The fundamental question behind stablecoins and their destiny for disruption remains: why? Why do we need stablecoins at all? The world was getting on fine without them. It was more or less, stable.
The bear market of 2022 following a virtually unbelievable v-shaped recovery following the first global pandemic of several generations brings into question the sustainability of said recovery. Pumping helicopter (free) money into a global consumer base alongside additionally free money from central banks everywhere challenges the concept of purchasing power.
Meaning, that purchasing power, the worth of your dollar or euro, should over a short-term remain stable while you accept small deteriorations over time.
However, the USA is currently experiencing, or suffering, a 9.1% inflation rate. All else held equal, this implies a 9.1% deterioration in your dollar over the last year. Another problem: we’re not yet sure if inflation has yet peaked, whether in the USA or abroad.
So how can stablecoins help? What’s the point?
The primary ethos of a stablecoin remains, forevermore, stability. The crypto community understands the outer world sees the volatility of cryptocurrencies as a whole, uninviting.
Like any traditional portfolio requires cash within a mix of equities or mutual funds, for example, a crypto portfolio necessitates the equivalent. Stablecoins represent that equivalent. No matter the issue, 1 USD equals 1 USD. Likewise, 1 USD Coin always equals 1 USD.
Stablecoins such as USD Coin or Tether earn the respect of regulators worldwide through their mandates of maintaining a 1:1 peg with the US dollar. Despite continuous money printing and the bear markets of 2022, their pegs are holding steady.
Yet you’d be correct if you thought: How does this solve the inflation problem?
This is the second goal underpinning stablecoins: to remove the reliance upon fiat currencies and establish, permanently, a way to eradicate high inflation. It’s easy to forget inflation, but what we all must not forget, is that it hurts most those in the lowest income brackets.
After all, it may be better to limit market intervention when v-shaped recoveries only lead to further downturns down the road.
The fiat world is not without issues. Central banks and regulators can raise concerns concerning crypto’s role in illicit activity. However, that narrative is outright false.
The true narrative suggests that the US dollar is used for illicit purposes far more than Bitcoin. Cryptocurrencies like Bitcoin operate through a blockchain, or a public register of all transactions. While seemingly countless transactions happen daily, any user’s name could ultimately be retrieved.
On the other hand, cash transactions effectively eliminate “tracing.” This remains common knowledge.
During times of market stress, analysts and executives alike seemingly stay glued to their screens, fixated upon the words of the current central bank leader. In the USA, we have the Federal Reserve (“the Fed”). In the EU, we have the European Central Bank (“ECB”).
As the Fed is the bellwether leading the G7, let’s focus upon its asset purchases. In this context, asset purchases translate to “printing” new money by lending money (generally for free) which did not yet before exist. These purchases grew from less than 1 trillion USD in 2008 to 9 trillion USD in 2022.
While this was to encourage a recovery following the global financial crisis of 2008 and altruistically help people get back on their feet, there is a catch-22. In fact, there is always a catch-22 when the financial markets are pushed one way or another away from their natural ebb and flow.
This translates into a bear-defying 26% return for the S&P 500 in 2021, or when the coronavirus pandemic struck. In other words, if you did nothing for your portfolio that year, you likely would have earned good money, better than many “normal” years.
However, we’re feeling the sharp downside today through inflation and the opposite knee jerk reaction of global bear markets. As that comes, we see how the words (read: “commentary”) of less than a handful of central bank chairs dictate the savings and wellbeing of millions.
Historically and somehow today, the cost of sending an international wire transfers ranges anywhere from 30 USD to over 100. While the exact cost depends upon your bank, you get the point.
Why should it cost so much for you to send your money?
And here lies only one part of stablecoins’ disruptive potential. Tether, intended only for large-scale business transfers of pegged USD coins, charges 0.1%. USD Coin showcases withdrawal fees as little as 2.0 USDC, or USD.
Further, select blockchains are working on zero transfer fees.
The incessant rise of stablecoins has forced regulators to seemingly accept their worldwide adoption.
In short, they’re:
Through staking, often returning yields greater than 5%, users deposit or “lock” their stablecoins for use by protocols. Each protocol is different, although they may be separated into categories according to their utility. One example is establishing liquidity for crypto-crypto or crypto-fiat trading pairs.
Not only does this yield far surpass a typical “savings” rate of 0.10% or less, it removes the centralization inherent with broker-dealers. These are a limited group of major institutions providing liquidity to popular trades across currencies and asset classes.
For example, there are now several leading brokers catering to everyday retail cryptocurrency or stablecoin investors regardless of geography.
Mass inclusion, democratization, and advancement through technology remain the central pillars of blockchain technology. They’re the pillars of stablecoins as well.
Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.
The co-author of this text, Conor Scott, CFA, has been active in the wealth management industry since 2012, continuously researching the latest developments affecting portfolio management and cryptocurrency. Mr. Scott is a Freelance Writer for Deltec International Group, www.deltecbank.com.
The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade.
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