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Written by Cyndie Martini
on October 26, 2021

Stablecoins are a type of cryptocurrency that pegs to fiat. In many cases, the peg is to the US dollar. This is supposed to keep the coin stable rather than fluctuate wildly like its peers, such as bitcoin. With this type of stability, a stablecoin can be used more reliably for transactions. It can also be used as a savings and loans mechanism, which is very popular with DeFi (decentralized finance) platforms.

Stablecoins are not offered by banks, credit unions, or the US FED central bank. They are cryptocurrencies and relegated to cryptocurrency platforms. That alone is a problem since cryptocurrency platforms are often hacked, have poor customer service, and are commonly involved in fraudulent schemes.

For those interested in the high rates paid out by stablecoins, DeFi platforms will often make them look like savings accounts. Anyone who works at a bank or credit union knows that deposit accounts are FDIC protected. That certainly isn't the case with stablecoins. 

In fact, once a customer deposits their fiat, which is then converted into a stablecoin, their funds are often used as the source of a loan.  People looking for low rate loans that don't require a credit check use DeFi platforms. These platforms make their "savings accounts" sound safe because they will say the loans are backed by collateral (i.e., the lender's cryptocurrency) and the firm is insured (i.e., non-government 3rd party) against fraud.

Even so, nothing says a stablecoin can't crash and wipe out depositors. Additionally, a lender's collateralized cryptocurrency can crash, wiping out the loan's collateral and savers along with it.

There have been some rumblings coming out of Washington around stablecoins. The FED recently said it has no intention to ban stablecoins. However, the entire space is unregulated, and customers have zero protection. While they may get a higher rate for depositing their funds with stablecoins, they are also taking high risks.

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