Among the assets that have been involved in the recent dramatic crypto saga of 2022, stablecoins have been an integral part. Stablecoins are a type of cryptocurrency whose value is usually pegged to a reference asset such as gold or the US Dollar. Stablecoin followed the sinking crypto market in 2022, as their market capitalization decreased significantly to under $140 billion, the lowest since mid-2021. The fact that their market dominance also dropped indicates that investor and crypto users alike turned away from stablecoins in favor of other, more risky crypto assets. So, having said all that, why did the stablecoin market perform so poorly last year, and is there a ray of hope for a significant rebound to occur sometime soon?
2022 – A year mired in disappointments
There has been an atmosphere of uncertainty surrounding stablecoins for the better part of 10 months, following the now-infamous collapse of the Terra USD (UST) stablecoin, which lost its peg to the US Dollar in May 2022, plunging the crypto market in a disarray only bested by the bankruptcy of exchange giant FTX in November. Other leading projects like Tether and Circle’s USDC also briefly lost their peg to the dollar, exacerbating what was already a critical situation.
To avoid future significant losses, investors have been cashing out their stablecoins, in addition to Bitcoin and Ether, towards the end of 2022. Crypto users have redeemed roughly $3.5 billion in stablecoins just in the two weeks following FTX’s collapse.
Stablecoin adoption and benefits
However, not all has been bleak for the asset class in recent times. Major tech and payment providers, such as Apple Pay and Mastercard, have demonstrated interest in incorporating stablecoin solutions within their products and services, and some leading crypto platforms, like Cardano, have launched their own stablecoins linked to the US Dollar. However, the best news has come from financial entities: for example, a number of Australian banks have already unveiled their own stablecoins as well.
Notwithstanding their poor run in 2022, stablecoins are still among the most interesting digital asset classes, with several traits that make them unique and therefore valuable and interesting for entities of every kind to explore their usage in some manner. Stablecoins are essentially fiat currencies but with the added benefits of blockchain technology, a trait that allows them to have rapid, low-cost transactions, as well as increased transparency and traceability, which are two indicators that are beloved in the crypto world, where anonymity is almost always preferred and transactions are public for all to see.
It is therefore unsurprising to see that stablecoin adoption has been most rampant in developing countries whose fiat currencies are mired, as they can be used as a tool to hedge against inflation. According to a Chanialysis review of 2022, 18 of the top 20 ranked countries for crypto and stablecoin adoption are not high-income nation, with Nigeria, Thailand and Turkey leading the way.
A new frontier of stablecoin regulation
Crypto adoption could grow to unseen levels in the next years, also due to the fact that they can be used to send almost any amount of cash anywhere for next-to-no fees, but this increase in utility could also mean that governments will look to heavily regulate the asset class. However, this might not be a terrible development, as increased regulation could decrease systematic risks while also opening up the door to traditional financial entities to issue their own stablecoins. Such a development would increase crypto market activity and ensure a larger degree of transparency to the sector as a whole.
However, this is unlikely to happen unless banks open their doors to these innovative assets. Even though some major entities are already working to launch their own stablecoin projects – as in Australia – until the banking sector as a whole does not choose to fully incorporate stablecoin users in its services network, it is unlikely that they will be accepted by any major businesses or operations as means of payment, therefore potentially stagnating their development
