Stablecoins and the US dollar dominance: is there another way?

Stablecoins are currently experiencing breathtaking growth. In 2021, total supply increased 388%, from $29 billion to $140 billion. In the first quarter of this year, the market capitalization of cryptocurrencies increased by another $40 billion to over $180 billion increased.

Since stablecoins are crypto assets that track the price of fiat currencies, they are coveted due to their low volatility. A large part of their growth therefore comes from the derivatives markets, increasingly in stablecoins settled will. Another important factor is the attractive stablecoin yields offered by DeFi protocols. In fact, Tether and Co. have developed into a large liquidity pool and serve investors as an entry point into cryptocurrencies.

This trend is also supported by Michael Svoboda, COO of Liquidity, a decentralized lending protocol. The protocol stablecoin LUSD wins in DAO Treasuries as it offers a competitive source of returns and is fully repayable at any time, counteracting classic bank run scenarios. Svoboda also sees growing interest from more traditional players: “Stablecoins offer attractive alternatives to traditional financial products and are one of the main drivers for institutional acceptance of cryptocurrencies,” says Svoboda.

All US dollars, or what?

It is telling that most of today’s demand is for USD-denominated stablecoins. According to the data from CoinGecko make them about 99% of the total stablecoin market cap. One obvious reason for this is that financial markets in general are heavily dollar biased. The US dollar is the internationally accepted currency for global trade, a fact that is obviously reflected in the crypto markets as well.

Another reason has to do with general market dynamics. “For the third largest Fiat currency, the euro, regulation and negative interest rates are a stumbling block,” argues Alexander Bechtel, lecturer and researcher at the University of St. Gallen and host of a podcast on digital currencies.”

According to Bechtel, stablecoins are regulated by the European Union’s MiCA framework, which requires stablecoins to be classified as e-money tokens and requires issuers to hold an e-money license. In addition, issuers must hold either cash or liquid assets in the form of government bonds or similar financial instruments.

And this is exactly where the dog lies dug. Most euro-denominated assets have negative yields, which increases the cost of backing a stablecoin with them. “It doesn’t pay off for stablecoin issuers, who would have to charge their users uncompetitive transaction fees,” Bechtel said.

Armin Schmid, Head of Pay & Stablecoins at BTC Suisse AG, the first crypto broker, agrees with Bechtel. He is co-responsible for the issuance of XCHF, a stablecoin backed by the Swiss franc. Its market cap is in the range of a few million US dollars and that is intentional.

“The fixed costs associated with the XCHF, mainly due to the correct regulation, as well as the negative interest rates on assets denominated in Swiss francs weigh heavily on the stablecoin – too heavily,” says Schmid. As he further reveals: If he had to start over, he would opt for a cryptoasset-backed stablecoin similar to that of Liquity, which can also be set up with leaner regulation.

What is happening to the XCHF stablecoin also weighs on the euro stablecoins. Although there are some options – namely Celo Euro, Status euros or monerium – they have not been widely used for the reasons mentioned.

Are stablecoins an opportunity for traditional banks?

Schmid says, “It’s not that demand for non-US dollar denominated stablecoins isn’t there. We receive a large number of requests and it will be no different for other stablecoin issuers.” However, the reality is that the existing stablecoins have not yet provided a cost-effective solution for most business cases.

One factor that could bring about change in this regard is traditionally regulated banks. As suggested by Fed pundits in a recent post suggested, banks could tokenize their deposits, effectively making them stablecoins. Tokenized bank deposits, so to speak. “The big benefit that regulated banks have is that they have access to central bank payment systems. That means they can use central bank reserves to back their stablecoin,” argues Bechtel. While he believes it will take some time, he sees it as inevitable that traditional commercial banks will launch their own stablecoins in the near future.

But there are also voices that express concerns about these approaches. Longtime crypto advocate and Wall Street veteran Caitlin Long has notoriously flagged potential risks associated with stablecoin issuance by traditional banks. In a recent tweet argued They argue that traditional banks may face increased risk of bank runs when issuing stablecoins because the fast settlement time of stablecoins potentially interferes with the traditional banking business model of short-term borrowing for long-term lending.

Stablecoins: The future is uncertain

banks or not. They will come one day. However, at this point it is difficult to predict exactly how the stablecoin market will develop. An emerging solution that will bring various fiat currencies onto the blockchain is Jarvis Network. This solution is based on the Synthereum protocol, which enables a capital-efficient on-chain forex market.

As such, it allows for the seamless exchange of various Jarvis fiat currencies (jFIATs) with no price impact as USDC’s high liquidity is leveraged for the exchange. All jFIAT stablecoins, whether jEUR, jGBD, jYen or jCHF, are overcollateralised, stable and liquid.

Thanks to Jarvis Network’s ecosystem of fiat on- and off-ramps, jFIATs of all types can be used for efficient cross-border payments around the globe. Just recently, a cross-border payment between Brazil and France was made via the binance Smart chain handled using various actors from the Jarvis Network ecosystem. The result was a faster cross-border fiat currency exchange that was about 3.44% cheaper than incumbent services like Wise (formerly TransferWise).

As elegant as this system is, it also carries risks. The biggest one is USDC risk as all Jarvis Network stablecoins are over-collateralized in USDC, again with a US-based stablecoin. The ultimate goal, therefore, remains to bring decentralized versions of stablecoins like Liquidity to the table for other fiat currencies.

When asked if Liquity will soon launch a non-US dollar-denominated stablecoin, Svoboda says: “Creating an analogous system for a EUR or CHF stablecoin would be fairly easy. But only if such a stablecoin is widely used and well integrated into the ecosystem will it succeed. So demand, potential use cases and timing are key – we’re definitely looking into that, but it’s not one of our top priorities.”

It seems that the dominance of the US currency will continue for some time, including in the crypto markets. Finally, there are some things that will take time and cannot be changed by technology alone. Luckily, crypto markets are known to move at the speed of light, so things can still change in an instant.