As digital currencies reshape the financial landscape, stablecoins are emerging as pivotal players.
Chicago, Illinois – December 19, 2017, Chicago, Illinois. (Photo by Scott Olson/Getty Images)
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Earlier this month, Castle Island Ventures partnered with Brevan Howard Digital and Artemis to produce an in-depth report on stablecoins sponsored by Visa. Based on their findings, “there are currently more than $160 billion in stablecoins in circulation, up from single-digit billions in 2020.”
The report claims that stablecoin use cases are on the rise, stating that “emerging markets are accelerating the adoption of stablecoins for payments, currency substitution, and access to high-quality yields. ” states.
Overcoming Stablecoin Transparency, Regulation, and Market Volatility After the TerraLuna Collapse
Stablecoins promise price stability while preserving the innovative potential of digital assets. Their rise was not without controversy. In particular, stablecoins face intense scrutiny regarding their transparency, KYC and AML regulatory compliance, and underlying technical mechanisms.
In May 2022, TerraLuna’s stablecoin known as Terra (UST) collapsed. This catastrophic event triggered one of the most important events in the history of cryptocurrencies. UST was an algorithmic stablecoin designed to maintain a 1:1 peg to the US dollar through its sister token Luna. However, when market confidence in UST began to waver, the mechanism linking UST and Luna collapsed. Due to the mass issuance of tokens, the price of Luna plummeted, causing a hyperinflationary spiral. This caused UST to completely lose its peg, wiping out more than $40 billion in value and destroying investor confidence.
Since this incident, the market has been recovering and transparency is needed. Consumer demand for stablecoins continues to grow.
The whole purpose of stablecoin design is to maintain stable value. Stablecoins are typically pegged to traditional assets such as the US dollar, commodities, or a basket of assets. The purpose of stablecoins is to reduce the volatility often seen in other cryptocurrencies. Therefore, it is more suitable for daily trading, savings or as a hedge against market fluctuations. The aforementioned report found that over 95% of stablecoins are “linked to the US dollar.”
The referenced stablecoin research results further state that “the divergence that appeared during the cooling-off period in virtual currency trading volumes from 2022 to 2023 suggests that stablecoins will have meaningful uses beyond mere speculative use.” It suggests that they have.”
Balancing innovation, regulation, and illegality in a $2.6 trillion market growth
There are many types of stablecoins, including fiat-backed, cryptocurrency-backed, and algorithmic stablecoins.
The purpose of stablecoins is to combine cryptocurrency innovation with price stability. There is a complex debate behind the scenes about how this will play out. Since their public entry into the world of digital assets in 2014, stablecoins have continued to be a vehicle for fraudulent activity.
However, the story is changing.
Castle Island’s Stablecoin Report found that “in the first half of 2024, stablecoins settled payments worth over $2.6 trillion (according to our adjusted estimates).”
USDT (Tether Tether ) is the most widely used stablecoin. The purpose of USDT is cross-border payments, remittances, and hedging against currency fluctuations and inflation. However, due to its anonymity and ease of transfer, Tether has also been exploited for illegal activities such as black market trading and money laundering.
In April 2024, Sen. Cynthia Lummis (R-Wyo.) and Sen. Kirsten Gillibrand (D-N.Y.) issued a press release regarding stablecoin legislation. Gillibrand said, “Passing a stablecoin regulatory framework is critical to preserving the dominance of the US dollar, fostering responsible innovation, protecting consumers, and cracking down on money laundering and illicit finance.” It is important.”
A key issue for regulators is balancing the legitimate benefits of stablecoins with the need for stronger oversight to combat abuse. While promoting financial inclusion and faster transactions for users.
Stablecoins vs. central bank digital currencies
Some stablecoins are more transparent than others.
“Each blockchain has trade-offs in terms of payment guarantees, fees, speed, etc.,” said Nick Carter, one of Castle Island Ventures’ founding partners.
One of the attractions of cryptocurrencies is that they are not tied to any government. Asked if governments might adopt stablecoins in the form of central bank digital currencies, Carter said, “I have yet to come across a government-backed stablecoin.” He continued, “My guess is that even if a CBDC is introduced, blockchain rails will not be used because governments will want to embed even more oversight into these systems. , because crypto transactions on public blockchains are less likely to be monitored and provide much more information to end users’ autonomy. Therefore, we are skeptical whether governments will embark on public blockchains. ”
As stablecoins evolve, their increased adoption reflects their potential to revolutionize digital finance. Balancing innovation and regulatory oversight and ensuring transparency will be critical in shaping the future of stablecoins within the global financial system.
