Stablecoins are one of the fastest growing sectors in crypto; attracts regulators’ eyes
Money doesn’t grow on trees — they grow virtually. At least that’s the plan. Stablecoins are the backbone of crypto, playing an important role in digital transactions, but their massive growth has them under the spotlight of regulators.
The massive growth in stablecoins
Stablecoins are growing fast — from $1B in 2018 to $180B today — making up nearly 1/10 of the total crypto market. Unlike other cryptocurrencies, stablecoins are designed to be stable — replicating a digital dollar (i.e. USDC, a popular stablecoin trading at ~$1).
Transferring money globally using stablecoins costs a fraction of a dollar — compared to outrageous bank transaction fees. There are two main types of stablecoins:
- Asset-backed stablecoins — backed 1-1 by an asset (i.e. US dollar), where the stablecoin owner can exchange 1 stablecoin for 1 unit of the backed currency.
- Algorithmic stablecoins — its peg (fixed price) is maintained by algorithms, often without a backed collateral.
Two largest stablecoins: Tether ($USDT) — $78B market cap; USD Coin ($USDC) — $51B market cap.
The benefits of a digital currency has led Russia, China and other nations to build their own central bank digital currencies.
The dark side of stablecoins
In the traditional financial system, regulations ensure banks have sufficient capital for people to withdraw their money. Stablecoins do not. The fear: If everyone withdraws stablecoins at once, stablecoin issuers might not have enough capital to do so, which could lead to bank runs.
- One proposed solution: Mandate stablecoin issuers to become a bank or partner with a bank.
- Circle — creator of USDC — is already seeking a bank charter and going public via SPAC — Concord Acquisition Corp (NYSE:CND).
Yesterday, stablecoin regulations were debated at the House Hearing — with Treasury Undersecretary, Nellie Liang, saying stablecoins shouldn’t be issued by tech companies (via SA).
Investors: Meta lol
Meta tried developing their own stablecoin, Diem, but failed to get regulatory support — eventually giving up and selling its Diem assets to Silvergate Bank (NYSE:SI) last month.
- With Diem, Silvergate hopes to release its own digital currency by the end of the year.
- Silvergate is a regulated bank — giving it advantages over tech firms in issuing a digital currency.
But Silvergate isn’t an ordinary bank — they focus on banking fintech and digital currency companies — seeing explosive growth in crypto adoption. Silvergate is a bet on crypto and stablecoins. More tomorrow 🤫.