Après Bubble, Cryptocurrencies Start To Earn Their Keep With Real-World Use Cases

Outside observers would be forgiven for thinking cryptocurrencies were tulip-bulb level speculative foolishness, replete with prominent fraudsters and a massive multi-year hype cycle. But the real-world use cases now emerging for stablecoins – cryptocurrencies pegged to an underlying asset to give them a stable, predictable value -- illustrates how crypto is beginning to earn a substantive seat at the global finance table.

With their (for the most part) real-world asset pegs, stablecoins were specifically not meant to be speculative instruments. The two most widely-used stablecoins, Tether, created by a company of the same name in 2014, and the USD coin, created by Circle in 2018, are pegged to the US dollar.

Together those two stablecoins have about $108 billion in value in circulation, dwarfing all other stablecoins. Circle counts BlackRock, BNY Mellon and both Visa and Mastercard among its partners, giving some credence to the company’s claim that the USDC is, in effect, a “digital dollar.”

The disadvantages of cryptocurrencies have been obvious. Even with greatly reduced volatility due to their asset pegs, stablecoins still have had their complexity and security problems working against their wide adoption. 

The IMF’s Journal noted, for instance, that the crypto ecosystem is “extremely complex,” which makes it hard to assess risks “even when there’s plenty of data.” And Tether has faced heavy fines from the US Commodity Futures Trading Commission for misrepresenting the hard-dollar assets held in reserve.

But as the excesses of speculative trading are wrung out of crypto markets, stablecoins are emerging as highly useful instruments and a genuine success in the defi world. 

The fast-growing real-world applications include financial processes that were traditionally expensive and inconvenient. Why is their use growing? For the same reasons all technological advances disrupt what was going on before – lower costs, greater ease of use, less physical infrastructure, and more efficiency with less friction.

The largest use of stablecoins is still as “on- and off-ramps” to the crypto world – but here’s where the non-crypto action is:

• Payments

The use of stablecoins for payments is skyrocketing, with a recent research report suggesting the volume will more than triple over the next five years, likely becoming the largest use case. That market share will come out of the hide of banks – wire transfers and ACH payments primarily. The defi capabilities of stablecoins increase speed of transactions, create a better audit trail, and greatly reduce fees.

• Workers’ remittances

Workers’ remittances are the sending of cash from overseas workers back to their families at home, and it’s a shockingly big flow of cash worldwide. The World Economic Forum estimates that workers sent home almost $800 billion in 2022 . The cost to those workers was staggering, averaging 6% of the total during 2022. Stablecoins could eliminate the lion’s share of those fees, representing enormous savings to economically challenged workers who can ill afford to pay it. 

• Gaming

Like it or not – and governments tend to not – stablecoins are growing in use for online casino gaming. While the US shut down all online poker sites in 2011, the modern version, using stablecoins, is far harder to trace and bottle up.  

• Local inflation-hedged cash holdings

Finally, there is a huge and growing demand, particularly in developing countries subject to currency instability and inflation, for stable and highly liquid assets that aren’t pegged to the local currency and therefore help the holders avoid the devaluation of their holdings. Stablecoins also allow holders to avoid bank risk in both the developing and developed world. Hyperinflation scenarios have swept Venezuela, Argentina, Turkey, Nigeria, Iran and other countries in recent years, and given current economic woes, is likely to recur in more places with more damaging effects.

The good news for investors who use stablecoins to hold cash balances is that defi applications allow them to earn reasonably high yields on their stablecoin holdings. Many of the larger crypto wallet companies offer these returns, and smaller wallets are increasingly offering yield using third party enabling companies.

Implications

Governments and central banks are certainly paying attention to the growth of stable coins, with the US Federal Reserve issuing a report on stablecoins and their potential impacts on the banking system last year. Governments are also continuing to study Central Bank Digital Currencies, which are exactly what they sound like. So far, most national governments are proceeding slowly, suggesting the stablecoins are likely here to stay and will keep growing in their real-world usage. 

Virtually all technological revolutions follow the same shaped hype cycle, with breathless coverage and even wild speculation front-running reality. But when that reality comes, its adoption and effects are often significantly larger than the hype cycle anticipated in the first place. 

Will it be that way with cryptocurrencies? That remains to be seen, but stablecoin adoption is making the case that the changes are coming.