Stablecoins: The Crypto Community Is Split on Their Future

Stablecoins are everywhere. Wealthy businesses and VCs see them as a silver bullet for companies struggling with outdated payment systems.

Stablecoins are quickly becoming the new normal in the world of finance. But what does the future hold for these digital assets? Some experts are optimistic, predicting that stablecoins will continue to grow in popularity and use. Others are more cautious, expressing concerns about regulatory hurdles and the potential for stablecoins to disrupt the financial system.

One thing is for sure: stablecoins are here to stay. In Q1 2024, market activity hit record highs with $5.5 trillion in transactions. Of this total, stablecoins accounted for an impressive 70% of the indirect flows from Brazil’s local exchanges to global exchanges.

This growth is being driven by a number of factors, including the increasing demand for digital assets, the high levels of inflation in some countries, and the regulatory clarity that is emerging in some jurisdictions.

For example, Nubank, the largest Brazilian digital bank in Latin America, is offering a fixed 4% annual return to users who hold USD Coin (USDC), a stablecoin issued by Circle. The bank says it started offering yields on stablecoins because “more than 50% of new Nubank Crypto users chose USDC as their first digital asset.”

Wealthy businesses and venture capital firms are also betting on stablecoins, expecting them to change how small businesses handle payments.

“I think stablecoins will go beyond just trading and enable things like 24/7 instant settlements, which banks can’t do because they close on holidays,” said Haseeb Qureshi, managing partner at Dragonfly Capital.

Citi Wealth strategists also see big potential in stablecoins, saying they “could end up reinforcing the U.S. dollar’s dominance.”

But not everyone is optimistic about the future of stablecoins. Some regulators are concerned about the risks posed by stablecoins, especially if they are not properly regulated.

For example, Marc Boiron, CEO of Polygon Labs, emphasizes that the growth of stablecoins is not just about market size.

“What’s compelling is how the fundamentals are aligning,” Boiron told crypto.news in a commentary. He pointed out that regulatory frameworks like Markets in Crypto-Assets in Europe are also providing clarity, helping traditional financial institutions enter the stablecoin space.

“Regulatory clarity is acting as a catalyst rather than a barrier. With frameworks like MiCA providing clear guidelines, traditional financial institutions and fintech companies can now approach stablecoins with greater confidence.”

However, Paolo Ardoino, CEO of Tether — the largest stablecoin issuer by market cap — argues that MiCA regulations are far-fetched, to say the least. He says that requiring stablecoin issuers to keep at least 60% of their reserves in cash deposits could create serious risks for banks.

Ardoino compared the regulations to the incident with Circle’s USDC in 2023 when billions of dollars of USDC reserves were stuck in the collapsed Silicon Valley Bank, which failed after a bank run.

“I don’t want to endanger those 300 million people holding USDT because I have to keep the 60% in uninsured cash deposits in a European bank,” he said.

Analysts at French blockchain firm Kaiko point out that European regulations don’t affect all stablecoin issuers equally.

So far, they say only one company has benefited from the stricter rules — Circle, whose Euro-pegged stablecoin EURC and USDC have seen the biggest jump in daily trading volumes since MiCA took effect.

It might still be early to draw conclusions. But one thing is clear — big money is searching for a way to make the “one trillion dollar opportunity” happen. Californian venture capital firm Pantera Also notes that these assets now account for over 50% of blockchain transactions, up from just 3% in 2020.

What’s unclear is how or where that breakthrough will come, especially with regulations already putting pressure on even the biggest stablecoin firms.