The United States dollar has been the dominant global reserve currency for quite some time, but recently it has been losing its position. In 2001, the U.S. dollar had 71% of the global foreign exchange reserves, whereas now it has only 58%. Powerhouses like China and Russia are pursuing ways to reduce their reliance on the U.S. dollar as well as digital assets, other fiat currencies, and potentially the BRICS currency, a currency between Brazil, Russia, India, China, and South Africa. If this de-dollarization continues, what will happen to the stablecoin market, as most stablecoins are pegged to the U.S. dollar?
Circle’s CEO, Jeremy Allaire, who issued USD Coin (USDC), suggested the U.S. must implement stablecoin legislation and digitize the U.S. dollar to remain competitive amidst the active de-dollarization. The Chinese yuan has already replaced the U.S. dollar as China’s most used cross-border currency, while in 2021, El Salvador made Bitcoin (BTC) a legal tender.
Dr. Joachim Schwerin, principal economist for the European Commission, suggested that changes in the global reserve currency occur regularly, with the role of the leading currency changing every 80-110 years of recorded financial data. The U.S. sanctions on Russia are a prime example of global friction, where sanctions could risk the U.S. dollar hegemony as targeted countries seek alternative currencies.
The leading reserve currency has been considered a key factor in a country becoming the richest and most powerful empire. The increased demand for the U.S. dollar, theoretically, makes it more valuable and imports cheaper for the U.S., while also allowing the country to borrow at lower costs. Stablecoins, which are mostly pegged to the U.S. dollar, increase its demand, but as the U.S. dollar substantially loses its dominance, the stablecoin market may see its usage diminish.
It’s not all bad news though. Stablecoins are vital for those in emerging markets who may face high levels of inflation and currency instability, and in countries with limited access to financial services. With the emergence of various stablecoins like Circle’s Euro Coin (EUROC), which is pegged to the euro, there will be improvisation and experimentation in the stablecoin market. Stablecoins are known for their innovation and solutions to financial needs, and there will be optimism from the crypto community to find new solutions.
While stablecoins can be designed in different ways, the most frequently used ones are currently fully/over-collateralized and exogenous. Stablecoins will not face any liquidity issues as long as they have sufficient collateral. Tether has always been at the forefront of innovation and has released various products such as Tether Gold (XAUT), a stablecoin collateralized by gold, and other fiat-backed stablecoins. The way forward will need improvisation, experimentation, and innovation to enable solutions to financial issues, particularly in emerging markets.
