Why The Current Global Crisis is a Defining Moment for Stablecoins

Stablecoins appeared in 2018 with inspiring promises of being used around the globe to improve financial access and assist countries suffering from hyperinflation or cross-border payments and remittance friction/headaches. In practice, they were mostly used to protect traders from the wild volatility of early crypto markets and for arbitrage. Now the global crisis brought on by COVID-19 allows stablecoins to live up to their promises, especially as now governments are doing their best to deliver stimulus money to those who desperately need it.

The global economic and health crisis has reinvigorated the use of stablecoins, as well as the discussion around digital dollars and central bank digital currencies (CBDCs). With almost 6 billion smartphones with active mobile subscriptions in the world, we are getting closer to a reality where an easy-to-use stablecoin can reach a large part of the world’s population.

Over the last month, stablecoins have delivered on their moniker and value proposition. We’ve seen a flight from traditional crypto assets to stablecoins similar to 2018. The market cap of all stablecoins has surged from $5 billion at the beginning of the year to above $8 billion in April. And the enhanced stability and usability of stablecoins allows them to rise on the ocassion and prove utility beyond demand from exchange arbitrage and safe haven appeal.

Although most stablecoins used today are backed by fiat, projects such as MakerDAO and Synthetix have shown it is possible to create stablecoins tethered to real world assets such as the U.S. dollar, but that are collateralized by other crypto assets in a decentralized way using smart contracts. There have been several hiccups and growing pains for both of these systems (including “Black Thursday”), both protocols have managed to sustain the price of their stable assets from depegging significantly and still offer empirical evidence that you can create a stable value completely in software.

Why now?

COVID-19 stresses on the need to transact from anywhere, quickly. Sending cash transfers with banks and checks at scale can be both slow and expensive, and expose recipients to possible infection as they attempt to deposit or cash their checks. Direct cash transfers have been shown to assist recipients in times of need if they can be delivered in time.

After weeks of negotiation, the U.S. has established partnership with Square, PayPal and Intuit to pay out the small business loan portion of the stimulus package. Outside of the U.S., especially where mobile money and electronic payments are not widely available, the promise of stablecoins for stimulus payments is more tangible and immediate.

The World Bank is recommending that governments send money with mobile phones to decrease the amount of in-person contact needed to receive the funds, but which infrastructure should they use? Because stablecoins run on open infrastructure, companies can create response tooling and wallet support without governments being concerned about the fact that they will be tied to a single provider.

The future

For stablecoins to be attractive alternatives, they have to be easy to custody, send, and receive on a budget smartphone. Solutions such as Argent and Celo are working hard to make this possible.

The use cases don’t end there. As stablecoins are programmable, their future counterparts will alter the way we perceive money itself.

Just how Synthetix gives people acesss to gold and other communities, there will be a growing amount of local and regional stablecoins which will provide community members access to their local economies, incentivize local spending, and thus empower their local communities. These will act much like today’s printed local currencies (e.g., Ithaca Hours, Bristol Pound), but with better usability and easier deployment.

In addition, programmable stablecoins will enable further experimentation around incentivizing spending during recessions. Direct cash rebates and negative interest rates (or demurrage) become possible on a much larger scale than before.

And finally, people will start experimenting with now money itself is created. Much like how money was supported by gold, new stablecoins may be supported by tokenized resources that we want to see more in the world (tokenized rainforests, for instance). When choosing between two stablecoins, you may soon be able to between, say, helping to solve global warming, or contributing to it.

Out of the coming recession, we will see stablecoins gain wider adoption from the conversations which have started out of necessity from this new normal.