What Are Stablecoins and Could 2024 Be Their Year?
For years, many financial experts have envisioned a world where private currencies can compete with each other. In this world, the currencies would be backed by tangible assets and the value of these currencies would be tied to supply and demand, not the government’s decisions.
In 2009 we began to move in the direction of this ideal world when Satoshi created the Bitcoin network. But it wasn’t until 5 years later when the first stablecoin BitUSD was launched that we truly had a currency that ticked the lack of government intervention and stability “boxes”. Due to the traction the stablecoin gained, the process used to create it, tokenization, also gained popularity, and I’ll explain how the world’s largest traditional bank has adopted it already.
In this article, I’ll also explain what a stablecoin is, its pros and cons, why there’s a predicted surge in stablecoin usage on the horizon, and the tokenization of assets by major financial institutions.
What Is a Stablecoin?
A stablecoin is a digital asset tied to a fiat currency or asset. In other words even though a stablecoin exists on a blockchain, its market value is tied to an external asset. Some of these assets include the US Dollar, the Australian Dollar, and even gold.
A stablecoin’s importance lies in its solution to the volatility problem of Bitcoin and its network. Even though said volatility can be great for volume traders it’s still an obstacle for people trying to use it for everyday transactions. Unless you plan on being the guy who became famous for paying 10,000 Bitcoins for two pizzas.
The existence of stablecoins can help keep your digital finances stable, but it still comes with a few cons.
So let’s look at what I think are the biggest issues with stablecoins.
The Cons of Stablecoins
There are certain risks associated with stablecoins like any financial item. Here are two of the most notable ones:
Nature of Centralization
A stablecoin exists on the blockchain and isn’t technically controlled by an individual, but the external asset that backs the coin is under a form of control. For example, if 1 USDT coin is backed by 1 US Dollar, ensuring each USDT in circulation is properly backed is the job of a team. This team, in essence, is a centralized structure.
So while blockchain technology supports the coin’s decentralization, the involvement of external entities can introduce centralization.
Risk of Liquidity
Explaining the liquidity risk of stablecoins needs a short hypothetical example. So let’s say we have many traders or individuals who use a stablecoin for everyday purchases. If a bunch of them want to sell off their coins at the same time it can be hard to find buyers. This clash can cause the value of said coin to drop. You will most likely encounter this liquidity when dealing with the lesser-known stablecoins on the market.
Now let’s take a look at the most notable benefits of stablecoins.
Pros of Stablecoins
Since their introduction stablecoins have been adopted by individuals and businesses alike. Here are some of the reasons why:
Easier Means of Exchange
Typically, individuals or financial service providers must make several exchanges before an international purchase can be approved. For example, if I wanted to make a wire transfer in the US it could cost me up to $50 for a transfer that could arrive in days. But with stablecoins, it’s much easier to move money across the globe. Stablecoin “transfers” are almost instant and greatly reduce costs for people who need to send money abroad.
Diversification of Payment
Businesses are always looking for ways to unlock newer markets across categories like age, location, and gender. Stablecoins provide them with the possibility of unlocking the market of people who like the product but prefer to use digital currencies as a form of payment.
Widespread Provision of Financial Services
In certain continents, not everyone has access to traditional banking services for many reasons. Stablecoins can serve as their best chance at storing and transferring their money. With the constant evolution of stablecoins, they can also take advantage of wealth-creation opportunities by accessing loans and making investments.
There are more pros to adding stablecoins to your wallet and I believe they outweigh the cons. While these reasons alone can justify the predicted surge in stablecoin usage a better case can be made.
The Potential Surge of Stablecoins
After Tether and USD Coin stablecoins pegged to the US Dollar were launched, their popularity spread like wildfire and they soon became the third and fifth largest cryptocurrency based on market cap.
The reasons for their popularity have been simple. They had a resistance towards volatility and businesses adopted them to execute cross-border payments. Some of these businesses include software giant Microsoft, basketball franchise Sacramento Kings, ExpressVPN, and Pacsun.
But certain recent developments look like they can give stablecoins adoption a big push as early as this year. One of these recent developments is the Bitcoin spot ETF approval that happened in January. In the months leading up to the approval, Bitcoin was in the spotlight, but I believe investors who can filter out “noise” will see that stablecoins can lead the narrative this year.
Beyond the spot ETF approval, there’s also the case of the “big boys” getting their feet wet in the stablecoin waters. In the second half of 2023, fintech giant Paypal launched a stablecoin and the third largest bank in France, SocGen, also unveiled a stablecoin developed by its crypto division.
The largest traditional bank in the world, JP Morgan, also got in on the action by rolling out a programmable payment feature for institutional users of its private blockchain platform, JPM Coin. This move can revolutionize the B2B payment landscape because of how it can shatter the “stiffness” that’s typically associated with paper-based processes.
Let me explain what I mean with a hypothetical programmable payment scenario involving two large corporations.
Say Company A agrees to purchase goods from Company B, with payment conditional on delivery by a specific date. Using JPMorgan’s blockchain platform, they can set up a smart contract where funds from Company A are held in a digital account and automatically transferred to Company B upon confirmation of goods delivery by the agreed date. This process ensures transparency and it drastically reduces the risk of disputes. Since such a transaction needs a stablecoin – JPM Coin – it can help make the case of stablecoins being the only accepted form of payment for B2B transactions.
It’s clear what any party involved in a tokenized transaction stands to gain, but there’s still another reason I believe the appetite for these digital dollars will go up.
See, for the past 60 years, the US dollar has been the world’s reserve currency. So it’s safe to say most existing stablecoins can serve as a “proxy” of the U.S. dollar’s leadership in the global financial system. Especially because over 90% of all stablecoin transactions involve tokens pegged to the U.S. dollar.
The stats alone show the global reliance on the dollar and it presents America with a massive geopolitical advantage. This dominance not only reinforces the dollar’s global standing but also suggests that stablecoins could extend this influence by offering a digital form of the currency. With the US being the biggest world power, their currency’s digital form is well positioned to be at the forefront of this evolving financial landscape.
In conclusion, stablecoins have emerged as a viable solution to the plague that is volatility. Despite facing their fair share of challenges like centralization and liquidity risks, their benefits, including diversification of payment options and improved financial access make them a compelling choice for individuals and businesses. With the details of the growing acceptance and integration of stablecoins I mentioned, I strongly believe we’ve entered an era with a more stable and efficient global financial ecosystem…and it starts now!
Disclaimer: The information provided in this article is for educational and informational purposes only and should not be construed as financial advice. The content is based on the author’s research and personal opinions and does not constitute professional financial guidance. Cryptocurrency investments carry risks, and readers should conduct their own due diligence and consult with a qualified financial advisor before making any investment decisions.
