The global introduction of stablecoin indicates increased dollarization

The global introduction of stablecoin indicates increased dollarization

cryptoassets may be volatile, but they have also gained worldwide attention as alternatives to unstable Fiat currencies. In particular, experts believe that a high inflation in connection with a possible global recession could promote the introduction of stable coins bound to the dollar in threshold or development markets and accelerate dollarization.

Maxim Ermilov, the founder of OVERNIGHT, who launched a interest-bearing stablecoin on the Proof-of-Stake chain of Polygon called USD+, told Blockworks that “People are trying to protect their savings from high inflation and potential devaluation and often choose to save in dollar.”

But that's not always easy. Banks have a high risk of failure in some countries, and the storage of dollars in cash is a costly and risky strategy.

"Stable coins solve these problems in emerging countries: it is a tough currency to store more easily than cash, not susceptible to bank failures, [and] can be used to generate earnings," said Ermilov.

Inflation is a hot topic in advanced economies where it was unusually high, but it is nothing new for some threshold or developing countries. In inflationary environments, some national currencies lose value, especially if the central bank of a country is not independent of political power.

"Stable coins have grown independently of market cycles," said Hugo Volz Oliveira, General Secretary of the New Economy Institute, a non-profit organization founded by leading web3 companies and supported by the Near-Blockchain, the web browser Brows and several Portuguese universities.

He said that Blockworks Tether (USDT) was introduced in 2014, but "was only widespread during the 2017 boom". Even with the crash caused by Covid in March 2020, "the range of stablecoins grew, while crypto prices fell, which indicates that declining periods actually contribute to an increase in the acceptance of stable coins".

Even the International Monetary Fund (IMF) admitted that economic turbulence could lead to further dollarization of economies, in particular with its digital versions such as USDT or USD coin (USDC), which are easily available worldwide.

"" It is possible that national currencies that are issued by their central banks, in particular currencies that can be used as less convenient or in value as a volatile, are suppressed by stable coins-private cryptocurrencies that are output by multinational companies or global banks and usually covered by US dollars to maintain stability-or by CBDCs, which of great ones Economics are issued ”, the economists of the IWF in a rel =" nofollow noopener "target =" _ blank "https://www.imf.org/en/fandd/issues/2022/06/enduring-preeminence-eswar-prasad"> publication published June.

"Even a volatile cryptocurrency like Bitcoin could be preferred in addition to the enabling of the capital flight, in economic turbulence of the local currency," said the IMF.

Where Bitcoin was successful in the past as an alternative to the local currency, the introduction of stablecoins could be carried out faster, since the population with the underlying technology that drives the cryptoma markets is better familiar thanks to Bitcoin.

"This acceptance will also increase considerably if these stable coins and cryptoassets can improve financial inclusion in places where banking is inefficient and the transaction costs are high," said Volz Oliveira.

A practical example of this is when employees work in developing countries for employers in wealthier countries, it is an advantage to be paid digitally without having to deal with the cumbersome financial systems of the employer. The same applies to transfers from family members abroad.

StableCoins do not protect the population from prohibited or confiscated

If the problem is not the devaluation of the currency but an authoritarian regime, stable coins will not be the answer. In contrast to Bitcoin, ether and a handful of other cryptoassets that are decentralized by design, stable coins tend to be centralized. This means that "their users are prohibited or confiscated by villain governments, while Bitcoin and some other projects are resistant to such attacks," said Volz Oliveira.

In June, many human rights activists emphasized how cryptoassets could be a tool for political dissidents in many countries around the world. In a letter to the US Congress cited by cnbc break down, break or be cut off from the outside world ”.

"We do not say that Bitcoin and stablecoins solve every problem or that they are completely positive or without risk," they recognize. But "this open and decentralized currency network will help to defy the tyranny for defying and democratic movements abroad." ^.

The letter names places such as Nigeria, Turkey and Ukraine, where, according to Cryptocompar's data, crypto activity has increased significantly-in Turkey (+85.4 %) and Ukraine (+218 %). In both countries, for example, the stable coin dominance increased beyond the dominance of the euro.

"In addition, despite the downward trend of price movements this year, our data show growth of crypto activity," says Jacob Joseph, Research and Data Analyst of CryptoCcare.

in Nigeria, the trend goes in the opposite direction. The crypto trade volume has decreased by 97.7 % in the same period, which is due to the warning of the central bank of cryptocurrency in February last year.

Since this analysis is based on the transaction volume between stable coin and fiat pairs, it cannot be concluded that more or less capital flows into stable coins in these countries, although this generally indicates greater interest in the assets.

is it really a safe good?

The reality is of course that not all stable coins are the same. Terrausd (VAT) is only the latest example of how an apparently safe asset can get out of joint. The collapse aroused skepticism compared to the introduction of stablecoins, although experts believe that the setback will only be temporary.

"Many people were attracted by the high interest rates that Anchor offered [Algorithmic Stablecoin] VAT and put on their savings. Unfortunately, many people were deceived by the term" stablecoin "when they referred to VAT," said Ermilov.

"There are stablecoins and stablecoins ... Specialists or supervisory authorities are needed to recognize the difference and only explain the consumer [some] types."

But there can be a silver lit on the horizon. "Even if many are currently cheering on Terra and the possible bankruptcy of Celsius, one should not forget that these centralized projects do not represent the industry and that the potential of this technology to improve the financial system of the world and people still benefit from many," said Volive Oliveira.

Regulation can help, and progress is made in both the European Union and in the US Congress to tackle the cryptoasset rules.

"It is only natural that most of the regulations affect stable coins and the control of their edition in a way that promotes financial stability and avoids infection in the event of a crisis," added Volz Oliveira and predicted that this should "bring more confidence in the system.

Ermilov also believes that future European crypto regulation will "clearly distinguish between different types of stablecoins" and therefore will support and promote "conformity stable coins" instead of "algorithmic" stable coins.

"If it had been there before, the VAT disaster could have been avoided or minimized," he said.

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The contribution "Global Stablecoin Adoption Points to Improved Dollarization" is not a financial advice.