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