Stablecoins: Are they really more stable than other cryptocurrencies?

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  Quantumrun Foresight
• January 7, 2022

Insight summary

Stablecoins, a type of cryptocurrency, provide a reliable and accessible medium of exchange that empowers individuals and companies to participate in the global economy without traditional banking limitations. Governments can leverage stablecoins to trade state currency independently, bridging the gap between fiat currencies and cryptocurrencies. Implications of stablecoin growth include advancements in blockchain technology, financial inclusion, faster cross-border payments, and potential shifts in power dynamics between governments and financial institutions. 

Stablecoins context

Since cryptocurrencies, in general, are digital transactions that are not backed up by fiat (real-world money or currency), their prices have the potential to fluctuate wildly. In 2014, the first stablecoin, Tether, was created, claiming that each token is “tethered” to one dollar reserve managed by a centralized third party. Thus, investors are assured that their tokens are not spun out of thin air and are worth actual dollars. Some stablecoins are even backed by non-monetary assets such as CACHE Gold and Petro (oil).

However, stablecoins also have some criticism. Tether, the largest stablecoin, claims that their tokens are 100 percent dollar-backed, but when they released their asset breakdown in May 2021, less than 3 percent of Tethers were actually backed by cash. This led to distrust among investors and particularly regulators, who have not been very welcoming of the rising popularity of stablecoins, mostly because they are not covered by the same level of regulations as central banks are. 

Jerome Powell, the chair of the US Federal Reserve, said in 2021 that stablecoins or digital coins are basically out there running amok, without any standardized framework to monitor or regulate them. Regulators think that if stablecoins are to become a major player in global payments, then they have to fall under legislation to provide safety and assurance to users. 

Disruptive impact

Stablecoins offer a reliable and accessible medium of exchange that go beyond traditional banking limitations. With the ability to conduct transactions 24/7 from anywhere in the world, stablecoins provide a level of convenience and financial freedom that was previously inaccessible. This feature empowers individuals to participate in the global economy on their own terms, without relying on banking institutions or geographical constraints.

In addition, by utilizing stablecoins, companies can bypass the inefficiencies and delays often associated with traditional banking systems. This feature can streamline international trade and facilitate faster, more secure cross-border payments. Additionally, stablecoins offer increased transparency in transactions, reducing the risk of fraud and providing companies with a more secure financial environment. 

Governments can benefit from stablecoins by leveraging their potential to trade state currency independently of state interventions. While central bank digital currencies (CBDCs) are being developed by several countries, stablecoins can serve as a bridge between traditional fiat currencies and cryptocurrencies. Governments can view stablecoins as a means to promote the adoption of cryptocurrencies while maintaining some level of control over the financial ecosystem. 

Implications of stablecoins

Wider implications of stablecoin growth may include:

• Crypto investors allocating more investments to other asset-backed stablecoins such as gold, oil, and even renewable energy.
• Central banks releasing their own digital coins to counter decentralized stablecoins, i.e., central bank digital currencies.
• Payment systems increasingly preferring stablecoins over other cryptocurrencies.
• Financial inclusion by providing individuals in underbanked regions with access to a stable and secure medium of exchange, empowering them to participate more actively in the global economy.
• Advancements in blockchain technology, driving innovation in various sectors beyond finance, such as supply chain management, identity verification, and voting systems.
• Faster, cheaper, and more secure cross-border payments, benefiting migrant workers who heavily rely on remittances to support their families back home.
• A more sustainable future by decreasing the demand for paper production, lowering carbon emissions associated with transportation and reducing the environmental impact of mining metals used in traditional currencies.
• Shifts in power dynamics between governments, central banks, and global financial institutions.
• Individuals in regions with unstable or inflation-prone currencies being able to preserve their wealth amid economic volatility, reducing socio-economic inequalities.
• Concerns about consumer data privacy and security, prompting governments to establish new laws and regulations to strike a balance between innovation and protecting individuals' personal information.

Questions to consider

• Would you consider investing in stablecoins instead of Bitcoin?
• What kind of regulations could improve the adoption to stablecoins?