(gentle music)
- [Narrator] Bitcoin has become a popular mainstream
investment, but it's also known for its volatility.
- You don't know if in a week's time
the value will be 20% lower, 10% lower, 10% higher
- [Narrator] Its value fluctuates so much
that few people would use it to buy everyday goods,
such as shampoo or a plane ticket.
Some crypto entrepreneurs say
there's one way to change that, stablecoins.
- Dia, this is a really interesting one.
- USD Coin or USDC.
- [Narrator] Stablecoins are different
from other cryptocurrencies in that they are pegged
to assets like the US dollar or gold,
which is meant to make them more stable.
They've grown particularly popular among traders online.
In just a year as Bitcoin hit new records
the market value of stablecoins has grown tenfold.
Facebook has announced plans to launch its own stablecoin
and Visa said it would create a stablecoin credit card.
But a probe of one stablecoin exposed
some potential risks with this system.
- It's Tether. (cash register bell rings)
- [Narrator] The New York Attorney General
had accused Tether, the most popular stablecoin
of lying about the cash reserves it uses
to guarantee its dollar peg.
Tether did not deny nor admit wrongdoing
as part of the 2019 settlement,
but agreed to release quarterly statements
detailing its reserves.
So can stablecoins accelerate the adoption
of cryptocurrencies in our daily lives
and will they change the way we pay for goods?
According to its creators,
Bitcoin was meant to allow direct payments
without ever going through banks.
But so far it's been accepted by few companies
with very few high-profile exceptions like Tesla.
Market analysts found that Bitcoin's price
has at times jumped or crashed by as much as $6,000 in a day
but that hasn't been the case for stablecoins.
In the past year, the value of top stablecoins
has fluctuated by as much as four cents to their $1 pegs.
- You can have reasonable assurance
that in three months time or six months time
or one week's time it'll still be worth a hundred dollars.
And that's what was missing in crypto
before stablecoins came along.
- [Narrator] Alex Kern is an analyst
who researches stablecoins and other cryptocurrencies.
He says the first stablecoins
were created as early as 2014.
- The 24-hour trading volumes is often over 90 billion.
Bitcoin is a little over 50 billion.
So it trades more often than Bitcoin.
- [Narrator] Tether was pegged to the US dollar
and more than 200 other stablecoins followed.
Some pegged to the Euro or to the Korean won
others to commodities like gold, silver, or oil
or a combination of different assets.
On top of stability stablecoins like Tether
have another key advantage, speed.
Because this is digital money
transactions go through in a matter of seconds,
faster than the three days it usually takes
to wire US dollars or euros using traditional banks.
Stablecoins are also faster than Bitcoin
because the payments are centralized
and managed by the company that created them.
For example, Tether transactions are managed
by the Tether platform.
While Bitcoin payments are processed
by a vast decentralized network of people called miners
who are spread out all over the world.
- It's instantaneous, there's no settlement process
that needs to occur.
- [Narrator] Only a handful of e-commerce websites
accept stablecoins at the moment.
But crypto traders have quickly adopted stablecoins
like Tether to buy and sell cryptocurrencies online.
That's because stablecoins
don't run on normal banking hours.
Compared to stocks that have to be traded in locations
like New York or Hong Kong during specific hours,
cryptocurrencies are traded 24 hours a day,
seven days a week, all across the globe.
Plus academics who study the role of cryptocurrencies
say some banks have been wary to interact
with crypto exchanges due to the lack of oversight
in the industry and concerns that they could be exposed
to illicit activities like laundering, money
or funding terrorism.
Binance one of the largest cryptocurrency exchanges
in the world said it is committed
to creating a compliance safe,
and reliable trading environment.
And it asks users to follow all local laws
on money laundering and counter-terrorism financing.
In 2019, the New York Attorney General
accused the companies managing the stablecoin Tether
also called USDT of making false statements to investors
about the cash reserves of its currency,
an essential component of what makes it stable
and secure for investors.
The crypto community online discussed the probe
and Tethers dollar backing.
- If you go to their website right here it says,
"Every Tether is always 100% backed by our reserves."
- Which sounds very much as if one US dollar went in
and a Tether was printed in return, it's so simple.
- [Narrator] The investigation found that in 2017 and 2018
Bitfinex a cryptocurrency exchange that has common ownership
with the company that controls Tether
relied on the third party company
named Crypto Capital Corporation to handle deposits
and withdrawals on Bitfinex's trading platform.
The New York Attorney General's office
said that Crypto Capital Corporation failed to process some
of these orders and Bitfinex lost access
to $850 million of its customers' money.
Crypto Capital said it couldn't process
Bitfinex transactions because in 2018 it's bank accounts
in the US, Poland, Portugal, and the United Kingdom
were frozen without justification.
- Naturally this significantly delayed fear withdrawals
from Bitfinex for its users which started to suspect
something was up.
- [Narrator] The New York Attorney General's office
said Bitfinex tapped into Tethers dollar reserves
to cover up the losses
and afterwards lied to its customers when it said
its currency was fully backed by US dollars at all times.
During the course of the New York Attorney General's
investigation Tether said it held 74%
of the necessary reserves,
which some investors considered to be enough
to make the digital currency secure.
- This is perfectly common in modern banking
in which only a fraction of bank deposits are backed
by actual cash on hand.
- [Narrator] As part of the settlement
with the New York Attorney General's office Bitfinex
and Tether Limited paid $18.5 million in penalties
and stopped trading activity with New Yorkers.
- This is finally coming to an end.
- [Narrator] Bitfinex and Tether said the amount
of money they agreed to pay
should be viewed as a measure of their desire
to put the matter behind them.
The firms did not admit or deny any wrongdoing.
Industry insider say this investigation should be a warning
to all companies that created stablecoins
and to expect the stablecoin industry
to be more tightly regulated in the coming years.
Some companies are already looking towards a future
of using reliable virtual money as payments.
Visa announced a stablecoin based credit card
and said that making its digital currency strategy secure,
private and trusted is a key priority.
Facebook's new cryptocurrency project Diem
aims to create stablecoins
backed to different fee out currencies.
Diem says the system is being built with security in mind.
Some countries are also working on what financial analysts
call the next iteration of stablecoins,
which will be a digital currency pegged
to the national currency and controlled by central banks.
But before this type of digital money
truly goes mainstream Kern says,
"Its creators and issuers are going to have to
convince regulators and users that their technology
will keep their money safe."
- It's going to be very important for people
to trust the entity that's issuing the stablecoin.
And the one that has the most trusted people
over a period of time
will be the one that becomes the most heavily used.
(gentle music)