The $170 billion stablecoin market is slowly but surely shaking off a litany of controversies to find favour among traditional financial institutions and payment providers.
A form of cryptocurrency, stablecoins are designed to maintain a stable value by being pegged to another asset- typically the US dollar.
They have emerged as an essential part of the decentralised finance (DeFi) ecosystem as they strip away the volatility of bitcoin, ether and other altcoins (or, at least, that’s what are designed to do).
More and more, stablecoins, primarily market leader Tether (USDT), are being used as a fiat-to-crypto ‘on-ramp’ into the cryptocurrency market.
But their utility as a frictionless way to transfer funds around the globe means interest has started to spread outside of the murky world of DeFi.
Visa recently announced the launch of its Visa Tokenized Asset Platform, a service designed to support the secure movement of tokenised assets.
Digital bank BBVA has teamed up with Visa to test-run fiat-backed tokens on the Ethereum blockchain network.
One of the most high-profile institutional stablecoin projects is PayPal's US dollar-pegged stablecoin PayPal USD (PYUSD), which was launched in August 2023 in collaboration with developer Paxos.
PYUSD also operates on the Ethereum blockchain.
State Street Corp is said to be exploring stablecoin technology and even JPMorgan Chase & Co, whose leader Jamie Dimon is an outspoken critic of crypto, is getting in on the action with its JPM Coin product.
A history of controversy
However, the volatility and risk associated with algorithmic stablecoins have been a topic of concern ever since the collapse of Terraform Labs’ TerraUSD stablecoin in 2022.
The TerraUSD collapse was one of the most crushing events in the cryptocurrency space that year when it began to lose its dollar peg.
It caused billions of dollars worth of losses to TerraUSD holders and attracted massive attention from regulators worldwide, prompting calls for tighter regulation of stablecoins and the cryptocurrency sector as a whole.
According to Eddy Travia, chief executive of Web3 investors Coinsilium Group Limited (AQSE:COIN, OTCQB:CINGF), this was down to bad management of the project’s tokenomics.
Travia pointed to the fact that TerraUSD's sister token LUNA, which was used as a stabilising mechanism, lacked intrinsic value, leading to a "death spiral" when the asset's price began to drop.
“There were mistakes in the way that it was structured,” said Travia. “One of the problems was that the assets were not sufficient to back such a large market value."
Terraform Labs was also offering unsustainable yields on deposits of up to 20%.
Do Kwon, the founder of Terraform Labs, was charged with a litany of financial crimes including wire fraud and securities fraud.
Even USDT, the largest stablecoin project in the world by a vast margin (it currently has a $120 billion market cap), has been mired in controversy.
Tether fell into legal and regulatory hot water in 2021 after the New York Attorney General ruled that Tether misled the public over its collateralised position.
Rather than cash, Tether was almost entirely collateralised by commercial paper (i.e. unsecured debt).
Since then, Tether has sought to reduce its commercial paper holdings to zero and has appointed an external accountant to monitor its holdings.
Nonetheless, stablecoin adoption appears to be gathering pace.
No way back
Asked if he sees more payment companies and institutions jumping into the stablecoin arena, Travia said: “Yes, I believe all these major players will do so.
There are different reasons. Obviously branding can be a reason for reaching out to different markets.
“Also, I think they realise in a deeper way that this is a very simple way to transfer money abroad, which is often the bread and butter of these companies.
“They realise that this is a competition. They’d better be on board and use it themselves rather than letting competitors come in.”
Regulation – or a lack thereof – remains a roadblock, but “overall, I think there’s no way back”, he added.