How stablecoins help protect savings

Economies around the world are facing a number of challenges caused by rising inflation. High inflation devalues ​​national currencies, which, in turn, increases the cost of living, especially in scenarios where earnings remain unchanged.

In the United States, the government has responded aggressively to inflation. The nation posted inflation of 9.1 percent in June, prompting the Federal Reserve to implement a series of fiscal countermeasures designed to prevent the economy from overheating. Rising interest rates was one of them.

The Fed’s soaring interest rates have consequently slowed consumer spending and business growth in the country.

The deflationary approach also strengthened the value of the US dollar against other currencies due to tight dollar liquidity controls. As 79.5% of all international trade takes place using the dollar, many countries now pay a premium on imports to offset the rising value of the dollar, exacerbating inflation in those importing countries.

Subsequently, citizens in some weakening economies began to convert their money into more stable foreign currencies to protect their money from devaluation, and many of them are turning to stablecoins to achieve this.

Whitney Setiawan, a researcher at crypto exchange Bitrue, told Cointelegraph, “With the US dollar experiencing a sharp appreciation against other fiat currencies, most crypto-savvy users are particularly interested in holding stablecoins.”

Setiawan also predicted that the stablecoin sector was likely to disrupt the remittance industry in the near future due to the combination of advantages that stablecoins offer.

“With interest in stablecoins fueled by a number of factors, I can predict that it will only be a matter of time before this asset class disrupts the remittance industry by a significant margin,” he said.

On this last point, remittance companies have indeed taken notice and in recent months have made moves to claim stablecoin market share. MoneyGram, for example, recently partnered with Stellar to offer stablecoin remittance services on its network.

What are stablecoins?

A stablecoin is a digital currency whose value is often tied to an asset or regulated by an algorithm to maintain a stable value.

Collateralized stablecoins are the most popular and are backed by reserves of their underlying assets. In most cases, their value tracks the value of popular national currencies such as the US dollar, the British pound or the euro.

This class of stablecoin is extensively used by cryptocurrency traders who want to avoid the turbulence in the cryptocurrency market and users who want to protect their money from inflation.

Other types of stablecoins include commodity-backed, crypto-backed, and algorithmic stablecoins.

Why stablecoins are ideal as anti-inflation instruments

Stablecoins are ideal as anti-inflation vehicles for many reasons. One of them is their immutable and borderless nature.

The decentralized nature of the blockchain technology on which stablecoins operate allows them to travel across borders that would otherwise be closed to cross-border financial activities.

Stablecoin transactions are also fast and cost-effective compared to fund transfers made through commercial bank networks. This makes them convenient for people who wish to send and receive money and a hedge against inflation.

Another disruptive property that stablecoins possess is their ability to serve the unbanked. About 2 billion people in the world today do not have a bank account. Stablecoins have proven the ability to reach this marginalized demographic, allowing anyone with a device that can host a digital wallet, such as a smartphone or laptop, to use stablecoins.

In some developing countries, many people do not have the necessary documentation to open a bank account, and are thus excluded from their country’s mainstream financial systems. Using stablecoins allows this group of users to send and receive money easily and use their monetary assets to offset inflation when the need arises.

Brian Pasfield, CTO of Fringe Finance – a cryptocurrency lending platform that provides lending opportunities to stablecoin holders – told Cointelegraph:

“Banks have tight monetary policies that generally reduce the supply of the dollar. This trend makes stablecoins an attractive option for those aiming to gain access to USD value, as they are generally accessible with a minimal barrier to entry.”

He also emphasized that governments have the ultimate power when it comes to mainstream stablecoin adoption.

“The potential for these (stable currencies) to become mainstream and therefore disruptive lies in the hands of governments themselves, who may seek to implement their own solutions or censor existing avenues,” he said.

While governments have been slow to adopt official policies regarding stablecoins or may even downgrade private stablecoins with the emergence of central bank digital currencies, there are several countries where citizens have taken matters into their own hands by using stablecoins to protect their savings.

Venezuela

Venezuela has experienced inflation averaging about 3,711% since 1973. The bolivar has lost so much value over the past four decades that it has had to be reconverted several times. For perspective, the country had to remove 14 zeros from its currency over the past 14 years to simplify the monetary scale.

Because the Venezuelan bolivar is volatile and has a price that fluctuates throughout the day, it is common practice for merchants to list the prices of goods and services in US dollars. Customers who do not have dollars are usually expected to pay using bolivars, but at the prevailing dollar exchange rate.

That said, dollar bills can, at times, be scarce, and that gap is currently being filled by stablecoins. With internet penetration standing at around 72% as per 2020 statistics, stablecoin-supporting e-payment companies have already started setting up shop in the country.

The companies include Reserve, a Coinbase-backed startup. Its app is now widely used in Venezuela to buy and sell stablecoins.

Even the US government has joined the stablecoin foray and is increasingly using Circle’s USD Coin (USDC) stablecoin to bypass corrupt government institutions when providing aid to Venezuelan citizens.

Turkey

Earlier this month, Turkey’s annual inflation rate hit 80%, with the Turkish lira losing about 27% of its value against the US dollar so far this year. In 2021, the pound lost 44% of its value against the dollar. Its sharp decline has caused a surge in demand for stablecoins as people move to protect their money from inflation.

According to data sourced from CryptoCompare, the Turkish Lira is the second highest traded fiat-to-Tether (USDT) pair and currently accounts for around 21% of all national currency exchanges. Tether is a stable dollar currency backed by a basket of different assets.

The pound is also the second most traded Binance USD (BUSD) stablecoin pair and is used in around 5.2% of trades. Binance USD is the dollar-denominated stablecoin of major cryptocurrency exchange Binance.

The growing popularity of cryptocurrencies in the country has, in the recent past, led to concerns about currency control and prompted authorities to ban the use of cryptocurrencies as a means of making payments.

However, crypto utility is still high despite the ban.

Nigeria

Nigerians are starting to use stablecoins to mitigate the effects of rising inflation.

According to the latest statistics released by the country’s National Bureau of Statistics (NBS), inflation in the country reached 19.64% in July — a 17-year high.

According to the NBS report, the cost of basic necessities such as food, transport, fuel and clothing have risen sharply as a result.

The situation was caused by climate change, the economic aftershocks caused by the coronavirus and growing insecurity. It has been further exacerbated by Russia’s invasion of Ukraine, which has cut off critical supplies of imports from the two countries. Nigeria imports over $2 billion worth of commodities annually from both Russia and Ukraine.

Inflation problems are forcing many Nigerians to start using stablecoins to prevent the depreciation of their savings. According to data sourced from Google Trends, Nigeria ranks first among countries with significant interest in stablecoins. Search statistics show that the country has the highest Tether stablecoin search interest in the world.

USDT is currently the most traded stablecoin.

Argentina

Argentinians are increasingly turning to stable US dollar currencies to protect their money against high inflation. The country’s inflation is expected to reach 95% by the end of the year.

Recent developments that have highlighted demand for stablecoins include the stablecoin buying frenzy in July triggered by the resignation of Economy Minister Martín Guzmán.

Major cryptocurrency exchanges serving Argentine citizens saw a surge in stablecoin sales following the announcement, with purchases increasing by 200%.

The news also caused the value of the Argentine peso to fall by about 15%.

Today, Argentine traders quote prices in dollars for high-value items due to the high volatility affecting the national currency. The Argentine peso has lost over 30% of its value so far this year.

Prevailing US dollar trading restrictions have also contributed to the increase in demand for stablecoins.

Barriers to stablecoins

There are many limitations that prevent the widespread use of stablecoins as a hedge against inflation. One of these is the changing regulatory landscape that threatens to hinder their use in some jurisdictions. The European Union, for example, is looking to ban the use of stable currencies linked to the dollar in the region in the near future. Such embargoes are likely to limit the use of stablecoins as a hedge against inflation.

Additionally, most countries lack the complex policies needed to legitimize the crypto industry. Right now, the stablecoin sector would do extensive anti-money laundering, tax policy and fraud prevention regulations in order to become truly mainstream, but many countries are unwilling to go that far due to the sheer complexity of such procedures.

This has led some countries, such as China, Algeria and Egypt, to ban cryptocurrency trading altogether.