Stumbling, yet growing through multiple phases, from an adolescent market of FOMO and bubbles to a maturing financial epiphany of the century, the crypto market has finally hit a mark where the need for regulatory support is almost demanding. I wouldn’t go so far as calling cryptocurrencies perfect, however, it’s no secret that it does fill the many fault points in the currently centralized financial system.
Despite the very visible and immeasurable growth across the crypto landscape (all the way to over $2 Trillion in global market cap), the extreme volatility and lack of regulatory support have somewhat signed crypto off from acquiring its much deserved legal recognition among major economies. However, as Defi expands and NFTs contribute to their multiple industry-wide potentials, the traction gained by cryptocurrencies requires governing trust and a more regulated oversight for financial inclusion.
While leading assets like Bitcoin and Ethereum often fall to the effects of a fluctuating market, Stablecoins have en route the future of cryptocurrencies to a more reliable frame (a concept that cryptocurrencies are not famously associated with, thanks to the lack of education and awareness along with the fact that the market is still relatively nascent on several checkpoints).
The recent sell-off plunged the market to a sharp decline as leading crypto assets like BTC, ETH, ADA, SOL, etc. were slashed by percentages in double digits. However, much similar to the last bear market, stablecoins came through the smoke in victory, keeping their worth intact with negligible fluctuations in the value.
Stablecoins were channeled to mediate the notorious fluxes of the crypto market, offering more stability as the assets succumb to publicized fear and regulatory uncertainty. And both 2021 bear runs witnessed as stablecoins maintained their peg to the dollar, offering liquidity along with a safety net to traders as red candles flooded the crypto charts. This Tuesday, as the crypto market came crashing down, CryptoQuant, a blockchain analytics service, reported massive spikes in stablecoin transfers.
The mean of all stablecoins transfer. Source: CryptoQuant
The trading volume of leading stablecoins like Tether (USDT) jumped over double the amount, processing over $10 billion worth of transactions on Tuesday as compared to $4.02 billion on the day before. The overall supply of stablecoins in circulation remained optimal, representing sufficient liquidity against the brutal demand of a crashing market which reduced the global crypto market cap from $2.38 trillion to $2.103 trillion in a matter of hours. Thus leading stablecoins were successfully able to retain their one-to-one dollar peg apart from a few inevitable minor drifts in the price.
Similar insights were drawn by Glassnode Insights during the unfortunate crash that severely hindered crypto investors earlier this year. As crypto-assets grew closer to the peak stage of being overbought, the market came crashing down until the leading tokens were literally slashed down to half their trading values. However, stablecoins were phenomenally able to prove the fundamental worth of their very mechanism and offered enough liquidity while maintaining their peg.
While the gravity-like drop showcased the worst side of volatility, Stablecoins like DAI adjusted their circulating supply in response to collateral requirements, all the way retaining their protocol stability.
Stablecoins, in their most layman form, can ideally be called modern money. In their true paradigm, stablecoins that are non-interest bearing with a firm value backed against a currency or asset can contribute to greater resilience of payments. Or so says the executive director for financial market infrastructure at the Bank of England, calling modern money to be an amalgamation of public and private funds,
“If new forms of digital money can be made safe, they could potentially contribute to faster, cheaper, and more efficient payments with greater functionality. They could increase the resilience of payments. And they could even have long-term benefits for financial stability.”
Stablecoins can play an essential role in serving the humanitarian cause of bringing those unbanked to the financial system. Offering real-time payments that are low-cost and safer in their means can significantly lower the cost of remittances. Emerging economies in particular can definitely foster positive value out of stable coins.
Stablecoins carry a lucid potential to ease safe and convenient transactions at a more conceivable cost compared to mobile money lying in non-bank wallets. And with remittances taking a historical decline of almost 20% in 2020 due to Covid-19, global remittances can definitely use a better financial flow. Here are a few ways stablecoins can bolster efficiency in the financial system-
With several countries including El Salvador, Ukraine, etc. now in complete support of cryptocurrencies, leading economies around the globe are under the spotlight on their next step towards the crypto space. Unlike China, countries including the US, India, etc. have not boycotted cryptocurrencies, however, any prediction in this particular subject is currently under muddy territory.
A few steps behind the racing exploration of the digital yuan for cross-border payments by the Asian Dragon, countries like Japan, India, the US, etc. are under a more calculated and constructive impression in the development of CBDCs. As for creating a regulatory framework for stablecoins, terms for stability, consumer protection, crime prevention, etc. have to be critically addressed and defined. Along with a robust adaptive backing by governments, businesses, merchants, etc., stablecoins require a rather comprehensive framework to aid stability and efficiency in the embodiment of a new financial order.