The Unstable State of Stablecoins

An overview of the stablecoin market’s growth, business cases, and regulatory uncertainties (as of June 2021)

Bringing Stability to Cryptocurrency

Stablecoins intend to solve a large issue among cryptocurrencies: volatility. One of the main detractors limiting Bitcoin’s mainstream adoption, specifically for consumer payments, is its volatility. That alone makes it almost impossible for the average consumer to attempt to manage and understand their purchasing power with Bitcoin along with most well-known cryptocurrencies. Additionally, to own and transact with most cryptocurrencies, there is a high level of technological and financial literacy needed by the consumer compared to owning and transacting with state-issued currency. Surveys from the past two years reflect these realities, showing low consumer adoption of cryptocurrencies, consistently under 10%. A more recent survey in 2020 from Cornerstone Advisors found that only 15% of American adults own cryptocurrency of some kind. This estimate is in line with the 2021 State of U.S. Crypto Report from Gemini, estimating only 14% of the U.S. population.

https://www.theblockcrypto.com/data/decentralized-finance/stablecoins

Mainstream Adoption and Mainstream Risk

In recent years, over 200 stablecoins have been in development, with more than 60 making it to market. Most live coins have little market share compared to the leading three coins. The top stablecoins currently in the market as well as larger coins in development pose systemic risk on the global financial system as they grow in value and reach.

  • Hong Kong-based Tether Holdings Limited operates the USDT.
  • Circle Internet Financial Limited operates USDC and according to their website “together with Coinbase and the Centre Consortium oversees the standards and protocol” of the stablecoin.
  • Paxos operates the BUSD under a limited-purpose trust charter from the New York State Department of Financial Services in a partnership with Binance a privately held company currently out of the Cayman Islands whose primary business is operating a cryptocurrency exchange.
  1. Traditional financial institutions (TradFi) consisting of banks, payments firms, and brokerages.
  2. Centralized financial institutions (CeFi) operating in the crypto space.
  3. Decentralized financial services (DeFi) operating in the crypto space.

An Unstable Regulatory Environment

Regulation of cryptocurrency varies around the world by country from effective bans in China to different implemented regulations in the United Kingdom, Singapore, and Canada. Other countries including Brazil and the United States have proposed national regulations being considered by their governments.

An Unknown Future for Stablecoins

As consumers gain more confidence in cryptocurrencies and begin to trial products built with stablecoins that behave like mainstream financial products but with higher yield, crypto may be poised to see larger market share gains into the traditional checking, savings, and investment account product markets offered by most banks. The future looks to hold a path of growth for stablecoins as younger generations view cryptocurrencies such as Bitcoin more favorably and claim that they are more inclined to use Bitcoin in the next five years compared to their older counterparts, as explained in Blockchain Capital’s 2020 Crypto Survey. Yet, with the spectrum of business cases spanning from traditional banking all the way to decentralized finance paired with inconsistent regulation and risks to consumers, the future of stablecoins remains unknown.

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Kelly Robert Chambers

FinTech executive exploring blockchain and digital money. I write to learn. Connect with me at www.linkedin.com/in/kellyrobertchambers/