Business Insight
Stablecoins Outlook 2023
Despite the disasters of the previous year, experts and investors have a positive outlook for stablecoins.
2022 was, without a doubt, a difficult year for the crypto industry. Heavily stricken by the crashed TerraUSD and the collapse of FTX, one of the major crypto exchanges, the industry is currently suffering from a great loss of value. The price of the two biggest cryptocurrencies, Bitcoin and Ethereum, dropped drastically.
However, there’s one bright spot in the industry. Leading stablecoins like USDT and USDC have successfully survived the turmoil. Despite the disasters of the previous year, experts and investors, including Bob Diamond, the former CEO of Barclays Bank, have a positive outlook for stablecoins. In an interview with the Financial Times in January this year (2023), Diamond said he believed that the technology being developed for stablecoins “have a very strong future.”
So, what is so special about stablecoins? Why do people, in the aftermath of the meltdown, maintain confidence in stablecoins? In this article, we will briefly explain what stablecoins are and the recent developments regarding their market situation and regulations.
What Are Stablecoins, and How “Stable” Are They?
Stablecoins, in essence, are cryptocurrencies — but more stable ones. Their values are tied to a real-world asset, typically the USD, which helps mitigate their volatility. The issuers of stablecoins guarantee that users can always exchange one stablecoin for one USD. This mechanism allows users to enjoy the convenience of digital currencies while also avoiding the volatility of other cryptocurrencies. This stability has fueled the rapid growth of stablecoins, making them stand out among crypto assets.
Digital Assets that Experienced Rapid Growth
Fiat-backed digital assets have seen significant adoption in recent years. According to the data from DeFi Llama, a TVL aggregator of DeFi, the total market cap of the top two stablecoins, USDT and USDC, has doubled over the past 21 months, growing from $51.6 billion to $109 billion. (data as of Jan 11th, 2023)
Coin Metrics, a crypto asset market data platform, indicates a substantial boost in the use of stablecoins: the settlement volume of stablecoins hit a new high of $7.4 trillion in 2022. This volume is higher than those of top credit card companies like MasterCard, American Express, and Discover. In a report by Circle, the issuer of USDC, USDC alone has powered over $8.6 trillion in cumulative on-chain transactions.
Despite the difficult times the crypto market is experiencing, asset-backed stablecoins have proved to be a reliable way to conduct business and for other transactions.
Wider Use for Everyday Transactions
At the end of 2022 — a tumultuous year for the crypto market — staff of the U.S. Federal Reserve and Bank of Canada, the central bank of the country, published articles about stablecoins. The articles outlined that, in spite of the chaos, both remained optimistic about the functions and potential of stablecoins as a means of payment in everyday life. If fiat-pegged stablecoins are backed by real-world assets, similar to the way that fiat currencies are backed by gold reserves, they can mitigate the volatility shown by other cryptocurrencies. They can be used to pay for goods and services, and change the way we use paper money. Once this becomes a reality, it will be a big step toward mainstream adoption of digital currencies.
The advantages of using digital assets are more than simply digitizing money. Users of stablecoins benefit from lower fees and faster settlements on blockchain networks. Beyond that, blockchain networks operate 24 hours a day, while fiat payment systems are usually limited to banking business hours. For businesses sending and receiving international payouts frequently, payments with stablecoins can be a far better solution to lower costs and speed up the process than traditional wire transfers.
Regulations around the World
As tempting option as stablecoin payments may seem, some worry about the security of stablecoin payments, especially for business transactions. The good news is that governments and authorities are seeking to regulate cryptocurrencies more proactively.
The US Congress, for instance, has been debating cryptocurrency regulation. These discussions seek to answer these questions: are cryptocurrencies securities? Which agency should take the lead in overseeing cryptocurrencies? While the debate continues, Senator Pat Toomey introduced legislation to guide future stablecoin regulation. The draft bill aims to provide a framework for the regulation of “payment stablecoins” so as to digitize the US dollar and to allow stablecoins to “be widely used across the physical economy.”
Canada is also developing and implementing regulatory approaches to promote innovation while mitigating risks. Analysts for the Bank of Canada note that a well-designed, fiat-pegged cryptocurrency should have a reserve of high-quality liquid assets and separate them from the issuer’s own funds. Holders should have the legal right to redeem them at any time, subject to clearly disclosed restrictions.
In other parts of the world, governments are now more open to stablecoins than they previously had been. Japan used to prohibit the listing and distribution of stablecoins issued outside the country, such as USDT and USDC. Now, the Japanese government is collecting comments and considering lifting the ban.
Although cryptocurrencies were initially created to be free, “decentralized” assets, it is recognized that the regulations are crucial to protect the rights of digital asset holders. If stablecoins are to be used for payments or business transactions, regulations are necessary and beneficial for all parties involved. With governments and authorities working on the regulatory frameworks, asset-backed stablecoins, like USDC, which is regularly audited, will thrive in a regulated environment.
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