Ok, so let us discuss how stablecoins, these quite unfazeable members of the crypto clan, are gradually but steadily elbowing their way in the traditional financial mainstream. It is not so much a great, red-carpet arrival as it is a small, vigorous penetration, to the great surprise (and possibly a certain perplexity) of the old guard.
Until recently, mentioning “crypto” to anyone in the old-school finance sphere would result in a polite nod and a nervous laugh at the mention of Bitcoin rollercoasters. Oh, that unstable nonsense? It is all very well to speculate upon, but not so good when it comes to paying the electric bill, is it? they’d say. And they were not absolutely wrong. Consider purchasing groceries with an asset that would have appreciated or depreciated by up to 20 percent by the time you got to the cashier desk. That will either make the dinner very cheap or the conversation with the cashier very awkward.
Meet stablecoins, the composed, coolheaded relatives of Bitcoin and Ethereum. What is their secret weapon? Stability. They remember to preserve a constant worth, most often tied to a fiat currency, such as the venerable U.S. Dollar. Consider them as the cybernetic analog of a dollar bill, but residing on a blockchain. It may seem a trivial innovation, but it has served as a game-changer, serving as the long overdue meeting point between the wild west of crypto and the more button-up world of traditional finance.
From Crypto Day Traders to Global Remittances: The Journey Begins
At first, the stablecoins such as Tether (USDT) and USD Coin (USDC) were predominantly the workhorses of crypto traders. They enabled them to easily jump in and out of unstable cryptocurrencies without the need to continuously convert back to regular bank accounts, saving time and expenses. It was a pit stop at the crypto racetrack, where you did not have to leave the digital world to refuel.
However, then, something interesting began to be noticed by people. Someone must have thought, “Hang on, if I can transfer a stablecoin around the world in minutes at a cost that is a fraction of what a old fashioned bank wire would cost, why the heck am I still using these archaic systems that feel like they use carrier pigeons under the hood?” And with that the gears began to grind.
- The Remittance Revolution (Or, Bye-Bye, Hefty Fees!)
Remittances? Okay, let us discuss remittances. The process of sending money back home particularly to migrant workers has been a painful experience. It was a nightmare with high fees, sluggish transfers and sometimes unknowable exchange rates. Stablecoins bridge this gap with an attractive alternative.
Consider a construction labourer in Dubai who remits money to his or her relatives in a distant village in Kerala. Rather than visiting a money transfer agent and spending huge sums on fees, they might be able to simply send a stablecoin to the digital wallet of a recipient, which would arrive nearly instantly and at a fraction of the cost.4 It is not only convenient, but a massive leap towards financial inclusion of the unbanked and underbanked. No more waiting days to have the money cleared, it is immediate gratification (and extra money in the pocket).
- Cross-Border Payments for Businesses: Speed and Efficiency
It is not only people. Faster and cheaper methods of moving money are also being sought by businesses, especially those involved in international trade. Conventional international payment processes may require days to finalize, pass through several intermediaries and attract high foreign exchange expenses. Stablecoins slice through this bureaucracy like a hot knife through butter.
Think of a textile exporter in Tirupur receiving payment in USDC, within minutes, compared to days, after being paid by a buyer in New York. This accelerates the movement of cash, lubricates the wheels of commerce and makes international business a lot more efficient. It is the equivalent of taking a horse and buggy and replacing it with a jet airplane when it comes to financial transactions.
- DeFi’s Foundation: Building the New Financial Rails
Stablecoins are definitely the workhorses of the Decentralized Finance (DeFi) space (although not quite mainstream enough to explain to your average person what a stablecoin is). DeFi is an attempt to re-create all the various financial services (lending, borrowing, trading, insurance) on the blockchain, without intermediaries.
Stablecoins are what give these protocols the stability they need to operate. You would not want to take out a loan in a highly volatile cryptocurrency, after all. That would be borrowing a cup of sugar that could possibly be a diamond (or a lump of coal) by the next day. Stablecoins make the value of loans, collateral and yields predictable, and thus DeFi a more practical alternative to traditional finance.
- Institutional Adoption: The Big Guns Are Waking Up
Now here is where it gets interesting. Big banks, pay giants such as Visa and Mastercard, and even certain central banks are no longer merely looking on; they are experimenting and adopting stablecoins. Why? Since they observe the possibility of innovation, efficiency, and access to new markets.
- Payment Networks: Consider the case of stablecoins being used to directly pay transactions on payment networks and avoiding some of the slower and more costly legacy systems. Visa and Mastercard are already working on it.
- Tokenized Deposits: Even banks are looking at issuing so-called tokenized deposits, which are really stablecoins, but which are covered by real deposits at the bank. This closes the gap even more, as it combines the advantages of blockchain (programmability, speed) with a regulated banking system. Here you can read more about Tokenized Banking System
- Wholesale CBDCs (and their stablecoin cousins): Although Central Bank Digital Currencies (CBDCs) are a different beast, the discussion surrounding it tends to overlap with stablecoins. Central banks are examining how privately issued stablecoins work, and how they would supplement or interoperate with a digital form of their fiat currency in wholesale interbank settlements.
The Regulatory Elephant in the Room (It’s Getting Dressed!)
Naturally, the discussion of stablecoins going mainstream is incomplete without the mentioning of regulation. Stablecoins have long existed in a grey area, which caused some concerns over their reserves, transparency, and possibility of illicit use. Regulators, who initially were scratching their heads, are starting to get serious. The entire world, be it the EU (and its MiCA framework) or the US, the UK, and even here in India are designing special regulations to deal with stablecoins.
This regulatory certainty, though occasionally slow and lumbering (government, right?) is a positive thing. It establishes confidence, offers consumer security and presents the platform upon which the large financial participants can dance with both feet. And conventional banks are allergic to regulatory uncertainty – it sends them into hives! With these frameworks becoming more concrete, further mainstream adoption is in the cards.
The Future: A Stablecoin-Powered Tomorrow?
Is this the future where we will pay everything with stablecoins? Probably not solely, but they are definitely on the way to becoming a major component of the worldwide financial plumbing. They are so versatile in their potential to provide the speed and programmability of blockchain with the stability of fiat currency, whether it comes to simplifying cross-border payments and remittances, driving the next era of financial services and even possibly shaping how central banks consider digital money. They are making a silent and strong presence and traditional finance is being slightly more digital, slightly quicker, and probably, a bit more fun. But do not repeat the last part to the old guard.
