Summary
- Non-dollar denominated stablecoins are accelerating outside the US, particularly as regions like Europe and Asia move to attract crypto companies with legislation.
- Even China, where crypto is banned, has found a strong use case for an offshore yuan-backed stablecoin.
- By yielding market share in stablecoins, US regulators are allowing the dollar to be eclipsed by other currencies and reducing their potential influence in regulation.
Stablecoins are a $130 billion market
The recent USDC de-peg–may have stoked fears about the viability of stablecoins. But despite the short-term volatility and possible structural issues that need to be figured out, stablecoins have remained a over $130 billion market. As “crypto’s killer use case,” stablecoins are used not only as working capital in DeFi but also by people around the world to make everyday payments.
Currently, the vast majority of stablecoins out there are denominated in US dollars. However, the dominance of the dollar in the stablecoins market so far is not something that US policymakers should take for granted.
The dollar hegemony vs the new, digital financial system
Almost 60% of the world’s reserves are denominated in US dollars as of 2022, and the vast majority of international transactions are conducted today using the dollar. Although some have argued about the extent of the US’s “exorbitant privilege” in recent years, the longstanding dollar hegemony has afforded the United States numerous benefits, including lower borrowing costs and the ability to pursue foreign policy objectives through sanctions.
Many of the cross-border payment innovations that are swiftly developing do not operate on the current correspondent banking system that the United States has been dominating. In fact, fintech companies like Wise, Airwallex, Checkout.com, and Stellar have found value in providing services outside of the SWIFT system–which has become clunky and costly. While the fundamentals—namely, the size and strength of the US economy—forming the dollar’s trust is unlikely to change overnight, the private sector in the US and abroad is building a new financial system that can threaten to erode the dollar’s market share.
As a part of this digital financial system, stablecoins have real use cases internationally. For example, they have provided cash aid to Ukrainian refugees, served as a hedge against local currencies in countries experiencing hyperinflation, and facilitated fast and cheap remittance payments. Even in China, where cryptocurrencies are banned, Fintech entrepreneurs are setting up stablecoin arrangements with Hong Kong to facilitate cross-border payments for merchants doing business offshore.
China: a case study on the strong demand for non-dollar stablecoins
From 2017 to 2021, China progressively cracked down on crypto exchanges, eventually banning crypto mining and trading altogether. Yet, research from Chainalysis shows a year-on-year increase in cryptocurrency adoption in China in 2022—ranking among the top ten overall in crypto adoption globally and among the top five for retail volume for centralized and DeFi services. In addition, an increasing number of people within China are accessing exchanges, despite a crypto ban.
Offshore yuan-backed and non-dollar stablecoins reduce frictions for small- and medium-sized importers seeking access to Chinese suppliers, especially from emerging markets. Chainalysis has spoken with merchants in Sub-Saharan Africa and Latin America using cryptocurrency to make informal purchases from merchants in China. This echoes articles from local Chinese news sources, which highlight the ease and cost benefits of transacting in cryptocurrency for informal or short-term cross-border businesses, all the while surpassing administrative and logistical barriers, such as opening a Chinese bank account–which requires a long-term visa.
In addition to reducing payment frictions for small, international business, China’s currency restrictions have made an offshore yuan stablecoin even more favorable. According to the world’s largest offshore yuan stablecoin issuer, CNHC, capital control restrictions of Belt and Road countries “causes a large number of foreign traders to resort to underground channels for their transactions despite increased compliance risks.” Chinese merchants who have limited access to US dollars, for instance, may instead use an offshore yuan stablecoin for “cross-border procurement, commodity trades, payment of wages overseas, e-commerce,” and other transactions.
While US dollar stablecoins like USDT have purportedly been used for transactions with Chinese merchants thus far, firms inside and outside the region see a market opportunity in non-dollar stablecoins. Within months of blockchain company Tron announcing its yuan-backed TCNH stablecoin in December 2022, another yuan-backed stablecoin company, CNHC, announced a $10 million investment round backed by US-affiliated companies KuCoin, Circle, and IDG Capital.
The CNHC will be run on both Ethereum and Conflux–China’s “only regulatory compliant, public, and permissionless blockchain” (in China, permissionless blockchains are restricted and can only exist with the government’s permission). Conflux received a $5 million investment from the Shanghai government in January 2021. Later in September that year, the blockchain company announced that it would be releasing an “offshore yuan-denominated stablecoin tied to the Chinese Reserve Bank’s digital currency (CBDC).” Though Conflux does not seem to have its own yuan stablecoin, it is a “Strategic Partner” of CNHC and is working together to “jointly carry out the development of new international payment channels for offshore RMB.”
Conflux has made clear that the offshore yuan will be used for international trade and is separate from the e-CNY (China’s central bank digital currency) used within China. However, a yuan stablecoin used in global transactions would fit nicely into a broader RMB internationalization strategy. At the very least, there appears to be a strong demand for a yuan stablecoin among Chinese merchants and their counterparts.
Europe and Asia move to attract crypto companies with legislation
The recent banking crisis may have stoked US regulators’ fears about the stability of stablecoins due to Circle’s $3.3 billion held at SVB and its subsequent de-peg. However, stablecoin issuance appears to be accelerating outside the US Stablecoin companies are emerging worldwide, particularly as regions like Europe and Asia move to attract crypto companies with legislation. Likewise, existing stablecoin companies are expanding their product offerings beyond the US dollar–such as Circle’s Euro Coin or Tether’s Mexican Peso-backed MXNT.
As the technology improves, risk control mechanisms will mature as well. For example, when USDC de-pegged, DeFi users flocked to exchange USDC for other stablecoins on decentralized exchanges like Curve and Uniswap. Relative to the roughly $1 billion of USDC redemptions on March 10, a significantly greater amount of activity was occurring on-chain that day—with over $2.5 billion USDC sold on decentralized exchanges (DEXes) and an inflow of $4.46 billion into centralized exchanges (CEXes). The need to off-ramp–and therefore the risks to traditional financial markets in times of crisis–would likely decrease if crypto alternatives advance and DeFi markets continue to develop and deepen.
US policymakers have the chance to engage with the technology and the American companies currently paving the way in the industry. US regulators would be able to take part and establish leadership in a growing technology industry by:
- creating conditions that encourage crypto companies to headquarter in the US–including supporting their access to traditional financial services (CNHC moved $10 of its $12 million previously held at SVB to a pilot free trade zone in Hainan, China, and DBS Singapore),
- encouraging users to try out the technology within a regulated environment, and
- implementing clear and comprehensive guidance that do not pose undue burdens to small startups with limited compliance resources.
While the risks associated with the novel technologies are real, some, such as concentration risk and opacity of underlying assets can be addressed through the crypto ethos of decentralization and transparency. Other issues are not isolated to cryptocurrencies, for example, run risks will remain top of mind in an environment of increasingly frictionless digital payments.
As we see in China, a ban on crypto won’t make it go away. Stablecoins provide benefits and uses for Chinese merchants even if users cannot access it in the Mainland. Likewise, a crypto ban in the US likely would not work. Crackdowns on the industry may facilitate, or expedite, the usage of other currencies as a means of global payment – at the expense of the dollar hegemony.
