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Stablecoins Should Be Regulated for Better Security And Safety

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Joyashree Dey Follow

INDIA

Oct, 11 2022

Oct, 11 2022

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The non-regulatory agency of the United States Department of Commerce, the National Institute of Standards and Technology (NIST) released an initial public draft highlighting many security considerations in relation to the architecture and implementation of stablecoins. 


Based on the study of the top 20 stablecoins over the past year, NIST found that the top 5 coins that retained their peg represented 87% of the entire top 20 market capitalization. Out of the many, the top five stablecoins, Tether (USDT), USD Coin (USDC), Binance (BUSD), Dai (DAI), Frax (FRAX), which are based on market capitalization and managed to maintain their pegs.  


Coincidentally, all 5 tokens are pegged to the U.S. dollar and sported a mean minimum value of $.9934 (-0.66 %) and a maximum minimum value of $.9871 (-1.29 %) over the duration of the study. 


NIST likewise featured the demise winding of TerraUSD (UST), the third-biggest stablecoin by market capitalization at the time of the study, which lost its stake in May 2022. A part of the security concerns raised by the report incorporates smart contract vulnerabilities, unauthorized or arbitrary minting, collateral theft, data oracles, and taking advantage of the underlying blockchain. 


Taking into account the trust given to the stablecoin issuers, NIST thinks that creators, maintainers, and managers of stablecoin systems could utilize their privileged status to be malicious or deceptive toward holders and investors.  


While concluding the findings, NIST stated, “This security analysis found that two stablecoins that function almost identically in third-party markets and enable the buying and selling of goods with coins at a pegged price can have vastly different risk profiles.” 


As per NIST, centralized finance (CeFi) architectures are more vulnerable to trust issues due to a greater reliance on human trustworthiness, while decentralized finance (DeFi) is typically more powerless against security issues due to increasing smart contract code intricacy and critical functionality. 


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Joyashree Dey

CBW - External Analyst

INDIA

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