, at last crystalizing the fact that Tether holds very little actual dollars on reserve.

Tether’s general counsel Stuart Hoegner said at the time that it is “misleading to focus only on cash.” 

Despite Hoegner’s defense, Tether’s critics say that Tether artificially props up the price of Bitcoin, and that if Tether investors tried to sell all their Tethers, there’d be no money left in the pot for them to do so. 

Tether’s optics issues have opened the door for Circle, the company behind stablecoin USDC, to challenge the stablecoin status quo. Tether, at least publicly, says it welcomes the competition. 

“Tether welcomes competition as a larger representation of stablecoins will result in much fairer regulations in the space,” the spokesperson added in conversation with Decrypt. 

Can Circle Win the Stablecoin Wars? Circle: the stablecoin reserve bank?

Boston-based Circle, one of the earliest companies in the crypto industry, co-created USD Coin (USDC) along with Coinbase, the largest U.S.-based cryptocurrency exchange. 

Circle has made a slew of moves this year. In May, the company partnered with FTX to bolster support for USDC. Two months later, Circle announced it will go public via a SPAC deal, where an already-public “blank check” fund merges with a private startup to take it public. 

This month, Circle CEO Jeremy Allaire announced that Circle aims to become a fully fledged reserve bank. This means that the company would have to comply with a growing list of regulations, but if Circle pulls off the shift, it would be the biggest step yet in its effort to overcome Tether as the primary stablecoin provider in the crypto industry. 

Circle to Become Full-Reserve Bank Amid Stablecoin Scrutiny

And yet, like Tether, Circle is not without its controversies. 

Allaire’s announcement followed a report that revealed USDC—similar to Tether—is not fully backed by cash, but by corporate bonds and commercial paper. This inevitably led to criticisms that USDC was not a legitimate stablecoin. 

So if Tether and Circle—the two companies behind the two largest centralized stablecoins in the industry today—are embroiled in accounting and regulatory controversies, where does the stablecoin industry go from here? 

Paxos: The company behind the scenes at PayPal

Paxos’s stablecoin (PAX), the “Pax Dollar” (formerly known as the “Paxos Standard” coin) is an ERC20 token that Paxos claims is fully backed by U.S. dollars. 

Paxos is also the company that provides the infrastructure for PayPal’s crypto venture.  

When PayPal announced account holders in the U.S. would be able to buy and sell cryptocurrencies through its platform, the payments giant became one of Paxos’s hottest clients. Instead of having to build its own infrastructure to facilitate crypto transactions, PayPal turned to Paxos to handle operations. 

Since then, Paxos has seemingly grown from strength to strength. In April of this year, the company made headlines when it raised $300 million via a Series D funding round—fundraising over $500 million in total and reaching a $2.4 billion valuation in the process.

PayPal's Crypto Firm Paxos Raises $300M at $2.4B Valuation

In the same month, Paxos also gained a federal banking charter from the Office of the Comptroller of the Currency (OCC), which oversees the United States’ banking industry. 

Albeit not the first crypto firm to be granted the charter, this helped grant the company (and the stablecoin) a level of legitimacy that it tries to use as a way of setting itself apart from competitors.

However, it’s not all been plain sailing for the PAX stablecoin. Last year, crypto analytics firm Coin Metrics published a report on stablecoins and their links to illicit activity. 

The report found that approximately 40% of all PAX volume, at the time, was tied to alleged ponzi schemes.

Binance partners with Paxos to launch BUSD

Paxos’s stablecoin exposure does not stop at PAX. The firm also partnered with Binance to help launch the exchange’s BUSD stablecoin. 

BUSD is supposed to be pegged to the US dollar, but it doesn’t always live up to that promise, having increased to as high as $1.15 and as low as $0.90 during its lifespan. 

The stablecoin can be traded for some of the world’s biggest cryptocurrencies by marketcap—including Bitcoin and Ethereum—and earlier this year, Binance listed the Coinbase Stock Token (COIN) to trade against BUSD. In recent months, BUSD has also made waves in some of the crypto industry’s most vibrant subcultures. 

Together with the State Hermitage Museum in Russia, Binance launched an NFT auction that featured the works of some of the world’s most renowned artists. The Binance NFT Marketplace platform auctioned off digitized collections of masterpieces that included “The Madonna and Child” by Leonardo da Vinci. 

Each NFT in the auction came with a starting bid of 10,000 BUSD—approximately $10,000—indicating that stablecoins can and have been used for specific marketplaces, as well as a means for mainstreaming the crypto industry as a whole. 

Filecoin and stablecoin incentives

Indeed, bespoke stablecoins are becoming a trend.

Filecoin’s recently launched stablecoin—oneFIL—is an illustrative example of why so many crypto projects feel the need to develop their own stablecoin.

With oneFIL, Filecoin storage buyers and providers are given access to discounts and incentives within the Filecoin ecosystem, providing a bespoke stablecoin option for its users. 

Filecoin Now Has Its Own Stablecoin. But Why?

The rather ambitious aim of ICHI—the protocol behind the oneFIL stablecoin—is to see Filecoin’s stablecoin achieve Satoshi Nakamoto’s original mission for Bitcoin, namely, becoming a “peer to peer electronic cash system.” 

OneFIL has also taken aim at DeFi, with the ICHI team claiming that the stablecoin can also be used to “earn yield in DeFi.” 

In short, oneFIL is designed to be a medium of exchange like any other stablecoin, but it is also a tailor-made medium of exchange for the Filecoin community itself. It’s meant to be a tool for everything from DeFi transactions to paying for hardware and storage space, and if it succeeds, it could be a sign of where stablecoins are headed next.

Facebook’s Libra Diem

Many onlookers who’ve seen the headlines for two years about Facebook’s crypto project may not realize that the final product will be a stablecoin—or so Facebook says; the road to launch has been paved with obstacles. 

In October 2019, eBay, Mastercard, Stripe and Visa withdrew from Facebook’s Libra Association (as the project was originally called) on the same day after regulators drilled Facebook over its plans. 

In December 2020, the Libra Association announced its cryptocurrency (not yet a stablecoin by design) was rebranding to Diem. The rebrand was announced amid the recruitment of several experts “as it progresses toward regulatory approval for launch,” the company said at the time. 

Facebook's Diem Testnet Hits 50 Million Transactions

One month later, the Diem testnet (a trial network that isn’t yet public) hit 50 million transactions. That might sound impressive, but at approximately 3 transactions per second, the speed of transactions lagged well behind much faster transaction speeds at rivaling cryptocurrencies like Bitcoin and Ethereum. 

In March, Kevin Weil, a Facebook executive and leader of Diem left the company. Two months later, Facebook announced it would launch a U.S. stablecoin instead of a global cryptocurrency—as it first promised back in the summer of 2019. The announcement also led to the Diem Association shifting its base of operations from Switzerland to the U.S. 

Despite a bumpy road, Facebook appears to be getting closer to finally launching its stablecoin. This month, Facebook Diem’s co-creator David Marcus said that Novi—the stablecoin’s wallet—”is ready to come to market.” 

“We’re a challenger in the payments industry, and we will offer free person-to-person payments domestically and internationally for people using the Novi wallet,” Marcus said at the time. 

What’s next for stablecoins? 

Tether and Circle still dominate the stablecoin chatter in crypto—for now—but as other projects have demonstrated, stablecoins pop up wherever there is demand. 

Enter El Salvador, the first country to recognize any cryptocurrency—in this case, Bitcoin—as legal tender. In July of this year, Salvadoran news outlet El Faro reported that President Nayib Bukele’s government plans to incorporate a stablecoin to facilitate the world’s first attempt at recognizing Bitcoin as legal tender. 

El Salvador President Submits Bill to Recognize Bitcoin as Legal Tender

“The Naybid Bukele government plans to introduce a new national currency, a digital version of the Salvadoran colones,” the outlet tweeted at the time. 

El Faro said it obtained footage of private meetings between President Bukele’s brothers—who advise the president frequently—where the proposed stablecoin was discussed. 

If El Faro’s footage is to be believed, it means yet another stablecoin launch—one that will set its sights on an entire nation’s financial infrastructure—is on the horizon.