Published on: thegww.com
For a good part of their existence, stablecoins were seen mainly as a crypto workaround. A means to hop between Bitcoin, Ethereum, and altcoins without being constrained by the delays, friction, and restrictions of traditional banking. Back then, traditional banks wanted nothing to do with crypto, which left traders trapped whenever they tried to cash out because transactions still had to go through traditional bank wires. This changed when stablecoins entered the scene and cut banks out of the equation entirely.
Businesses began integrating them into their payment systems. Payment giants began settling transactions with them. Banks started bringing them into their current financial infrastructures. Over only a year, Visa’s number of card payments conducted via stablecoins jumped 200% across more than 160 active consumer and commercial programs, which is just an example of how stablecoins have entered mainstream use. Stani Kulechov, CEO and founder of Aave, explained in a recent interview with Scott Melker, known as The Wolf of All Streets, how stablecoins aren’t going after the money that people keep in bank accounts, but after a younger generation that’s more concerned about inflation, and open to experimenting with new types of financial products. Over time, he believes that stablecoins will become the default way people hold and move money, largely thanks to their high accessibility. After all, learning how to buy USDC and other large stablecoins can take less time than opening a new bank account. USDC and USDT are the leading stablecoins in terms of market capitalization, controlling roughly 85% to 90% of a market that’s now worth just over $300BN.
Photo source: https://www.pexels.com/photo/close-up-of-coins-and-banknotes-7634158/
What keeps stablecoins stable
The idea behind a stablecoin is simple: such a coin is designed to always maintain a 1:1 value with the asset it is tied to, which in most cases is the U.S. dollar. At the moment of writing, it’s estimated that most stablecoins are pegged to the greenback, while digital coins tied to other assets, like the euro, yen, and even gold, exist too, though in a smaller proportion. But people want to know exactly what keeps their value stable, and the answer comes down to the reserves that the issuer of a given stablecoin holds. Commonly, these reserves can include cash, bank deposits, and short-term U.S. government bonds, the idea being that the issuer has enough liquidity to honor conversions when anyone wants to exchange their coins for dollars. That’s why the reserves that back up a stablecoin matter so much.
Not all stablecoins follow this recipe, however. Some coins are backed by other crypto assets, while others use algorithms and code to mirror an asset’s value into a stablecoin and adjust the circulating supply without needing asset reserves or cash as backing. But for most people and use cases, stablecoins backed by verifiable, real reserves remain the baseline – and regulators around the world increasingly require that. In the US, the Genius Act requires issuers of payment stablecoins to peg their coins against safe reserves like cash and bank deposits. In the European Union, the Markets in Crypto-Assets Regulation (MiCA) requires issuers to hold enough reserves to back every coin in circulation. Japan, Hong Kong, and Singapore all require full backing in cash, short-term government bonds, or cash equivalents. Then there’s the Central Bank of the United Arab Emirates, where not only do stablecoins need to be backed 1:1 by cash reserves in AED, but the issuance or trading of algorithmic stablecoins is banned altogether. The details may differ from country to country, but the idea is the same. Regulators require issuers to have a license, hold enough safe reserves to match the coins they issue, and make sure holders can get the full value of their money back whenever they want to cash out.
How are stablecoins used today
First things first, stablecoins’ use in trading hasn’t diminished just because they’ve entered the financial mainstream. They’re still being used heavily in trading for their ability to enable traders to move between different assets without having to convert back into traditional currencies every time. But everyday use is rapidly expanding into other areas, too. Blockchain data provider for crypto enterprises and institutions Allium found that payments have become the fastest-growing way people use stablecoins, with somewhere between $401BN and $527BN transacted using stablecoins yearly. Businesses play a key role in this regard, which rely on stablecoins in multiple areas of operation, such as service fees, supplier payments, and payroll. Payments between businesses (B2B) also stand out and highlight how useful stablecoins have become for firms working with partners in other countries.
Remittances are another widespread stablecoin use case, as stablecoins enable people to send money abroad without needing to connect with legacy banking. Stablecoins operate around the clock, which eliminates the delays of days that international bank transfers usually subject transfers to. High fees are also a bygone concern because stablecoins cut transfer overhead substantially – when the infrastructure on which they move is highly developed, sending stablecoins can cost only a few cents. Companies are also figuring out ways to use stablecoins to pay remote workers, keep money in escrows until deals are completed, and to carry out smaller payments where the use of a card doesn’t make sense.
Payment companies and institutions are also adopting stablecoins.
Big payment companies are also making stablecoins easier to use at checkout – Stripe, Mastercard and Visa are adding stablecoin options to their payment systems, which helps merchants get paid faster and often pay lower fees. And in terms of institutional progress, stablecoins’ impact is seen in the way institutions’ approach to liquidity and settlement has started to change. Collateral efficiency, settlement speed, and real-time liquidity visibility are three areas where this shows up most. Institutions can move money in minutes no matter the time of day, instead of waiting days for money to clear between banks. For involved participants, this means that money spends less time sitting idle until transactions are settled and that funds are more easily tracked.