Would it make sense to buy a $5 cup of coffee with ethereum? Consider this: $5 worth of ethereum may be worth $5 at the time of the transaction, but by the time you’ve received your coffee, that $5 could be worth $3, $6, or another value significantly further away from $5.
To address this issue, the crypto industry created a unique type of cryptocurrency called stablecoins. FIDD (short for Fidelity Digital Dollar) is one of the newer stablecoins on the market. Let’s explore how it works and examine the potential advantages and disadvantages of using it.
What is FIDD and how does it work?
FIDD is a cryptocurrency that’s issued and backed by Fidelity Digital Assets, NA (a subsidiary of Fidelity Investments®, which has been an active participant in the crypto space since 2014, and currently supports the Fidelity Crypto® platform).
Like other stablecoins, FIDD’s value is “pegged” (meaning “tied”) to another asset—in this case, the US dollar. It’s a 1:1 peg with the US dollar, which means it aims to always have 1 FIDD equal $1. This allows it to be used for transactions without the worry that its value will fluctuate after the transaction is completed.
FIDD is fully collateralized, which means for every unit of FIDD in circulation, Fidelity Digital Assets, NA also holds at least $1 in its reserves (which can be held in the form of cash, US Treasurys, or other liquid assets). Stablecoins that are fully or overcollateralized (meaning they hold more than $1 for every unit of stablecoin in circulation) may be more likely to maintain their peg, which is important, as losing a peg could result in a stablecoin’s collapse.
FIDD’s collateralization mix makes it a mostly fiat-backed stablecoin. This contrasts with other stablecoins, which may hold their reserves in assets like gold (commodity-backed) and other cryptocurrencies (crypto-backed). Some stablecoins are algorithmic, meaning their supply and demand characteristics are determined by a computer algorithm. FIDD does not fall under this category.
Potential advantages of using the FIDD stablecoin
So why not just use US dollars instead of FIDD stablecoins?
- Runs on the Ethereum blockchain. Stablecoins run on blockchains, which crypto supporters believe provide greater security, accessibility, cost efficiency, and speed compared to some traditional transactional routes like bank transfers. FIDD runs on the Ethereum network’s blockchain, which is currently the largest cryptocurrency blockchain based on TVL (total value locked). A higher TVL can signify better liquidity and improve the trust users have in its reliability.
- May make it more convenient to trade and transact in crypto ecosystems. Those who want to use DeFi platforms may find it slow, expensive, and inconvenient to convert dollars into crypto, and vice versa. FIDD attempts to bridge this gap by making it seamless to transfer dollars to stablecoins to crypto (and vice versa) through near-instant transactions.
- FIDD operates under a full-service model, unlike other stablecoins. FIDD’s purchases, redemptions, reserve asset management, coin issuance, and other functions are supported by Fidelity businesses. FIDD's reserve reports are prepared by Fidelity Digital Assets, NA on a monthly basis in accordance with American Institute of Certified Public Accountants (AICPA) standards. FIDD also aims to provide full transparency by self-disclosing its circulating supply and reserve net asset value at the close of every business day.
Potential disadvantages of using the FIDD stablecoin
- Comes with certain risks. As with any stablecoin, users should consider the possibility that it can lose its peg, as mentioned earlier. In the event this does occur, the consequences are uncertain and could result in users losing their assets. While proper collateralization and auditing may make this scenario unlikely, it’s prudent to be aware of the possibility.
- Operated by a centralized organization. If the Fidelity businesses that support FIDD experience volatility with their finances or operations, or fail to properly maintain its reserves, the stablecoin may be negatively impacted.
- Could experience network congestion. FIDD runs on the Ethereum blockchain, which, as mentioned earlier, is currently the largest crypto blockchain by TVL. While this may help make Ethereum reliable to its proponents, it can also be prone to network congestion (i.e., when too many users try to use the blockchain at once). This can result in slow transaction times and high network fees, which may in turn impact how easy it is to use FIDD.
What to consider when buying FIDD
FIDD allows users to hold value and transact with a stablecoin supported by Fidelity businesses. However, keep in mind that some of the same risks that apply to other stablecoins may also apply to FIDD.
As with any digital asset, note that crypto and crypto-related assets may be more susceptible to market manipulation than securities, and crypto holders don't benefit from the same regulatory protections applicable to registered securities.
The future regulatory environment for crypto is currently uncertain, and crypto is not insured by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC), or any other government agency, and is not an obligation of any bank.
In light of these factors, consider limiting any stablecoin holdings to an amount you can afford to lose.