Non-USD Stablecoin: Market Potential and Regulation

In today’s world, stablecoins have become an essential part of the crypto industry. Despite the continuing controversy surrounding the cryptos, fiat-backed stablecoins are still considered one with excellent market potential.

This article discusses the growing stablecoin market, reviewing changes in global currency reserve, the development of regulatory frameworks, and opportunities for non-USD stablecoins.

Let’s start with the growth in the stablecoins market in the past few years.

Growth of the stablecoin market

The stablecoin market had a 13% gain in the first quarter of 2022, setting the year up for success, but the tragic Terra Luna breakdown had other plans. The fiat-backed stablecoins’ market cap is over $141 billion at the time of writing, and you can see the growth in the stablecoin market in the past two years in the graph below.

Source: https://defillama.com/stablecoins

Although the Terra Luna disaster cost the industry billions of dollars and highlighted concerns about the stability of stablecoins, its failure caused the crypto sector to mature. This way, investors are now more aware of the risks involved in cryptocurrencies.

The World’s Dominant Reserve Currency

Today, most of the fiat stablecoins in the market are USD-backed stablecoins, accounting for more than 90% of the stablecoin market value. The U.S. dollar has been the world’s dominant reserve currency since World War II. Central banks and organizations worldwide prefer to conduct business with U.S. dollars.

According to the Federal Reserve, the dollar will account for 60% of worldwide revealed government foreign reserves in 2021. This percentage has fallen from 71% of reserves in 2000, but it still significantly outnumbers all other currencies, including the Euro (21%), Japanese yen (6%), British pound (5%), and Chinese yuan (2%). Furthermore, the loss in the U.S. dollar share has been absorbed by various other currencies rather than a single currency.

Thus, while nations’ reserve holdings have varied significantly over the last two decades, the U.S. dollar remains the dominant reserve currency.

Source: https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-u-s-dollar-20211006.html

Currencies in the Forex Market

The forex market is exceptionally liquid; the total value of the worldwide forex trading market is expected to be over $2.4 quadrillion, or $2409 trillion. In 2019, the three most frequently traded currency pairs and their share of the OTC forex turnover were: EUR/USD 24%, USD/JPY 17.8%, and GBP/USD 9.3%

According to the Bank for International Settlements survey, the U.S. dollar is the most popular currency in the forex market, accounting for 88.3% of global trades. The second most traded currency is the Euro, which accounted for 32.3% of transactions. The Japanese yen comes in third, with 16.8% of global trades involving the currency.

While other fiat currencies are unlikely to challenge the USD anytime soon, several initiatives are developing synthetic copies of them to construct blockchain-based foreign-exchange markets. As we can see, non-USD-backed stablecoins started getting volumes by the end of 2021. We cannot ignore the potential of these stablecoins in the future ahead. Meanwhile, governments worldwide are accelerating their pace in developing regulatory frameworks for cryptocurrencies.

Source: https://www.statista.com/statistics/1316277/non-usd-fiat-backed-stablecoin-market-value/

Regulation towards stablecoins

With the explosive growth of the crypto market, the global currency market is facing digital disruption. According to the Bank for International Settlements, 90% of the world’s central banks are working on some form of central bank digital currency (CBDC). Meanwhile, authorities have also been actively addressing crypto regulation issues to protect investors.

In September, the White House released a comprehensive framework for crypto regulation and development, providing a clearer vision of U.S. crypto regulation. The content includes consumer protection and encourages private-sector innovation and cooperation at the international level. Also, other countries, such as Europe, Japan, and Australia, are at different stages of progress for crypto regulation.

European regulations

The Council president and the European Parliament have passed the Markets in Crypto-Assets (MiCA) bill, which will be passed onto the European Parliament for a final vote and is expected to come into effect in 2024. The bill covers several aspects of the crypto market, including stablecoins, consumer protection, crypto companies’ accountability, and money laundering prevention.

This regulatory framework will safeguard investors and maintain financial stability while allowing for innovation and increasing the appeal of the crypto-asset industry.

Japanese regulations

Japan’s parliament passed legislation to regulate stablecoins or cryptocurrencies, which pegged values to the yen, dollar, or other currencies.

The new rule aims to increase investor safeguards by reducing financial system risks posed by stablecoins, which have a total market value of roughly 20 trillion yen ($134 billion). Stablecoins can be issued by licensed banks, registered money transfer agents, and trust firms under the new law, which revises the payment services law. In addition, the Japanese government has decided to amend the existing foreign exchange laws to curb money laundering activities using cryptocurrencies.

Australian regulations

In a letter to the industry, the Australian Prudential Regulation Authority (APRA) outlined its first risk management objectives for regulated businesses participating in crypto-asset-related activities and a policy roadmap for the future. Please discuss various ways to the prudential regulation of payment stablecoins for stablecoins.

These stablecoin arrangements are comparable to Stored-value Facilities (SVFs). APRA is researching alternatives for including them in the proposed regulatory framework for SVFs in collaboration with peer agencies on the Council of Financial Regulators (CFR). APRA plans to consult on prudential standards for big SVFs in 2023, subject to establishing a more significant legislative and regulatory framework.

Although the progress of crypto regulation varies, it is clear that reducing the risks of cryptocurrencies to protect consumers as well as preventing money laundering activities will be the regulatory focus going forward.

Regulated non-USD stablecoins and opportunities

In the meantime, the number of non-USD stablecoins joining the market is also increasing, providing innovative services that comply with regulations while benefiting from blockchain technology. In 2022, these regulated non-USD stablecoin projects have been launched:

Euro Coin (EUROC), issued by Circle, is a euro stablecoin that is backed by full reserves. It allows companies broader access to Euro liquidity in payments, transactions, and lending. Individual traders can also use it for trading on cryptocurrency exchanges. Together, Euro Coin and USDC open new avenues for multi-currency digital finance and near-instant foreign exchange in a world where daily turnover in traditional markets may exceed $6.6 trillion.

Poundtoken (GBPT), the first British-regulated GBP stablecoin, is intended to combine the benefits of a regulated financial instrument with the benefits of blockchain technology and smart contracts. As a stablecoin, it is 100% backed by GBP and can always be exchanged 1:1 for GBP. In addition to being regulated by the authority, it also ensures monthly audits via the auditing firm KPMG.

A$DC, the stablecoin published by ANZ earlier this year, is fully collateralized by the Australian dollar and scrutinized by regulators for its structure, including asset-backing and custody arrangements. The A$DC enables retail users to purchase non-fungible tokens (NFTs) in Australian dollars easily. In addition, A$DC is also being piloted by the Australian Federal Government to help collect excise taxes.

Closing Thoughts

As it becomes easier for users worldwide to choose a stablecoin backed by a local or trusted fiat currency, it will reduce friction and make trades more efficient and cost-effective. In addition to the expected growth of digital foreign exchange, it will also expand the accessibility and opportunities of cryptocurrencies. Moreover, regulations ensure stablecoins are aligned with authorities’ guidelines which also builds an environment for users to join easily.

We believe that regulated non-USD stablecoins will provide users with reliable access to cryptocurrency trading, creating further chances for the crypto space.

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DisclaimerThis content is not financial advice and it is not a recommendation to buy or sell any financial instruments, FX trading, cryptocurrency or engage in any trading or other activities. You must not rely on this content for any financial decisions. Acquiring, trading, and otherwise transacting with financial instruments or cryptocurrency involves significant risks.We strongly advise our readers to conduct their own independent research before engaging in any such activities.GMO Trust does not guarantee or imply that any cryptocurrency or activity described in this content is available or legal in any specific reader’s location. It is the reader’s responsibility to know the applicable laws in their country.

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Building Financial-Grade Digital Assets. The World’s First Regulated JPY-Pegged Stablecoin Issuer.