The United States dollar has long been the dominant global reserve currency, but this is changing. In 2001, the US dollar accounted for 71% of global foreign exchange reserves. As of 2021, that number has decreased to just over 58%. This shift, known as de-dollarization, is being pursued by countries like Russia and China, who are actively looking to replace the US dollar with digital assets, other fiat currencies, and potentially a BRICS currency between Brazil, Russia, India, China, and South Africa.
Jeremy Allaire, CEO of USD Coin (USDC) issuer Circle, has argued that the US needs to implement stablecoin legislation and digitize the US dollar to remain competitive amid this de-dollarization. Allaire suggests that this shift in global currency dominance will have a significant impact on the stablecoin market.
The Future of Stablecoins
As the US dollar continues to lose its dominance, stablecoins may see their usage diminish. According to CoinMarketCap, every stablecoin with a market cap exceeding $1 billion is currently pegged to the US dollar. However, Tether, the issuer of the largest stablecoin by market capitalization, has noted that stablecoins pegged to the US dollar increase demand for the currency. This increased demand theoretically makes the US dollar more valuable relative to other currencies, which makes importing goods and services relatively cheaper for the US and allows the country to borrow funds at lower costs.
However, if the US dollar were to lose its hegemony, many economists cite the words of Nobel Prize-winning economist Paul Krugman, who argued back in August 2015 that “while reserve-currency status may have political symbolism attached, it’s essentially irrelevant as an economic goal” due to its benefits being worth “a small fraction of one percent of GDP.”
Tether has highlighted that stablecoins are “particularly beneficial for citizens in emerging markets who may face high levels of inflation and currency instability,” or those in countries with limited access to financial services. As such, even if the US dollar and stablecoins pegged to it diminish, others will likely step in. Stablecoins like Circle’s Euro Coin (EUROC) which is pegged to the euro are already being developed to cater to this scenario.
Dr. Joachim Schwerin, principal economist for the European Commission, has suggested that big issues are already reaching out outside the US to cater for this scenario, referencing stablecoins like Circle’s Euro Coin (EUROC), which is pegged to the euro, adding: “There will have to be quite a lot of improvisation and experimentation, which is good for innovation.” Schwerin noted that he didn’t know exactly what would work but expressed optimism that the crypto community would be able to quickly find solutions.
Tether has always been at the forefront of innovation and has released other products like Tether Gold (XAUT) – a stablecoin collateralized by gold – as well as other fiat-backed stablecoins. While stablecoins can be designed in different ways, the most frequently used ones are currently fully/over-collateralized and exogenous (backed by external assets). As long as stablecoins have sufficient collateral, their users should not be worried that a transition away from US pegged stablecoins will cause any liquidity issues, particularly when a high proportion of the collateral is stored as highly liquid assets.
The shift away from the US dollar as the dominant global reserve currency is a reality, and it is likely that stablecoins pegged to the US dollar will see their usage diminish. Tether and other stablecoin issuers are already developing stablecoins pegged to other fiat currencies, such as the euro, which are likely to become increasingly popular. While the future of the stablecoin market is uncertain, one thing is clear – the crypto community will continue to innovate and find solutions to the challenges presented by a de-dollarizing world.