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February 08, 2024

Evolution of Stablecoin landscape: Stablecoin, a new financial choice for the future.

In the past, there have been intriguing topics in the cryptocurrency industry for people to follow, like stablecoin, which is a topic that keeps coming up. This includes the rise in stablecoin users and the growing interest in this alternative asset during the economic crisis. Problems, challenges, and changes arise as more people join this industry, offering the cryptocurrency ecosystem advantages as well as disadvantages.

In this article, we take a look back at the stablecoin market over the past two years. We are also looking at the development and evolution of stablecoin, which has resulted in a new financial option.


An overview of stablecoin's circumstances in 2022–2023

Stablecoin's circumstances started to become more unstable following the collapse of TerraUSD (UST). Since mid-2022, the supply of stablecoin has steadily decreased due to UST's failure. While the total market value of cryptocurrency increased in 2023 from 8.3 hundred billion USD at the beginning of the year to 1.48 trillion USD at the end, the supply of cryptocurrency decreased from 1.4 hundred billion USD early in the year to 1.25 hundred billion USD in November.

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However, lots of sectors have been impacted by the global economic crisis, which also included rising interest rates, inflation, the failure of several banks, and even minor issues like difficult transactions and expensive fees. Stablecoin, according to many investors, could still resolve these issues and continue to be a crucial component of the cryptocurrency ecosystem's infrastructure.

In addition to the TerraUSD issue, which is regarded as a stablecoin downturn, Binance USD (BUSD) and USDC, two stablecoins that were previously attractive, are also having difficulties.

First, BUSD is a coin that Paxos issues under the Binance brand. It permits users to trade and transact on the BSC ecosystem, whereas USDC, USDP, and TUSD coins are no longer supported on the platform. The state agency in charge of overseeing financial services in New York, the New York State Department of Financial Services (NYDFS), later ordered Paxos to stop issuing BUSD coins in February after the company failed the risk assessment and ran into additional legal problems. Then, in order to make room for the new coin known as First Digital USD (FDUSD), Binance had to publicly delist BUSD from the platform. It reaffirmed that coin holders must exchange their BUSD coins for FDUSD coins for free by February 2024.

The failure of Silicon Valley Bank (SVB) also had an impact on USDC. Out of 40 billion USD, USDC deposited 3.3 billion USD with SVB as reserve funds. By the time the bank disclosed its crisis, a large number of investors had dumped their coins, causing the USDC's value to drop to 0.88 USD and its market share to drop from 30% to 24%. After that, Circle was able to overcome the crisis and successfully bring the value of the USDC back to 1 USD. Yet, investors' attention has shifted to safer coins, like USDT. The USDT's market share continued to rise as a result.

The growth of Tether, which has supply on the Tron network, is another factor contributing to the USDT's increased market share. Investors are drawn to Tron because it allows them to transact quickly and with minimal fees. It facilitates all international transactions, including those involving Latin America, Europe, and Africa. Furthermore, Tron guaranteed that 97% of transactions were made using USDT and that more stablecoins were issued on Tron than on Ethereum.

Why is it interesting that corporations and central banks are joining the stablecoin market?

Businesses, financial institutions, and central banks in many countries have entered the stablecoin and digital currency industries in an attempt to turn a profit and provide customers with more options for transactions due to the impact of the interest rate increase in 2023.

Throughout 2023, a number of major corporations unveiled blockchain-based financial products, and others partnered with intriguing financial platforms to create projects centered around stablecoins and Central Bank Digital Currencies (CBDC).

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For example, PayPal presented PYUSD (PayPal USD), a stablecoin on Ethereum issued by Paxos, in the middle of 2023. PYUSD, which ranks among the top 20 stablecoins with a value of more than 150 million USD, has the potential to break the record for market value. At the moment, PYUSD enables trading on one of the PayPal platforms, Venmo, a mobile payment service. In addition, it is anticipated that PYUSD will be introduced on PayPal along with a decrease in transaction fees for the retailers, increasing the interest of PayPal users in PYUSD.

In addition to corporations, banks play a larger role in this market. Once the cross-border transactions were successfully resolved in 2022, they issued CBDCs or Central Bank Digital Currencies. One such project is the mBridge project, which is being led by the BIS Innovation Hub in partnership with central banks from various countries, such as the Hong Kong Monetary Authority, Central Bank of the UAE, People's Bank of China's Digital Currency Institute, and Bank of Thailand. In order to develop the DLT platform, this project will concentrate on mBridge Ledger. It also focuses on the development of technology, research and the introduction of new laws, and the creation of a suitable and harmonious regulatory framework.

S&P Global Ratings introduced Stablecoin Stability Assessment, a stablecoin user assistance tool

The Stablecoin Stability Assessment was introduced by S&P Global Ratings to assess the stablecoin's ability to maintain its value in line with the value of fiat money following the collapse of TerraUSD, the suppression of BUSD, and any stablecoin-related effects. The results of this assessment will help facilitate more convenient and secure transaction processing for both traditional finance and Decentralized Finance (DeFi).

The S&P Global Ratings evaluation procedures are as follows:

  • The evaluation of asset quality for verifying credit risk, market risk, custody risk, and other risks that could affect the asset's quality.
  • Next, an evaluation of the over-collateralization value and the asset's liquidation mechanisms will be conducted in an attempt to mitigate risk.
  • In addition, a further assessment will be carried out based on five criteria: governance, legal and regulatory framework, redeemability and liquidity, technology and third-party dependencies, and track record.
  • Stablecoin stability will be rated from 1 (very strong) to 5 (weak) following the assessment of processes and factors.

The evaluation results of eight significant stablecoins in the market—DAI, FDUSD, FRAX, GUSD, USDP, USDT, TUSD, and USDC—were released in conjunction with the launch of S&P Global Ratings' Stablecoin Stability Assessment. The results are shown in the table below.

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Stablecoin's future and the way it will be utilized

The stablecoin's advancement and growth can be measured by the increasing role it plays in the cryptocurrency market and in real life, as evidenced by the growing number of stablecoin-related products that banks, financial institutions, and other organizations have introduced.

For the reasons previously mentioned, there appears to be a greater trend toward stablecoin and digital currency applications. The following are areas of stablecoin and digital currency development that are anticipated to be interesting to follow along the way.

Digital Yuan

The electronic China Yuan, or e-CNY, gained recognition in 2023 as a result of its growth and steadily increasing user base. It made it possible for foreigners to create e-CNY Wallets and carry out transactions without paying for internet or mobile data. Additionally, it worked with the mBridge project to highlight China's goal of making e-CNY a global digital currency. Southeast Asia is going to host the e-CNY transactions shortly.

Cross-border Transactions

Along with e-CNY, other nations that joined the mBridge project have expressed a desire to make cross-border transactions simpler, faster, more convenient, and fee-free. For example, the Central Bank of the United Arab Emirates (CBUAE) has developed a digital dirham in partnership with G42 Cloud and R3 to enhance technology and infrastructure for transactions. Additionally, it has teamed up with the Reserve Bank of India to enable cross-border transactions via CBDC.

Wholesale CBDC settlement

The ability of banks and financial institutions to communicate directly with one another around the clock without depending on an intermediary reduces risks associated with settlement risk, credit risk, and operational risk. This system shortens the duration of international transactions, lowers costs, and improves the effectiveness of international money transfers.

Efficient Financial Services Access

More efficient financial services would be better available to the public. For example, the Brazilian Central Bank introduced DREX, or Digital Real, a CBDC created specifically for Brazilians to enable easy access to and efficient use of this technology.

In addition to Brazil, Europe has introduced the Digital Euro, which is intended for individual use, simple access across multiple platforms, assistance for people without digital devices or bank accounts, and carrying out different types of transactions under EU regulation. Launching the new Digital Euro, however, will still need to wait for the outcome of the ongoing EU legal procedure.

Stablecoin is still a topic worth keeping an eye on though. Stablecoin has gained progress in recent years and is now a major issue that banks and other financial institutions are pursuing. Stablecoin may soon be used to develop products, or it will likely play a bigger part in our actual financial system.

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