Global Stablecoin Adoption Indicates Increased Dollarization

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  • High inflation and unstable currencies make stablecoins an alternative to maintain value in emerging or developing countries
  • As stablecoins are mostly pegged to the US dollar, dollarization is expected to increase in these economies

Crypto-assets can be volatile, but they have also caught the world’s attention as alternatives to unstable fiat currencies. In particular, experts believe that high inflation coupled with a potential global recession could boost the adoption of dollar-pegged stablecoins in emerging or developing markets, accelerating dollarization.

Maxim Ermilov, the founder of Overnight, which launched an interest-bearing stablecoin on Polygon’s proof-of-stake chain called USD+, told Blockworks that “people are trying to protect their savings from high inflation and potential devaluation and often choose to save in dollars. ”

But it’s not always easy. In some countries, banks are at high risk of failure and hoarding dollars in cash is an expensive and risky strategy.

“Stablecoins solve these problems in emerging markets: they are a hard currency, easier to store than cash, not prone to bank failures, [and]can be used to generate yield,” Ermilov said.

Inflation is a hot topic in advanced economies, where it has been exceptionally high, but it is not new for some emerging or developing economies. In inflationary environments, some national currencies depreciate, especially when a country’s central bank is not independent of political power.

“Stablecoins have been growing regardless of market cycles,” said Hugo Volz Oliveira, secretary general of the New Economy Institute, a nonprofit founded by leading Web3 companies and backed by Near blockchain, Brave web browser and several Portuguese universities.

He said Blockworks Tether (USDT) was launched in 2014, but “was only widely adopted during the boom of 2017.” Even during the Covid-induced crash in March 2020, “the supply of stablecoins increased while crypto prices fell, implying that bearish periods are indeed contributing to an increase in stablecoin adoption” .

Even the International Monetary Fund (IMF) has recognized that an economic crisis could lead to further dollarization of economies, especially with its digital versions like USDT or USD Coin (USDC) which are readily available around the world.

“It is possible that national currencies issued by their central banks, especially currencies considered less convenient to use or whose value is volatile, will be replaced by stablecoins – private cryptocurrencies issued by multinational corporations or global banks and usually backed by US dollars to maintain stability. – or by CBDCs issued by major economies,” IMF economists wrote in a June publication.

“Even a volatile cryptocurrency such as Bitcoin could, in addition to enabling capital flight, be preferred over local currency during economic turmoil,” the IMF noted.

However, where bitcoin has been successful as an alternative to local currency in the past, stablecoin adoption may be faster as people are more familiar with the underlying technology of crypto markets, partly thanks to bitcoin.

“This adoption will also increase significantly if these stablecoins and crypto-assets can improve financial inclusion in places where banking services are inefficient and transaction costs are high,” Volz Oliveira said.

A practical example of this is when workers in developing countries work for employers in wealthier countries, being paid digitally without having to deal with employers’ cumbersome financial systems is an asset. The same applies to remittances from family members abroad.

Stablecoins do not protect people from bans or seizures

If the problem is not currency depreciation but an authoritarian regime, stablecoins will not be the solution. Unlike bitcoin, ether, and a handful of other cryptoassets which are decentralized by design, stablecoins tend to be centralized. This means that “their users are subject to bans or seizures by rogue governments, while bitcoin and some other projects resist such attacks,” Volz Oliveira said.

In June, many human rights advocates highlighted how crypto-assets could be a tool for political dissidents in many countries around the world. In a letter to the US Congress quoted by CNBC, 21 human rights advocates from 20 different countries explained how important these digital assets are where “local currencies collapse, break or are cut off from the outside world. “.

“We do not claim that Bitcoin and stablecoins solve all problems, nor that they are entirely positive or risk-free,” they acknowledge. Still, “this open and decentralized monetary network will help challenge tyranny and strengthen democratic movements abroad.”.

The letter cites places such as Nigeria, Turkey and Ukraine where, according to 2021 data from CryptoCompare, crypto activity has increased significantly – in Turkey (+85.4%) and Ukraine (+218%). ). In both countries, the dominance of stablecoins has overtaken the dominance of the euro, for example.

“Additionally, our data shows growth in crypto activity this year, despite the downward trend in price action,” says Jacob Joseph, research and data analyst at CryptoCompare.

In Nigeria, the trend is in the opposite direction. The volume of crypto exchanges decreased by 97.7% over the same period, which can be attributed to the central bank’s warning against cryptocurrency in February last year.

As this analysis is based on trading volume between stablecoins and fiat pairs, it is not possible to conclude that there is more or less capital moving to stablecoins in these countries, although this indicates more interest in assets in general.

Is it really a safe bet?

The reality is not that all stablecoins are created equal, of course. TerraUSD (UST) is just the latest example of how a seemingly safe asset can go off the rails. The collapse has sparked skepticism about the adoption of stablecoins, although experts believe the setback will be temporary.

“Many people were attracted by the high interest rates offered by Anchor on [algorithmic stablecoin]UST and put their savings there. Unfortunately, many people have been misled by the term ‘stablecoin’ when referring to UST,” Ermilov said.

“There are stablecoins and stablecoins… it takes specialists or regulators to tell the difference and explain to the consumer that only [some]types are safe.

But there may be a silver lining. “While many are currently applauding the downfall of Terra and the potential insolvency of Celsius, it cannot be forgotten that these centralized projects do not represent the industry and the potential of this technology to improve the global financial system and benefit to the lives of many is still strong,” said Volz Oliveira.

Regulation can help, and progress is being made both in the European Union and in the United States Congress to address crypto-asset rules.

“It is natural that most of the regulation concerns stablecoins and the control of their issuance in a way that promotes financial stability and avoids contagion in the event of a crisis,” added Volz Oliveira, predicting that this “should bring more confidence in the system, both in Europe and abroad, as EU regulations are often followed by other countries and regional blocs.

Ermilov also believes that future European crypto regulations will “clearly differentiate between different types of stablecoins,” thereby supporting and promoting “compliant stablecoins” instead of “algorithmic” stablecoins.

“Had it been in place earlier, the UST disaster could have been avoided or minimized,” he said.


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  • Tiago Varzim

    blockages

    Freelance journalist

    Tiago Varzim is a Portugal-based journalist covering macroeconomics, financial markets and digital assets in the European Union. He works for the main financial newspapers in Portugal. Tiago graduated from the Escola Superior de Comunicação Social in Lisbon with a degree in journalism.

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