Stablecoin Survival: Navigating the Future Amid Global De-Dollarization

It is an empirical fact that the US dollar is losing its dominant role as a global reserve currency, but what could happen to the stablecoin market if it were replaced?

According to International Monetary Fund data, the US dollar now accounts for just over 58% of global foreign exchange reserves, a significant drop from its share of 71% in 2001.

Jeremy Allaire – the CEO of USD Coin (USDC) issuer Circle – highlighted this shift at the April 26 Consensus 2023 conference, arguing that the US needs to implement stablecoin legislation and digitize the US dollar to remain competitive. in the midst of “very active de-dollarization operations”. place.”

De-dollarization refers to the process of reducing the use of the US dollar in a country’s economy, and major powers such as Russia and China are actively pursuing de-dollarization as they try to replace the US dollar with digital assets, other fiat currencies and possibly a BRICS currency between Brazil, Russia, India, China and South Africa.

As an example of this de-dollarization taking place, according to Bloomberg, the Chinese yuan has recently overtaken the US dollar as China’s most widely used cross-border currency, rising to a high of 48% of transactions after accounting for nearly 0% in 2010. .

For the first time in history, the Chinese yuan overtakes the US dollar as the most widely used currency in cross-border transactions in China.

Yuan share rose to a record high of 48%, up from almost zero in 2010.

The US share fell to 47%, down from 83% over the same period.

Wow. pic.twitter.com/Lm3Rygpm45

— Genevieve Roch-Decter, CFA (@GRDecter) April 26, 2023

Another example that may be more familiar to crypto users is El Salvador, which in 2021 became the first country in the world to adopt Bitcoin (BTC) as legal tender.

Following news of crypto exchange Coinbase launching a derivatives exchange in Bermuda, some crypto proponents, such as venture capitalist David Sacks, have even suggested that the US may be trying to prevent crypto firms from accessing banking services in the country, in a deliberate effort to drive them. abroad for fear that crypto could further eat into the dominance of the US dollar.

Speaking to Cointelegraph, Dr. Joachim Schwerin – chief economist of the European Commission – that there are frequent changes in the world’s main reserve currency, adding:

“Since we have financial data, the role of the world’s leading currency has changed every 80 to 110 years. Times of accelerated global frictions significantly affecting trade patterns greatly accelerate such changes.”

The sanctions imposed on Russia by the US are a good example of this global friction, and on April 16 Treasury Secretary Janet Yellen noted that sanctions could jeopardize US dollar hegemony as targeted countries seek move to alternate currencies.

Consequences for the world economy

Many people are probably familiar with the video”Principles for dealing with the changing world order’ by billionaire investor and hedge fund manager Ray Dalio, in which Dalio suggested that having the leading reserve currency is “a key factor in a country becoming the wealthiest and most powerful”, which is a view shared by many experts.

The US used its advantage of US dollar hegemony to build an aggressive army to bully the entire world.

De-dollarization will cause the US dollar to collapse, exactly the same as what happens when Ponzi schemes collapse. pic.twitter.com/GALHzBj0AI

— Richard (@ricwe123) April 18, 2023

It is believed that one of the main benefits of being the dominant reserve currency is the increased demand it experiences compared to other countries, as it is widely accepted worldwide and regarded as a safe haven, making it more valuable.

Responding to questions from Cointelegraph, Tether — the issuer of the largest stablecoin by market cap Tether (USDT) — noted that stablecoins pegged to the US dollar are also increasing demand for the currency.

Greater demand for the US dollar theoretically makes it more valuable against other currencies, making importing goods and services relatively cheaper for the US and allowing the country to borrow money at a lower cost.

But responding to concerns about what would happen if the US dollar lost its hegemony, many economists quote the words of Nobel Prize-winning economist Paul Krugman, who argued in August 2015 that “while reserve currency status may have political symbolism, it is essentially irrelevant as an economic goal” because its benefits are “a small fraction of one percent of GDP.”

It is worth noting that economists are known for disagreeing with each other. In an April 11 poll of economists, 50% of them disagreed with Krugman’s claim that the benefits are only slight.

A time for innovation in the stablecoin market

According to CoinMarketCap, any stablecoin with a market cap over $1 billion is pegged to the US dollar, which makes sense given its dominant status.

However, as the US dollar continues to lose its dominance, the use of these stablecoins may decline.

Tether emphasized that stablecoins are “particularly beneficial to citizens in emerging markets who may experience high levels of inflation and currency instability,” or those in countries with limited access to financial services, so even if the U.S. dollar and its pegs stablecoins decline, others will likely intervene.

Schwerin noted that “major problems are already reaching beyond the US to cater for exactly this scenario,” referring to stablecoins like Circle’s Euro Coin (EUROC) pegged to the euro, adding:

“There will be a lot of improvisation and experimentation, which is good for innovation.”

Schwerin noted that he wasn’t quite sure what would work, but expressed his optimism that the crypto community could find solutions soon.

Tether said it has “always been at the forefront of innovation,” pointing to other products it has released, such as Tether Gold (XAUT) — a gold-backed stablecoin — and other fiat-backed stablecoins.

While stablecoins can be designed in very different ways, the most commonly used today are both fully/over-secured and exogenous (backed by external assets).

As long as stablecoins have sufficient collateral, their users need not worry that a transition from US-pegged stablecoins will create liquidity problems, especially when much of the collateral is stored as highly liquid assets.

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