No crypto bear market for stablecoins
The crypto hype cycle seems to be over. Sam Bankman-Fried, the poster child of the 2021 crypto bull run, is now on trial and is facing a lengthy jail sentence. Speculative interest for dog coins and NFTs is at the lows. But despite the end of the hype cycle, there’s an active ecosystem: stablecoins.
Peter Johnson & colleagues from Brevan Howard Digital recently put out a report on stablecoins showing that by multiple usage metrics, stablecoins are thriving. The market cap of Tether, the market leading stablecoin lead by Paolo Ardoino, is at all time highs. This growth has been fueled by the depreciation of many currencies against the dollar, which has increased demand for digital dollars in people who have trouble accessing them. Stablecoins have become a global phenomena: they’ve been spotted in use in places as varied as Venezuelan supermarkets and Istanbul moneychangers.
The roaring success of stablecoins has brought in new entrants to the market. PayPal has recently launched the PayPal PayUSD. PayPal, being a publicly owned company, is not so much motivated by the cypherpunk ethos of “freedom to transact” but rather the commercial reality that stablecoins are eating into their market share. Nevertheless, stablecoins a legal and regulatory headache. The implosion of TerraUSD in 2022, which claimed to be a stablecoin, has brought a lot of legislative attention to the topic. Products advertising themselves as stablecoins range from the highly unsafe and opaque (e.g. TerraUSD) to much safer products with a high degree of investment protection. Indeed, users of PayPal’s stablecoin product have stronger legal protections than user’s of PayPal’s traditional product.
Stablecoins present novel challenges for regulators on the anti-money laundering front too. On one hand the transactions are permissionless and (with the exception of a few large clients) are non-KYC-d. On the other hand, the transaction ledger is completely transparent and permanent. Moreover, governments can (and often do) freeze assets related to crime or terrorism.
Regulatory uncertainty has hampered stablecoin adoption. Payments remain an unsolved problem in much of the world. Many regulated global companies would love to use stablecoins to solve their global payments problems, but are reluctant to do so lest they lose their relationships with highly conservative banks.
But some regulators are slowly warming up to the reality of cryptodollars. The Bermudan regulator (not to be confused with the Bahaman regulator that used to supervise FTX) has recently approved Mountain Protocol. Mountain Protocol not only offers a dollar backed stablecoin, it also shares the yield generated by the underlying UST’s with the holders. The second largest stablecoin operator Circle is also offering a yield product to its holders through its partnership with Coinbase. Stablecoins are evolving from being a payments system to a fully formed savings system for those who have limited access to safe dollar denominated yields.
Boaz is a FinTech analyst & commentator with an interest in innovative solutions for individuals on the margins of society, cited by CNBC, Fortune, WIRED, NASDAQ.com, the Human Rights Foundation and others. Boaz has written & spoken about topics ranging from cross-border transfers, the efficacy of the current KYC/AML regime, web3 gaming & the “Metaverse”, decentralised finance, futures & automated market makers, the use of cryptocurrencies in authoritarian nations and the difficulties of measuring Bitcoin markets.
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