Explainer: ‘Stablecoins’ in the spotlight as Facebook unveils Libra cryptocurrency

LONDON (Reuters) – Is bitcoin’s crown slipping?

FILE PHOTO: A bitcoin logo is seen at a facility of the Youth and Sports Ministry in Caracas, Venezuela February 23, 2018. REUTERS/Marco Bello/File Photo

The original cryptocurrency accounts for over half of the $285 billion global coin trading market. But that dominance is under threat, with a host of alternative digital coins emerging as developers race to build cryptocurrencies able to enter mainstream commerce and finance.

As these “altcoins” gain prominence, Reuters is publishing a series of stories that looks at the major alternatives to bitcoin as they muscle their way onto the radar of developers, investors and regulators.

Facebook Inc revealed plans on Tuesday to launch a cryptocurrency called Libra, the latest development in its effort to expand beyond social networking and move into e-commerce and global payments.

Like a variety of altcoins known as “stablecoins,” Libra will be backed by a reserve of real-world assets, including bank deposits and short-term government securities. This should make it more stable than other cryptocurrencies.

Here are three key questions about stablecoins.

WHAT’S THE BIG IDEA?

Stablecoins are designed to overcome the wild price swings that have rendered bitcoin and other cryptocurrencies impractical both for commerce and payments and as a store of value.

In theory, stablecoins should then be more useful for paying for goods and services or transferring money across borders. Most are backed on a one-to-one basis by mainstream assets like the U.S. dollar, while others are collateralized by baskets of cryptocurrencies. Some use algorithms to maintain stable values.

Proponents say stablecoins could help cryptocurrencies gain mainstream appeal.

By overcoming bitcoin’s perennial headache of high volatility, the argument goes, stablecoins could pave the way for the adoption of a wider suite of blockchain- and cryptocurrency-based financial products that aren’t…

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