What are the disadvantages of stablecoins? What risks are associated with them?

Kabir903

Stablecoins have inherent disadvantages and risks. When choosing stablecoins, it's important to consider potential risks.

Insufficient Collateral
Is there genuinely enough collateral as claimed by the stablecoin? This is a frequently raised question, especially regarding whether it truly maintains a 1:1 peg with the US dollar.

In reality, in the most severe circumstances, the reserve funds supporting fiat-backed stablecoins might not be sufficient to redeem every stablecoin when everyone rushes to redeem them simultaneously. This situation can lead to a run on the stablecoin, causing the collapse of its value against fiat currencies.

Intermediaries May Not Be Trustworthy
The nature of most collateral-backed stablecoins dictates that they are controlled by the issuing entity. Consequently, institutions can control the funds and influence when transactions occur.

For example, USDC has a backdoor that can be used to freeze payments. In 2020, Circle confirmed that it froze $100,000 worth of stablecoins in response to law enforcement requests.

What if such an operation happens without investors' knowledge? Funds could potentially be depleted without their awareness.

Systemic Risks
A report from the US Department of the Treasury regarding stablecoins suggests that widespread use of a single stablecoin could introduce systemic risks. This is because economic power would be concentrated in a single entity, namely the issuer.

Tether currently holds a market share exceeding 50%, making it particularly susceptible. If Tether's non-cash collateral value sharply declines during an economic overheating, triggering a run on the stablecoin, the impact could extend from the virtual world to the real world.

Moreover, stablecoins are widely used on payment platforms. If millions of users are unable to withdraw funds from cold wallets, and businesses cannot send or receive payments, economic activities would be adversely affected.

Potential Involvement in Illegal Activities
Stablecoins could be misused and violate laws related to Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT). They might also facilitate other illegal activities.

A report from Chain Analysis indicates that a significant portion of cryptocurrencies used in illegal activities flows to scams and darknet markets. Due to a lack of global standards and the existence of anonymity, stablecoins are widely employed in cross-border transactions, creating illicit risks.

Kahn332

Stablecoins generally have low risk.

Jafar224

There are definitely drawbacks, and of course, risks.

Isha000

Whether there are drawbacks or not doesn't prevent us from using them.

Ritu13

Exactly, how could there be no risk?