What makes a stablecoin useful?
Here is our pick of the 3 most important Stablecoin news stories during the week.
One feature is that Stablecoins offer interim protection to traders from notorious crypto price volatility. They did so by almost maintaining their one dollar-peg and offering sufficient liquidity to traders who looked for a safety net during the market decline.
Blockchain analytics service CryptoQuant reported dramatic spikes in stablecoin transfers as the cryptocurrency market capitalization fell from $2.38 trillion to $2.103 trillion last Tuesday.
For instance, Tether (USDT), the leading stablecoin by volume, processed $10.51 billion worth of transactions on Tuesday compared to $4.02 billion on Monday.
The mean of all stablecoins transfer. Source: CryptoQuant
Similarly, the second-largest stablecoin USD Coin (USDC), backed by Circle, reported $5.728 billion worth of transfers on Tuesday versus $3.27 billion in the previous session, logging a 74% spike.
At the same time, the net stablecoin supply in circulation remained relatively idle, around $67 billion, showcasing adequate liquidity against demand even in the face of a brutal crypto market decline. As a result, many top stablecoins maintained their one-to-on dollar peg despite logging minor price drifts.
In the meantime, Benoit Coeure, head of innovation hub at the Bank for International Settlements (BIS), in a speech delivered at the Eurofi Financial Forum on Friday, said stablecoins and DeFi platforms will “challenge” bank models, and central banks “have to act while the current system is still in place — and to act now.” But then he moved on to ask a series of questions that Central Banks must have clear, consistent and thought thru answers to.
“Stablecoins may develop as closed ecosystems or “walled gardens”, creating fragmentation. With DeFi protocols,3 any concerns about the assets underlying stablecoins could see contagion spread through a system. And the growing footprint of big techs in finance raises market power and privacy issues, and challenges current regulatory approaches.4
Will the new players complement or crowd out commercial banks? Should central banks open accounts to these new players, and under which regulatory conditions? Which kind of financial intermediation do we need to fund investment and the green transformation? How should public and private money coexist in new ecosystems – for example, should central bank money be used in DeFi rather than private stablecoins?”
One of the use cases Benoit may have in mind is deep negative interest rates. According to the Wall Street Journal, central bank digital currencies (CBDCs) could actually negatively impact interest rates by giving policymakers an additional tool.
In his article, “Digital Currencies Pave Way for Deeply Negative Interest Rates,” senior columnist James Mackintosh argues that the difference between a CBDC and cash would be highlighted if interest rates fell below zero. People would be more inclined to hold on to physical cash to “earn zero” rather than lose money on a digital dollar issued by the central bank.
This means the central bank will have more leverage with interest rates if it issues digital dollars that can’t be stashed under the mattress, he added.
In summary, we have been talking about CBDC’s stablecoins for nearly four years now, yet all we have to show for it are lots of questions and the only use cases for them are negative (interest rates or economic surveillance and control). In the meantime the privately issued stablecoins continue to grow and are regularly tested at doing one thing – being stable in the Crypto world which is inherently unstable.
Alan Scott is an expert in the FX market and has been working in the domain of stablecoins for many years.
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