For much of the short history of digital assets like bitcoin, their buyers have used them mostly as a store of value — like gold. Their price volatility is one reason that they have not gained greater acceptance as a means of exchange, like a traditional currency.
Stablecoins, unlike bitcoin, are pegged to a specific asset value.
But there are signs that is about to change with the rise of stablecoins — or digital assets that are pegged to a specific asset value. Stablecoins are a form of private sector money. They combine the programmable, decentralized and borderless benefits associated with blockchain and cryptocurrency technology with the price stability of the dollar. But they are not legal tender and they carry their own risks.
As stablecoins gain a toehold in the marketplace, they are helping pave the way for traditional currencies, like the U.S. dollar, to become digital assets.
Jerome Powell, chairman of the Federal Reserve, recently stated that the Fed is working on creating a central bank digital currency (CBDC), or a true digital dollar. But he acknowledged that its progress would be measured in years, not months. Other countries are looking into CBDCs, too — most notably China, which has already started a limited release of its digital yuan.
And the Bank for International Settlements recently said that its survey of central banks found that those representing a fifth of the world’s population planned to launch CBDCs for retail use within three years. The survey found that the pandemic had added urgency to the push.
Demand for digital money is high. U.S. dollar-denominated stablecoins represent around 99% of the total stablecoin market, and last year they saw record growth. The total market cap of dollar-denominated stablecoins in circulation ballooned from $6 billion to $36 billion last year.
Last year also saw the rise of U.S.-based stablecoin reserves. Tether, the largest and first issuer of a dollar-denominated stablecoin, is a foreign-based entity with its reserves kept in a non-U.S. bank. Tether has long faced speculation that its stablecoin is not backed 1 to 1 with the dollar. This speculation has led to Tether losing its dollar peg several times over the years.
Tether has yet to release an official financial audit. This uncertainty is one reason for the increase in market demand for a better-regulated stablecoin with reserves kept in U.S. trust companies, such as Gemini Trust and Paxos Trust.
These reserves are generally audited by reputable accounting firms on a bi-weekly or monthly basis. U.S.-custodied stablecoin reserves grew from $1.02 billion to $7.66 billion last year. American regulators have taken notice and are likely to pay closer attention.
All of these forces at work have the potential to rewrite the traditional rules of finance. With digital currency, global merchant settlement could be instantaneous and would no longer be limited to “banking hours.” Core banking services would be available around the clock across the globe, as long as there was an internet connection. What’s clear is that the growth of stablecoins is gaining momentum, and, like many technologies, its adoption and growth will most likely be exponential.