Can Stablecoins Transform the Future of Savings and Investments?

Imagine a scenario in which your financial safety net is as elastic as a rubber band yet as firm as the ground beneath your feet. This world exists today with the advent of stablecoins! In the sphere of financial technology, stablecoins, which aim to maintain a stable value by pegging to a reference asset such as the US dollar (fiat) or gold (commodity), blend the stability of traditional assets with the innovation of cryptocurrencies and have emerged as the hybrid vehicle of digital currencies.

By early August 2024, the market capitalization of stablecoins stood at an impressive USD 171.63 billion, reflecting the growing trust in and reliance on these digital currencies as a stable store of value and medium of exchange among investors. They also see robust trading activity, with a trading volume of USD 88.18 billion in mid-July, underscoring the active use of stablecoins from day-to-day trading to long-term investment strategies.

Essentially, stablecoins are designed to protect investors from the volatility of the broader cryptocurrency market, ultimately reshaping how we save, invest, and transact. In addition, they are opening new avenues to secure financial independence and wealth generation through interest-bearing mechanisms.

The dawn of a new financial era

Stablecoins are designed to maintain their peg, unlike highly volatile cryptocurrencies such as Bitcoin or Ether, using various mechanisms to maintain their value, such as backing the coins with a reserve of assets or controlling supply and demand algorithmically. As a result, they are considered ideal financial instruments for savings and investment purposes.

They emerge as a beacon of stability and a catalyst for growth in the stormy waters of global finance, particularly in countries where traditional systems face escalating challenges such as currency devaluation (for example, the Turkish lira), inflation (for example, Argentina), and operational inefficiencies. By leveraging blockchain technology’s inherent qualities, namely, transparency, security, and decentralization, stablecoins offer a refuge for investors and a powerful tool for savings and investments. Furthermore, the democratization of finance powered by blockchain technology fosters greater inclusion and removes barriers to global economic participation imposed by traditional banking.

While stablecoins are often considered potential hedges against inflation, fiat-pegged stablecoins such asTether (USDT) experience the same inflation as their underlying currency, which itself could be losing value due to inflation. For example, owning USD 1,000 USDT would still equal USD 1,000, but its purchasing power would decline by 5% if the annual inflation rate in the USA was 5%.

This is where Tether’s Alloy (aUSDT) comes into play. Unlike traditional stablecoins, it tracks the US dollar using Tether gold as collateral, which can provide a hedge against inflation as gold has a long history of preserving value during economic downturns and inflationary periods. That said, holding aUSDT means investors could benefit from the potential price appreciation of gold, which can help offset the effects of inflation and preserve the real value of their investment.

Is stability the bedrock of investments?

Traditional investments such as stocks, mutual funds, and bonds are often erratic and subject to market sentiments and economic cycles. Their value rises and falls unpredictably, creating uncertainty. For instance, investors across the globe suffered significant financial losses during the global financial crisis of 2008 when stock markets plummeted, highlighting the vulnerability of traditional investments to systemic risks and market volatility, and underscoring the importance of alternative investments to mitigate such risks.

This is where stablecoins can help build a financial foundation as solid as bedrock due to the pegging mechanism, which ensures their value remains consistent during times of market turbulence. This is especially attractive for risk-averse investors, whose modern investments, like stablecoins, preserve wealth from being swept away by market waves.

However, it is important to know that not all stablecoins are immune to risks. For example, in June 2021, Iron Finance’s stablecoin, IRON, suffered a disastrous failure due to a bank run and an ineffective collateral system, resulting in its value dropping to almost zero. Similarly, in May 2022, Terra’s UST collapsed due to its algorithmic mechanism failing to maintain its peg, leading to a nearly 100% loss in value. Neutrino USD (USDN) also faced a drastic devaluation in November 2022 when its algorithmic stabilization failed. These incidents remind us that even assets designed to be stable can carry significant risks, and investors should carefully assess each stablecoin’s specific mechanisms and risks before making any investments.

A gateway to financial inclusion

The traditional banking system is highly controlled and only accessible to those with the ‘right’ resources and credentials. In contrast, anyone with a crypto wallet and a reliable internet connection can access stablecoins from anywhere in the world, regardless of their economic status, opening the gates to financial services for everyone. Think of it as a bridge connecting isolated communities to the global financial system.

This is revolutionary for those living in developing countries, where traditional financial infrastructure is often lacking. Thanks to stablecoins, these individuals have access to previously unattainable opportunities and may now participate in the global economy.

However, it’s essential to acknowledge that the new financial landscape, while promising, isn’t free from barriers. Know Your Customer (KYC) checks and other regulatory requirements, similar to those in traditional banking, could still limit access for some individuals. For instance, those who lack government-issued documentation identity or who live in areas with underdeveloped financial infrastructure may find it difficult to comply with these rules, which could exclude them from taking advantage of this evolving system.

A high-speed highway of transactions

As stablecoin transactions occur directly on the blockchain, no go-betweens are involved, making transactions swift, direct, and cost-effective, akin to the efficiency of a high-speed highway. In contrast, using traditional financial transaction methods that involve multiple intermediaries, such as the SWIFT network, is often like navigating a congested city during rush hour, with numerous stoplights and detours, and unexpected delays, each taking a toll in the form of lost time and fees.

Stablecoins, on the other hand, provide unparalleled flexibility and responsiveness to investors by enabling them to move assets instantly at the speed of a racing car, bypassing the toll booths of traditional finance. They enjoy higher net returns and rapidly grow their wealth over time by sidestepping exorbitant fees and time-consuming processes.

A journey to financial independence

Consider the story of Alice, who lives in a developing country with a volatile local currency. Traditional investment avenues remain inaccessible to her due to high fees. After learning about stablecoins through a friend, she feels she is able to access a safe harbor from the inflation and devaluation of her national currency by converting a portion of her savings into a USD-pegged stablecoin.

But Alice's journey doesn’t stop there. She invests in interest-bearing stablecoin accounts on decentralized finance (DeFi) platforms to grow her stablecoin holdings over time. The outcomes are transformative — her investments increase gradually and hold their value, even as her local currency fluctuates. Because of the low transaction costs and simplicity of transferring payments, Alice is able to support her family and pursue her business endeavors. Stablecoins ensure a smooth financial journey for Alice by offering security and growth potential she could never have imagined.

Navigating challenges while seizing opportunities

While stablecoins offer a plethora of opportunities, they are not without challenges. As governments and regulators worldwide grapple with the implications of this new asset class, regulatory uncertainty looms large. As a result, their sustainable growth demands the establishment of robust regulatory frameworks that protect investors without stifling innovation.

A notable regulatory development is the European Union’s Markets in Crypto-Assets (MiCA) legislation, which introduces significant measures for stablecoins. One necessary provision is the cap on transaction volumes. Article 23 of MiCA states that if a company’s (namely, stablecoin issuer) non-euro stablecoins are used as a “means of exchange”, and they process more than one million transactions or EUR 200 million in value daily, they must stop issuing them. This seeks to ensure market stability and reduce systemic risks.

In addition, there have been instances where stablecoins have depegged from their intended value, causing significant concern among investors. Thus, knowing the risks is crucial for maintaining the stability and reliability of stablecoins as a financial tool. Furthermore, the continuous evolution of blockchain technology is essential to addressing security and scalability-related concerns, building trust, and ensuring the resilience of stablecoins.

Despite these hurdles, stablecoins present an exciting opportunity to provide a stable, efficient, and inclusive alternative to traditional investments, with the potential to transform how wealth is saved, invested, and managed.