Cryptocurrency has long been perceived as highly speculative and volatile, often introducing individuals to the crypto space through the prominent coins, Bitcoin and Ethereum. According to a survey conducted in February 2023, 82 percent of respondents in Singapore who owned cryptocurrency held Bitcoin, with Ethereum being the second most popular at 50 percent.
Unbeknownst to the public, companies like VISA have already initiated live pilots working with Merchant Acquirers involving a type of cryptocurrency known as stablecoins to Merchant Acquirers In these trials, VISA successfully executed the transfer of millions of USD Coin (USDC), a digital stablecoin pegged to the United States Dollar over both the Solana and Ethereum blockchain networks. In this article, I aim to shed light on a less commonly discussed category of cryptocurrency known as stablecoins, which might be unfamiliar to most Singaporean users compared to the well-known Bitcoin and Ethereum. This article will delve into the use cases of stablecoins and the associated risks.
A stablecoin is a type of cryptocurrency designed to maintain a stable value, in contrast to the significant price volatility associated with cryptocurrencies like Bitcoin or Ethereum. This stability is typically achieved by pegging the value of the stablecoin to a stable asset or a basket of assets. For this article, the focus will be on fiat-backed stablecoins, specifically those pegged to the USD. As of December 10, 2023, the total market cap of fiat-backed stablecoins is approximately 129 billion USD, with the most common ones being USDT and USDC, differing only in terms of the issuer. So, what does these 129 billion means? It signifies that there are currently 129 billion USD worth circulating on the blockchain, and while this figure may seem substantial, it represents only 0.578% of all USD in circulation globally. Why convert USD into a stablecoin pegged to USD? The primary advantage lies in the ability to conduct instant money transfers powered by blockchain technology. This eliminates the constraints imposed by market or bank operating hours, as the crypto market trades 24/7, 365 days a year.
Stablecoins, exemplified by the likes of USDT and USDC, are gaining prominence in diverse financial applications. Their utility extends to facilitating 24/7 crypto trading, offering a stable reference point for pricing digital assets, and ensuring seamless transactions even amid market uncertainties. Additionally, stablecoins play a pivotal role in remittances, providing a cost-effective and nearly instant solution for international money transfers. Furthermore, stablecoins act as a secure store of value and currency hedge, particularly in regions facing economic volatility, enabling individuals to safeguard their savings and transact across borders efficiently.
Despite their myriad applications, stablecoins are not without risks. Depegging events, driven by factors like market volatility and governance challenges, pose a significant threat to their stability. Additionally, varying regulatory frameworks worldwide create uncertainties, demanding a nuanced understanding of the evolving landscape. As the world of stablecoins unfolds, users and investors navigate a dynamic terrain balancing the benefits and risks associated with this innovative financial tool.
Crypto Trading
In the cryptocurrency market, like traditional equities priced in USD, stablecoins such as USDT and USDC serve as a stable reference point for pricing digital assets. Trading pairs like BTC/USDT or ETH/USDC indicate the value of cryptocurrencies in terms of these stablecoins, providing traders with a more predictable value compared to volatile cryptocurrencies.
This approach not only facilitates seamless trading between different digital assets but also allows traders to quickly move funds without the need to convert back to fiat currencies. This flexibility is particularly advantageous during market uncertainties, enabling traders to promptly shift their holdings to stablecoins to mitigate exposure to volatile price movements.
The use of stablecoins enhances market stability, attracts more participants, and contributes to overall liquidity, creating a more mature and accessible environment for cryptocurrency trading. Below is a screenshot from CoinGecko showing the trading volume of Bitcoin priced in stablecoins.
Remittance
Remittance, as defined by the World Bank, refers to the portion of earnings that migrant workers send back to their family members in their country of origin. According to the world bank, in Q4 of 2022, the global average cost of sending $200 as remittances was 6.2%, a slight increase from the previous year and more than double the Sustainable Development Goal target of 3%, according to the World Bank's Remittances Prices Worldwide Database.
Banks were identified as the costliest channel with an average cost of 11.8%, followed by post offices (6.3%), money transfer operators (5.4%), and mobile operators (4.5%), which handle less than 1% of total transaction volume. How can we reduce cost of sending money? Enter stablecoins!
Unocoin CEO Sathvik Vishwanath suggests that India, acknowledged as the world's largest recipient of foreign remittances by the World Bank, has the potential to achieve substantial savings of up to $7 billion annually in remittances and online transaction fees through the adoption of cryptocurrencies.
In the Philippines, which ranks as the fourth-largest recipient of remittances, having received $38 billion last year—a 3.4% increase from 2021—the Bangko Sentral Ng Pilipinas reports an impressive $36.1 billion in remittance flows for 2022 alone. This underscores the pivotal role remittances play in the Philippine economy. Traditional remittance channels in the Philippines often involve high fees and prolonged transaction times, posing a significant challenge, especially considering that 44% of the adult population was unbanked in 2021, according to the country's central bank.
Coins.ph, the leading cryptocurrency exchange, and digital wallet provider in the Philippines, has recently announced a strategic partnership with Circle Internet Financial, the issuer of USDC. This collaboration aims to promote awareness of USDC-denominated remittances as a secure, cost-effective, and nearly instant solution for international money transfers. With a focus on the 18 million Filipino users of Coins.ph, the partnership seeks to highlight how USDC can offer a faster and more accessible remittance option.
By driving real-time settlements and minimizing transaction costs, Coins.ph and Circle’s partnership aims to improve the existing remittance landscape, starting in the Philippine. The initiative will begin with educational campaigns and community engagement initiatives to help Filipinos abroad learn to use USDC for remittances.
Let’s compare traditional remittance method vs stablecoin remittance method.
Traditional Remittance Method:
Sender goes to a bank or money transfer operator and pays a fee of around 4% ($40) to send the $1,000.
The recipient in the Philippines receives the money in local currency, minus a currency exchange fee of around 2% ($20).
Total cost to send $1,000: $60 (6%)
Stablecoin Remittance Method:
Sender buys $1,000 worth of USDT or USDC on a cryptocurrency exchange, paying a fee of around 0.5% ($5).
The sender then sends the USDT or USDC to a cryptocurrency wallet owned by the recipient in the Philippines.
The recipient in the Philippines converts the USDT or USDC into local currency, paying a fee of around 0.5% ($5).
Total cost to send $1,000: $10 (1%)
In addition to the cost savings, cryptocurrencies offer a significant boost in transaction speed. Unlike traditional methods that take days due to the number of intermediaries, crypto transactions can be finalized within minutes and are available 24 hours a day, 365 days a year.
Store of Value (Currency Hedge)
Living in Singapore offers the privilege of having a robust and stable currency, a circumstance that many residents might overlook or take for granted. The strength of the Singapore Dollar provides a sense of financial security, as residents don't need to concern themselves with deliberating over which currency to denominate their savings in.
However, the situation is markedly different for many people in various countries around the world. Unlike Singapore, numerous nations face challenges related to currency volatility, economic instability, and fluctuating exchange rates. In these regions, individuals often find themselves grappling with decisions about how to denominate their savings, which can be a complex and uncertain process.
In countries with unstable governments and currencies, stablecoins are a neutral, decentralized way for citizens to safeguard their savings and transact across borders. Emerging markets already dominate overall crypto adoption. Nigeria and Brazil, the sixth and seventh biggest countries by population, for example, are proving to be pivotal in encouraging the adoption of stablecoins and cryptocurrencies around the world.
In Nigeria, the primary driver for stablecoin ownership is to secure money in USD and to be able to transact internationally more efficiently. Nearly every Nigerian internet-using adult (99%) is aware of cryptocurrencies generally, more than half feel knowledgeable about stablecoins, and nearly three in 10 (28%) have owned them.
In Brazil, 51% of crypto owners have owned or currently own stablecoins. Among current owners, 58% see the best use case to be saving money without risk of volatility. Half want to earn interest on their deposits.
In Argentina, where 12% of the internet-using population has experienced ownership of stablecoins and 64% are aware of their existence, the newly elected President, Javier Milei, has recently implemented drastic measures such as devaluing the Argentine Peso by 50%. This effort is aimed at combating triple-digit inflation and reducing overall government spending.
One of the most substantial risks associated with stablecoins is the potential deviation from their pegged value, events where stablecoins depeg and their value falls below its $1 peg. Various factors have contributed to the depegging of stablecoins in recent years. Key elements involve the absence of regulatory frameworks, governance challenges, and issues related to risk management at a significant cryptocurrency exchange. Additionally, stress within traditional financial systems and imbalances in digital asset pools that provide liquidity to decentralized exchanges have been identified as substantial contributors to these events, as outlined in detail in an article by Moody’s.
The newly introduced Digital Asset Monitor (DAM), an AI-enabled tool tracking volatility and risk by Moody’s Analytics, suggests that in 2023, there have been 609 depegging incidents among large-cap fiat-backed stablecoins, defined by fluctuations of over three percent in a day against their fiat peg. It also reveals a total of 1,914 depegging events up to mid-September this year. In comparison, 2022 witnessed 707 large-cap depegs, including the top five stablecoins, with a total of 2,847 depegged events.
Depegging events are not exclusive to crypto; they can also happen in the traditional market. The loss of the Thai Baht’s USD peg during the Asian Financial Crisis in 1997 is a classic example of this. After more than a decade of maintaining the Thai baht’s near-peg to the U.S. dollar, Thai authorities abandoned the peg on July 2, 1997. By October 24, market forces led the baht to depreciate by 60% against the U.S. dollar.
Despite occasional uncertainties, stablecoins are expected to maintain a vital role in the digital economy. Functioning as widely accessible digital currencies, they ensure value stability which is pivotal in shaping the future landscape of digital financial transactions.
The regulatory environment for cryptocurrencies is inconsistent, leading to variations in rules from one jurisdiction to another. This inconsistency creates reluctance among individuals to engage in cross-border transactions using crypto, particularly when the legal status of cryptocurrencies is not clearly defined in their respective countries.
Inadequate and inconsistent regulation poses a barrier to the expansion of the market. The lack of clear regulatory guidelines creates uncertainty, impacting investor confidence and hindering the widespread adoption of stablecoins. In the United States, the regulatory landscape for stablecoins is ambiguous, leading to ongoing debates about oversight authority and whether these digital assets should be categorized as securities or commodities. To address these challenges, it is crucial to establish well-defined regulatory frameworks specifically designed for digital assets.
Implementing such an approach would fill existing gaps, provide legal clarity regarding the status of these assets, and prevent regulatory fragmentation within the industry. Without clear and comprehensive rules, investors are likely to remain cautious, as demonstrated by notable DeFi platforms experiencing significant withdrawals from investors in response to market events or regulatory interventions.
In conclusion, stablecoins represent a crucial and evolving facet of the digital economy, offering solutions to various challenges and inefficiencies in traditional financial systems. Despite occasional uncertainties and risks such as depegging events, stablecoins continue to play a vital role in diverse financial applications, from facilitating 24/7 crypto trading to providing cost-effective and swift solutions for international remittances. The use of stablecoins not only enhances market stability but also contributes to overall liquidity, creating a more mature and accessible environment for cryptocurrency trading.
However, the full potential of stablecoins is contingent upon addressing regulatory ambiguities and establishing clear frameworks tailored to digital assets. The lack of consistent regulation hampers market expansion, affecting investor confidence and hindering widespread adoption. As the regulatory landscape evolves, it becomes imperative to strike a balance that fosters innovation while ensuring investor protection and market integrity.
As we navigate the dynamic terrain of stablecoins and the broader cryptocurrency ecosystem, it is essential for stakeholders, including regulators, industry players, and users, to collaborate in shaping a regulatory environment that fosters responsible growth and innovation. Only through such concerted efforts can stablecoins truly fulfill their promise as a transformative tool in reshaping the future landscape of digital financial transactions.
We, from Blockchain at NTU, thank you for being part of this enlightening journey and extend a warm welcome to the enthralling universe of blockchain!
NOTE: Articles written by Blockchain at NTU ARE NOT FINANCIAL ADVICE!
Written By:
Perion Lim
Researcher of Blockchain at NTU Club AY23/24
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