[citation needed] Stablecoins are typically non-interest bearing and therefore do not provide interest returns to the holder.
In many cases, these allow users to take out a loan against a smart contract via locking up collateral, making it more worthwhile to pay off their debt should the stablecoin ever decrease in value.
In addition, to prevent sudden crashes, a user who takes out a loan may be liquidated by the smart contract should their collateral decrease too close to the value of their withdrawal.
The potentially problematic aspect of this type of stablecoins is the change in the value of the collateral and the reliance on supplementary instruments.
The complexity and non-direct backing of the stablecoin may deter usage, as it may take time to comprehend how the price is ensured.
Due to the highly volatile and convergent cryptocurrency market, substantial collateral must also be maintained to ensure stability.
[13] In May 2022 UST broke its peg with its price plunging to 10 cents,[14] while LUNA fell to "virtually zero", down from an all-time high of $119.51.
[17] The Bank of International Settlements lists the possible merits of the subject as enhancement of anti-money laundering efforts, operational resilience, customer data protection, financial inclusion, tax compliance, and cybersecurity.
[18] Nellie Liang, Under Secretary of the Treasury for Domestic Finance reported to the Senate banking committee that the rapid growth of the stablecoin market capitalization and its potential for financial services innovation require urgent Congressional regulation.
[19] Although US legislation is progressing in May 2024 to provide increased regulatory clarity for many digital assets, the Financial Innovation and Technology for the 21st Century Act in its current form excludes certain stablecoins from regulation by the SEC, "except for fraud and certain activities by registered firms", and is specifically excluded from regulation by the CFTC.
It has been accused of failing to produce audits for reserves used to collateralize the quantity of minted USDT stablecoin.
[citation needed] Griffin and Shams' research attributed the creation of unbacked USDT to the rise in Bitcoin's price in 2017.