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Stablecoin survival: Navigating the future amid global de-dollarization

May 19, 2023No Comments

It is an empirical fact that the US dollar continues to lose its dominant role as the global reserve currency, but what might happen to the stablecoin market if it were replaced?

According data According to the International Monetary Fund, the US dollar now accounts for just over 58% of the world's foreign exchange reserves, a sizeable decline from the 71% it had in 2001.

World foreign exchange reserves from 1999 to 2021. Source: IMF

Jeremy Allaire, CEO of USD Coin (USDC) issuer Circle, highlighted this change at the Consensus 2023 conference on April 26, arguing that the US should implement stablecoin legislation and digitize the US dollar to remain competitive amid the โ€œvery active de-dollarization that is taking placeโ€.

De-dollarization refers to the process of reducing the use of the US dollar in a country's economy, and powerhouses such as Russia and China are actively pursuing de-dollarization as they seek to replace the US dollar with digital assets, other fiat currencies, and potentially a BRICS currency between Brazil, Russia, India, China and South Africa.

As an example of this de-dollarization, the Chinese yuan recently overtook the US dollar as the most widely used cross-border currency in China, according to Bloombergrising to a high of 48% of transactions after it accounted for almost 0% in 2010.

Another example that may be more familiar to cryptocurrency users can be seen in El Salvador, which in 2021 became the first country in the world to use Bitcoin (BTC) as legal tender.

Following the news that crypto exchange Coinbase is launching a derivatives trading in Bermudasome cryptocurrency advocates, such as venture capitalist David Sacks, have even suggested that the US may be trying to prevent cryptocurrency companies from accessing banking services in the country in an intentional effort to drive them abroad out of fear. for cryptocurrencies to follow eat in domain of the US dollar.

Speaking to Cointelegraph, Dr. Joachim Schwerin, Chief Economist at the European Commission, suggested that changes to the world's leading reserve currency occur regularly, adding:

โ€œFor as long as we have financial data records, the role of the world's leading currency has changed every 80 to 110 years. Times of accelerating global frictions that significantly affect trade patterns greatly accelerate such changes."

The sanctions imposed on Russia by the US are a prime example of this global friction, and on April 16, Treasury Secretary Janet Yellen noted that the sanctions could put the US dollar's hegemony at risk as target countries seek alternative currencies.

Implications for the world economy

Many people are likely familiar with the video."Principles for dealing with the changing world order' by billionaire investor and hedge fund manager Ray Dalio, in which Dalio suggested that having the main reserve currency โ€œis a key factor for a country to become the richest and most powerful empireโ€, which is a shared view by many experts.

It is believed that one of the main benefits of being the dominant reserve currency is the higher level of demand it experiences relative to other countries due to it being widely accepted globally and considered a safe haven asset, making it more valuable.

In response to questions from Cointelegraph, Tether, the issuer of the largest stablecoin by market capitalization, Tether (USDT), noted that stablecoins that are pegged to the US dollar also increase demand for the currency.

In theory, increased demand for the US dollar makes it more valuable relative to other currencies, making it relatively cheaper for the US to import goods and services and allowing the country to borrow funds from lower costs.

However, in response to concerns about what would happen if the US dollar lost its hegemony, many economists quote the words of Nobel Prize-winning economist Paul Krugman, who argument in August 2015 that "while reserve currency status may have political symbolism attached to it, it is essentially irrelevant as an economic goal" due to its benefits being worth "a small fraction of one percent of GDP."

It's worth noting that economists are famous for disagreeing with each other. In an April 11 survey of economists, 50% of them in disagreement with Krugman's claim that the benefits are minor.

A time for innovation in the stablecoin market

According to CoinMarketCap, every stablecoin with a market capitalization above $1 billion is pegged to the US dollar, which makes sense given its dominant status.

However, as the US dollar continues to lose its dominance, these stablecoins may see their use decline.

Tether noted that stablecoins are "particularly beneficial to citizens of emerging markets who may face high levels of inflation and currency instability," or those in countries with limited access to financial services, so even if the US dollar and stablecoins linked to it decline, others will probably step in.

Schwerin noted that โ€œbig problems are already spilling over outside of the US to cater for exactly this scenario,โ€ referencing stablecoins like the Euro Coin de Circle (EUROC), which is pegged to the euro, adding:

โ€œThere will have to be a lot of improvisation and experimentation, which is good for innovation.โ€

Schwerin noted that he did not know exactly what would work, but expressed optimism that the crypto community could find solutions quickly.

Tether said it has โ€œalways been at the forefront of innovationโ€ and pointed to other products it has launched, such as Tether Gold (XAUT), a gold-collateralized stablecoin, as well as other fiat-backed stablecoins.

While stablecoins can be designed in many different ways, the ones most commonly used today are fully or excess collateralized and exogenous (backed by external assets).

As long as stablecoins have sufficient collateral, their users should not worry that a transition away from US-pegged stablecoins will cause liquidity problems, particularly when a large proportion of the collateral is stored as highly liquid assets.

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