Stablecoin demand reaches ATH amid COVID-19

We look at the surging interest in stablecoins during the coronavirus pandemic and what’s driving this growth

Copper Team

The big news in crypto this past weekend, barring the JK Rowling twitter storm on Friday, was Tether (USDT) leapfrogging Ripple (XRP) to claim the title as the third-largest cryptocurrency after having passed $9 billion in market capitalisation —a milestone.

The value of assets for all stablecoins, of which Tether has the lion’s share at 85.1%, also surpassed $10bn for the first time last week, having surged by over 70% since the beginning of February.

Ripple has since reclaimed its third place position and continues to battle it out with Tether but the point remains; stablecoins’ importance to the crypto marketplace has become too large to ignore.

A calm island within the raging market seas?

Stablecoins have been instrumental in opening up crypto to a broader audience given that they’re always backed by some other assets, making them a less risky alternative for investors and serving as the bridge between traditional assets and cryptoassets. According to researcher Messari, stablecoins added nearly as much market cap in Q1 2020 as they did in all of 2019.

Driven by a global flight to safety amidst the current uncertainty, pegged cryptocurrencies have become an even more important feature of the overall crypto asset ecosystem. While the prices of tokens on exchanges have a tendency to fluctuate wildly, stablecoins provide a relatively safe ‘parking space’ at times when investors sense a crash in the cryptomarkets, and can be quickly converted into other coins such as Bitcoin when they want to play the market again. However, tethering stablecoins to traditional fiat currencies hasn’t been without challenges.

Tether’s chequered history and notorious missteps such as claiming to have 1-for-1 reserves for their flagship US dollar stablecoin before eventually being forced into admitting that they actually maintained a 74% reserve, have courted a great deal of controversy. While in traditional markets, this would have prompted an immediate sell-off and inevitable long-term reputational damage, Tether has since more than doubled in market capitalisation. However, as this demand rose, so did the attention from financial watchdogs.

Regulators maintain a watchful eye

Financial Stability Board (FSB), a regulator behind G20, recently recommended for central banks to avoid dealing with stablecoins given that they are highly under-regulated.

The FSB’s response was triggered by the upcoming launch of Facebook’s Libra coin, as many market players consider it as a threat to the existing financial system. Libra has since recently pivoted from a multi-currency basket into a multitude of single-currency stablecoins.

A key partner of the Libra project, Visa, notoriously quit along with a number of other financial payments partners in autumn last year. However, the company clearly remains committed to digital currencies, with the United States Patent and Trademark Office last week publishing a Visa-registered patent application for a blockchain-powered ‘digital fiat currency system’.

When Visa CEO Alfred F. Kelly was asked about the corporation’s stance on digital assets and stablecoins at last week’s virtual JP Morgan Annual Tech Conference, he declared that digital currency backed by fiat is a very real potential emerging payment technology and that Visa views cryptocurrencies as complementary to current payment systems – not competitive.

The transition to digital solutions

In addition to accentuating the need for better financial tools and digital solutions, what we are experiencing globally with Covid-19 is spurring a surge of interest in this type of asset. This is according to a report released by central bank think tank OMFIF alongside its launch of the Digital Monetary Institute (DMI), of which Copper is a member.

Amid the pandemic, regulators are certainly not short of other concerns, yet continue to allocate significant resources to the assessment of the ever-evolving stablecoin market, publishing a variety of research papers. The recent FSB report is a positive sign of regulators stepping up efforts to understand this growing market but also highlights the large void that regulators must fill.

Between the growing interest of global central banks wanting to issue digital currencies, the uptick in adoption of stablecoins in the market, and major players such as Facebook interested in building a version of a stablecoin, it is evident that greater governance is required for this burgeoning market.

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