Stablecoins: from the fringes of finance to popularity

Crypto has moved away from the fringes of finance since the launch of Bitcoin way back in 2009.[1] Since then, there has been constant debate about whether economies will shift to digital currencies.

Case studies: Argentina, Turkey and Nigeria

Currently, a quiet shift of sorts is happening but that is driven by specific macro shocks rather than a conscious move to digital assets. In countries with significantly high inflation such as Argentina, stablecoins are seen to preserve wealth in the face of instability.[2]

Argentina has been suffering from high levels of inflation from the 1970s. Before the presidential election in 2023, inflation reached close to 140%. In addition, right after the election the Argentinian peso was devalued by 50%. All these factors had a very negative effect on the economy and led to the increase the poverty levels close to 50%, which now impact 3.4 million Argentinians.[3] [4] All of these factors pushed the citizens to try alternative ways to preserve their wealth and one such way has been with the use of stablecoins. Argentina is now the 2^nd largest users of stablecoins in Latin America, just ahead of Brazil, according to data from Chainalysis with close to $91.1 billion received. [5] The situation is becoming even more challenging with the upcoming elections, and it is becoming increasingly common for employees to request their salaries in stablecoins. [6] Another example of this is the situation in Turkey, where inflation scares and the Turkish lira’s devaluation caused an upsurge in purchases of stablecoins, which reached 4% of GDP in 2024 in an effort by citizens to preserve the value of their assets. [7] [8] Similarly, in Nigeria the devaluation of the local currency- the naira- pushed adoption to stablecoins, where between July 2023 and June 2024, $22 billion in transactions were completed.[9] [10] [11] [12]

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Wider Adoption: Benefits and Efficiency

But what are stablecoins, and what a shift to using them more widely within the economy might look like?[15]  Cryptocurrencies such as the USDT and USDC are also called stablecoins, as they are pegged to the US dollar in 1:1 fashion. They have grown tremendously in popularity given the fact that USDT is now the 4^th largest cryptocurrency and USDC the 7^th by market cap. They also are backed using reserves predominantly in US Treasuries, which is a requirement of the GENIUS ACT that all stablecoins maintain 100% reserves. [16] Currently, they act as a bridge between the world of volatile crypto assets such as Bitcoin and Ether and traditional finance. [17] [18]

From a purely efficiency-driven perspective a move to digital currencies could streamline a lot of processes. Payments would improve and become almost instantaneous compared to the 4-5 days required by traditional payment transfer methods. Costs would drop significantly (from average of $15-30) to less than 10 cents. Cross-border transactions would improve dramatically. Security and transparency would improve dramatically, and they are operated 24/7. [19] [20] [21]:

However, with any benefit come a few downsides.

If customers move deposits into stablecoins, banks could lose retail deposits, thus reducing their ability to lend and this would have a detrimental impact on liquidity. [22]

There are no KYC requirements and there are significant limitations for KYC. This puts significant challenges from anti-money laundering and preventing crime perspective. This puts the burden on authorities to flag such transactions.[23]

Also, the speed of transactions could be overstated as the Federal Reserve Bank of Boston showed that a non-blockchain payment technology could execute ten times more transactions per second than high-performance blockchain.[24]

In addition, stablecoins are issued by private companies, they are backed by reserves to maintain the peg. However, that is not without risks as the case of Terra showed us, where close to $20 billion was wiped out and Tether (USDT) lost its peg temporarily. [25] [26] [27] [28]

Finally, since the most popular stablecoins USDT and USDC are pegged to the US dollar, they perpetuate the dominance of the US dollar abroad. [29] [30]

Risks and challenges: regulatory, monetary, and sovereign

From an international regulation perspective, there are several key problems with the current setup of stablecoins. For one, they are pegged to the US dollar. Also, with the GENIUS ACT signed in July of this year, projections suggest that the size of the stablecoins supply could increase rapidly from $230 billion now to $2 trillion by 2028.  This poses significant challenges for a lot of sovereign countries, including the EU. This reliance on the US dollar poses challenges from both monetary policy and stability point of view.[31]  

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Central Bank Digital Currency (CBDC)

Given the above facts the EU has expedited its push to launch its very own CBDC - the digital euro much like what China did in 2020 with the launch of the electronic renminbi. The ECB recognizes that in a digital age digital assets bring several benefits such as speed, convenience and efficiency.[33] And with a digital euro the ECB would ensure that it would maintain strategic autonomy for the reasons specified above. [34]

China has had some foresight, when it launched the e-CNY in 2020. It had several aims such as providing more efficiency to the banking system, providing a backup to the retail system, improving digital payments and inclusion, reducing transaction costs and finally improving cross-border payments. [35] [36]This has allowed the e-CNY to expand the services offered to the wider public, still, however, predominantly in China, thereby supplementing and not undermining PBoC’s sovereignty and monetary policy.[37] [38]

In addition, stablecoins offer significant challenges to traditional banking. If anybody with a phone can pay and receive funds where do banks fit in this scenario?  There is significant potential for stablecoins to replace traditional banks, thereby making their operations obsolete. [39] However, several prominent financial institutions such as Citibank[40] and JP Morgan[41] are exploring options in utilizing stablecoins, specifically for deposit transactions, reducing overhead costs, and improving operations. Other firms that are jumping on the stablecoin train are PayPal and Stripe, which are integrating stablecoins into their digital payments.

Final Remarks

In summary, as the world of crypto has evolved over time it has shown that there are many challenges and opportunities. In the case of wider adoption of stablecoins there have been benefits in developing countries, and countries with high inflation. They also allow for lower, more efficient transactions. However, the main challenges are the speed and size of their use, their peg to the US Dollar, and the loss of sovereignty thus undermining monetary policy and stability of central banks. These developments have pushed governments and central banks to become more proactive, accelerating their own digital currency projects to stabilize the financial system while delivering the benefits of stablecoins to the wider public.