What will be the payment method of tomorrow? According to the European Commission, this could be the digital euro, the legal framework for which has just been set. But another digital asset is paving its way in the crypto galaxy: stablecoins. As regulation takes shape in a nascent sector, these “stable tokens” are not only speculative products. Backed by a traditional currency (mainly the dollar) or gold, their intermediary function is multiple. They could even be the first to take the step of mass adoption of an electronic, instant, secure and centralized currency in the future “Web 3”.

In the United States, in the opinion of members of Congress, stablecoins even fall under the “national security”. It is therefore a question of subjecting them to financial regulations but the debates still rage: “If recent banking crises have taught us anything, it is the danger of allowing shadow banking products, particularly stablecoins, to issue deposit-like products without the backing of the Federal Deposit Insurance Corporation (FDIC) . I strongly believe that we need to separate cryptoassets from our banking system”estimates, for example, the elected Democratic Stephen Lynch, quoted by the site decrypt.io.

In Europe, the MiCA regulation also offers them a first legal framework, under conditions. Enough to encourage exchange platforms to choose the Old Continent to open a head office.

What is a stablecoin?

Stablecoins first emerged from insider circles in 2019, when Mark Zuckerberg, boss of Facebook (future Meta) launched the “Diem” project, a currency, managed by a private company, backed by a blockchain (or a DLT For distributed ledger technologies), in partnership with NGOs so as not to worry regulators who warn against the hyper volatility of cryptocurrenciesbitcoin in the lead.

Faced with this volatility, a stablecoin holds the magic computing formula and their use is exploding in 2021, in parallel with the rush on buying and selling crypto-assets.

Backed by the price of a currency, or a commodity, its value strictly respects parity: 1 token for 1 dollar for example. Each USDT token created therefore corresponds to one dollar (USD) in the company's bank account. Tether Limited. Most often, the exchange of these digital tokens is operated by the public Ethereum blockchain which carries out a very large number of calculations to authenticate a transaction with a network of computers. Its price is guaranteed and centralized by the social network (so-called collateral currency) but other stablecoins only rely on algorithms (so-called non-collateral).

Until now, foreign currency reserves (or “fiat currency”) were supposed to secure the system and inspire confidence. But a scandal shook the sector, with the fall in 2022 of the Terra/Luna stablecoin whose price was based on an algorithm, causing a brutal bearish cycle in cryptos.

What is a stablecoin used for?

Stablecoins were created to serve as a bridge between the real world of fiat currency and the world of blockchain. The stablecoin is a bit like the crypto world’s version of the bank account. The tool is practical and commonly used as a safe haven crypto or to easily switch from one crypto to another. summarizes Philippe de Gouville, co-founder of ISMO, a financial investment application.

In other words, it offers an alternative to investors looking to sell volatile cryptocurrencies, without going back to fiat currencies like the euro or the dollar. The stablecoin is used to “quickly rebalance positions in a relatively stable currency”summarizes the French specialist CoinHouse.

“I exchange my bitcoins for stablecoins when the market is high, and I use these stablecoins to buy back bitcoin when its price has fallen”illustrates the platform.

In addition to being a settlement asset for transactions on the blockchain, it can be seen as a cash management solution for businesses, including banks.

“Stablecoins are cryptographically secure. This allows users to settle transactions almost instantly without double spending or an intermediary facilitating settlements. On public blockchains, this also allows transactions 24 hours a day, 7 days a week, 365 days a year “, explain Gordon Liao and John Caramichael in a note for the US Federal Reserve (Fed) in January 2022.

On the business side, and in particular banks, stablecoins make it possible to “move cash almost instantly across their subsidiaries in order to manage internal liquidity, and to facilitate wholesale transactions in existing financial markets, such as intraday repo transactions.” Because public stablecoins are programmable and composable, they are widely used in decentralized markets and services based on the public blockchain, known as decentralized finance or DeFi.explains the Fed.

What are the most important stablecoins?

In terms of circulation volume and capitalization, Tether (USDT), created in 2014, is the first stablecoin, valued at 80 billion euros in June. It is followed by four other private players: USD Coin (the USDC token), at $28.4 billion, Binance (BUSD) at $5 billion, True USD (TUSD), 2.1 billion and Dai (DAI) , 4.8 billion. To date, only the DAI has decentralized governance and is partially backed by algorithms.

“There are three main sets to consider: private stablecoins such as Tether, Circle's USDC, or Lugh (EURL); decentralized stablecoins (or intended to be) such as DAI; digital assets directly issued by central banks, which are then called Central Bank Digital Currencies (CNBC). Private stablecoins are now in the majority, in the absence of strong competitors,” summarizes CoinHouse.

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How much weighs the stablecoin market?

In 2023, stablecoins will already capture 10% of the crypto market ($1.2 trillion), at around $132 billion, according to CoinGecko data. Their growth is such that the market share is now around 12.5%, according to experts.

At the height of cryptos, driven by the “helicopter money“and low interest rates, the stablecoin market even grew by 3,000% between September 2020 and 2022, notes ESMA (European Securities and Markets Authority). In terms of volumes traded, stablecoins already surpass the volumes of national currencies and even more widely unbacked cryptos, illustrates theBlock.co in a report from the Bank of Australia.

“While the total capitalization of the cryptocurrency market fell by $1.2 trillion between January 2022 and January 2023, stablecoins increased their market share to 12.9% at the end of last January, compared to 7.3%. a year earlier,” says CoinGecko.

For example, in two years, the capitalization of USDT has doubled, going from 40 billion in 2021, to more than 80 billion in April 2023.

What is the future of stablecoins?

“Among the different scenarios, a two-tier banking system can both support the issuance of stablecoins and maintain traditional forms of credit creation. On the other hand, a narrow banking approach to digital currencies can lead to a disintegration of the traditional banking system (…). Additionally, dollar-pegged stablecoins backed by sufficiently secure and liquid collateral can potentially serve as a digital safe haven during periods of cryptocurrency market distress.”estimate Gordon Liao and John Caramichael of the Fed.

Also, for banks, the uses of these tokens are multiple, starting with cross-border transactions.

“Banks are increasingly looking to tokenize deposits to enable faster and cheaper payments, and to tokenize traditional financial assets to achieve significant efficiencies in clearing and settling transactions”adds the Oliver Wyman firm.

This is the meaning of the Goldman Sachs bank's stake in the stablecoin champion Circle.

In France, Forge, the crypto subsidiary of Société Générale, has just obtained PSAN approval from the Financial Markets Authority (AMF). Objective: to provide immediate and secure transaction services via the Ethereum blockchain to the bank's institutional clients, using the Euro Convertible stablecoin, backed by the euro.

Also, “Stablecoins can play a key role in the tokenization of financial markets. This would involve converting securities into digital tokens on DLTs (non-blockchain distributed systems) and trading and servicing them with stablecoins », Still anticipates the Fed. The best-known institutional stablecoin is that of the JP Morgan bank which is used for transactions or internal liquidity management.

Finally, thanks to these DLTs, central banks which manage national currencies are increasingly leaning towards stablecoins. Thanks to its role as intermediary, the European Central Bank (ECB) announced that it was working on an exchange solution allowing “ facilitate interaction between (its) TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer Editor’s note) services”, for wholesale transactions. That is, a wholesale central bank digital currency backed by a currency in order to accelerate digital exchanges…

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