It is safe to say that the cryptocurrency market had a pretty bad year. In addition to the fact that prices have been falling since November 2021, the industry faced a series of black swan events, such as the collapse of Terra last May, followed by the bankruptcy of several major digital asset lenders and now, the FTX scandal.
Additionally, we are currently in the midst of an economic downturn as governments around the world struggle to bring down record levels of inflation. Taking all this into account, as well as a decrease in seed funding that could last up to 18 months, it looks like Crypto Winter will be around for a while yet.
In light of such a prospect, crypto market participants are increasingly selling their holdings to avoid more significant losses in the future. And in addition to Bitcoin, Ether, and other major cryptocurrencies, investors are also cashing in their stablecoins: data shows investors redeemed around $3.5 billion in stablecoins, including $2 billion in USDT, in the two weeks after the FTX implosion. In total, the stablecoin economy lost $28 billion in market capitalization in 2022.
That being said, ditching stablecoins may not be the smartest course of action in the long run. Let’s take a look and see why that might be the case.
The advantages of cryptocurrencies, with price stability
In theory, stablecoins are cryptocurrencies that claim to track the value of major fiat currencies like the US dollar, the euro, and the British pound. As a result, they are designed to work like standard currencies, but without the high volatility and frequent price swings associated with them.
The term “stablecoin” gives a clear message about its intent. In the extremely volatile world of cryptocurrencies, where prices tend to fluctuate rapidly, this category of assets is meant to provide stability. And, in the case of reputable stablecoins that are reportedly backed directly through fiat or crypto reserves, they seem to be serving their purpose very well.
In fact, the chairman of the US Securities and Exchange Commission, Gary Gensler, claimed that stablecoins reduce risks to the financial system, arguing that they should fall under a regulatory framework similar to that of money market funds. .
At the same time, they are superior to fiat currencies, as stablecoins retain all the benefits of blockchain technology. These range from instant and low-cost transactions to increased transparency and traceability, as well as the ability to use them in crypto applications for lending, lending, yield farming, and other activities.
Should stablecoins be regulated?
In the aftermath of the FTX crash, the need for deeper regulation and supervision of stablecoins has come to the fore.
And this shouldn’t come as a surprise. With their market capitalization now falling below US$140 billion, governments around the world have expressed their intention to regulate stablecoins in a bid to ensure the stability of their economies and safeguard investors. consumers.
Multiple benefits can be found by opting for more comprehensive regulation. First, it could decrease systematic risks, as well as facilitate transparency and trust when licensing stablecoin issuers. In addition, regulators could also order them not only to publicly disclose their reserve allocations, but to exclusively use cash and other low-risk instruments to keep their currencies pegged.
Additionally, a clear regulatory framework around stablecoins could open up the market for traditional financial players who could issue their own digital stablecoins. Doing so could boost crypto market activity and encourage innovation, creating a new line of financial products.
At the same time, the integration of stablecoins into a nation’s economy could increase the transparency of the financial system and make it more robust by drastically reducing transaction costs. The latter is especially important in the case of cross-border transfers, which can lower operating expenses for government organizations and businesses.
For citizens, stablecoins hold great promise in emerging markets and developing economies as they can be used to hedge against inflation and weak currencies. It’s a crucial solution to a real problem: the Argentine peso, for example, has lost 90% of its value against the US dollar in the last five years.
It seems to be the main reason why developing countries have overtaken developed nations in adopting cryptocurrencies. For example, in Chainalysis’ 2022 cryptocurrency adoption index, only two of the top 20 ranking jurisdictions were high-income countries. The remainder were lower-middle-income or upper-middle-income countries. Statista data confirms this trend, with Nigeria, Thailand, and Turkey occupying the top three spots for percentage of cryptocurrency owners and users among respondents.
Where is the stablecoin market headed in 2023?
By combining low volatility and the benefits of blockchain technology, stablecoins play an integral role in the cryptocurrency industry. Despite recent selloffs, stablecoin digital assets are increasingly gaining ground against standard cryptocurrencies, reaching a new high of 18% market share recently before easing back to 16%, but still above its 11% share of the total crypto market from a year ago. .
Given the benefits of regulation in this field, it is likely that several jurisdictions will complete their regulatory frameworks for stablecoins by the end of 2023. Flexible designs and clear rules will give the cryptocurrency industry a much-needed boost, That could help alleviate the shocks of the current winter and may even prepare the market for the next bull run.
Furthermore, the above regulatory developments may help stabilize local economies and provide more opportunities for traditional finance and big tech players to join the market and issue their own stablecoins. At the same time, citizens could gain access to a safer and more convenient way to protect themselves against weak macroeconomic conditions and unstable national currencies.