Many investors don’t realise how disruptive stablecoins could be

By Fergus Halliday

November 25 2021
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Bitcoin and ethereum are snagging the headlines, but stablecoins could be a rising giant in the global financial landscape.

Perhaps because they eschew the volatility seen elsewhere, stablecoins like Tether aren’t necessarily seen as radical or transformative in the same way as cryptocurrencies like bitcoin.

When it comes to crypto-assets, headliners like ethereum take up much of the spotlight. However, it’s stablecoins that could have a larger and longer impact on the financial sector.

Amundi Asset Management strategist Tristan Perrier noted that stablecoins only represented roughly 6 per cent of the total cryptocurrency market cap but accounted for a much larger share in terms of transaction volume.

“Most cryptocurrency trades involve a stablecoin on one side, with Tether, the largest stablecoin, being also the most traded cryptocurrency (ahead of bitcoin),” he said.

Unlike mainstream cryptocurrencies, the value of stablecoins like Tether isn’t left entirely to market forces. Instead, the token is pegged to the price of fiat currencies and real-world assets like the US dollar.

Speculators typically don’t buy stablecoin to hold them. They’re doing so to use it as an intermediary between the traditional and crypto financial markets.

By buying a stablecoin like Tether and then exchanging for other cryptocurrencies via an exchange, investors are able to reduce slippage, cut down on transaction costs and execute trades faster.

“So far, the main role of stablecoins has been to facilitate cryptocurrency trading, allowing market participants to stabilise the value of their investment in USD terms, without having to move funds out of the cryptocurrency ecosystem,” Mr Perrier explained.

However, the long-term trajectory for stablecoins is arguably more transformative than that of speculative assets like bitcoin.

“If used for other purposes, stablecoins can offer many practical advantages over bank deposits,” Mr Perrier noted.

He said that stablecoins have the advantage when it comes to accessibility and speed.

Thanks to quasi-instantaneous 24/7 settlement, he said that this could make them particularly well suited for new fintech innovations in the years to come.

“Stablecoins, more than other fluctuating cryptocurrencies, may thus be seen, for better or worse, as the most imminent competitors to conventional money,” he suggested.

Of course, with this new paradigm in personal finances comes new risks and disruptions.

“As competitors of bank deposits, stablecoins could, in theory, have an adverse effect on banks’ credit distribution capacity,” Mr Perrier said.

While it is easy to think of circumstances where stablecoins could act as magnets for destabilising money runs in a crisis, he noted that the failure of a large stablecoin could generate significant financial shocks.

“In most cases, authorities are much more likely to regulate stablecoins than ban them as they cannot ignore the fact that, despite the risks, stablecoins offer many practical advantages and can support financial innovation, generally seen as promising in terms of income, development of new skills and jobs,” he said.

Going forward, Mr Perrier expects that stablecoins will continue to grow and find new uses, both as an asset class and means of payment.

“Given the complexity of the assessment, by public authorities, of the balance between the many threats and opportunities presented by stablecoins, it is unlikely that their current development will soon be brought to a sudden stop,” he said.

About the author

Fergus Halliday

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

About the author

Fergus Halliday

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

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