It’s safe to say that the cryptocurrency market has had a pretty bad year. Aside from the fact that prices have been falling since November 2021, the industry has faced a number of black swan events like the collapse of Terra last May, followed by the bankruptcy of several major digital asset lenders and now FTX -Scandal.
Additionally, we are currently in the midst of an economic downturn as governments around the world scramble to bring down record inflation. Considering all of this, plus a drop in seed funding that could last up to 18 months, it seems like the crypto winter is here to stay for a while.
Faced with such a prospect, crypto market participants are increasingly selling their holdings to avoid bigger losses in the future. And alongside bitcoin, ether, and other major cryptocurrencies, investors are also cashing out their stablecoins: data shows that in the two weeks following FTX’s implosion, investors recovered around $3.5 billion in stablecoins, including $2 billion in USDT, redeemed. Overall, the stablecoin economy lost $28 billion in market cap in 2022.
However, getting rid of stablecoins may not be the wisest course of action in the long run. Let’s take a look and see why that might be the case.
The benefits of crypto with price stability
In theory, stablecoins are cryptocurrencies designed to track the value of major fiat currencies such as the US dollar, euro and British pound. As a result, they are meant to function just like standard coins, but without the high volatility and frequent price fluctuations that come with it.
The term “stablecoin” gives a clear statement of its intention. In the extremely unstable world of cryptocurrency, where prices tend to fluctuate rapidly, this category of assets claims to offer stability. And in the case of serious stablecoins reportedly directly backed by fiat or crypto reserves, they appear to be serving their purpose well.
In fact, US Securities and Exchange Commission Chairman Gary Gensler stated that stablecoins reduce risks to the financial system, arguing that they should fall under a similar regulatory framework to money market funds.
At the same time, they are superior to fiat currencies as stablecoins retain all the benefits of blockchain technology. These range from instant and low-cost transactions to increased transparency and traceability, as well as the ability to use them in crypto apps for lending, borrowing, yield farming, and other activities.
Should stablecoins be regulated?
In the wake of the FTX collapse, the need for regulation and more oversight of stablecoins has come to the fore.
And that shouldn’t come as a surprise. With their market cap now falling below $140 billion, governments worldwide have announced their intention to regulate stablecoins to ensure the stability of their economies and protect consumers.
There are several benefits of opting for more thorough regulation. First, it could reduce systematic risk and promote transparency and trust through licensing stablecoin issuers. Furthermore, regulators could also order them not only to publicly disclose the allocations of their reserves, but to exclusively use cash and other low-risk instruments to maintain their coins’ pegs.
Additionally, a clear regulatory framework for stablecoins could open up the market for traditional financial players who could issue their own stable digital assets. This could boost activity in the crypto market and encourage innovation, creating a new set of financial products.
At the same time, the integration of stablecoins into a country’s economy could increase the transparency of the financial system and make it more robust by drastically reducing transaction costs. The latter is particularly important in cross-border remittances, which can reduce operational costs for government organizations and businesses.
For citizens, stablecoins hold promise in emerging and developing countries as they can be used to hedge against inflation and weak currencies. It’s a crucial solution to a real problem – the Argentine peso, for example, has lost 90% of its value against the US dollar in the last five years.
This seems to be the main reason why developing countries have surpassed developed nations in adopting crypto. For example, in Chainalysis’ 2022 Crypto Adoption Index, only two of the top 20 jurisdictions were high-income countries. The remainder were either lower- or upper-middle-income countries. Statista data confirms this trend, with Nigeria, Thailand and Turkey taking the top three spots for the percentage of crypto owners and users among respondents.
Where is the stablecoin market headed in 2023?
Combining low volatility and the benefits of blockchain technology, stablecoins play an essential role in the crypto industry. Despite recent sell-offs, stable digital assets are increasingly gaining ground against commodity cryptocurrencies, recently hitting a new high in market share at 18% before falling to 16%, but still above their 11% share of the overall crypto market from a year ago lie .
Given the benefits of regulation in this area, we can likely expect multiple jurisdictions to complete their regulatory frameworks for stablecoins by the end of 2023. Flexible designs and clear rules will give the crypto industry a much-needed boost, which could help mitigate the effects of the current winter and could even prepare the market for the next bull run.
Additionally, the above regulatory advances may help stabilize the local economy and provide more opportunities for traditional financial firms and big tech companies to join the market and issue their own stablecoins. At the same time, citizens could gain access to a safer and more convenient way to hedge against weak macroeconomic conditions and unstable national currencies.
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