The Rise of Stablecoins and its Effects on the Banking Sector

The Rise of Stablecoins and its Effects on the Banking Sector

SINGAPORE – Stablecoins are continually growing in popularity as they bring about stability in an uncertain and booming crypto market scene. Stablecoins facilitate the trading of digital assets as a semblance of real money. They are also designed to hold a stable value or at least values with minimal volatility but offer no appreciation in value. Instead, stablecoins represent the performance of the underlying assets compared to other crypto assets. 

As with other types of cryptocurrency, stablecoins should be supported by real assets such as USD-backed bank accounts, the euros, other fiat currencies or even gold. In Asia, stablecoins represent other world currencies, including the Singapore Dollar and Hong Kong Dollar.

Today, one of its most common uses is for the investors and traders to have a less volatile holding ground during upswings and crashes of the crypto market. This includes applications in the areas of global payments, cross-border money transfers, foreign exchange (Forex), and market entry among others. This allows investors and traders to use stablecoins in sending money and transferring payments to neighbouring countries with low transaction fees. In totality, stablecoins are maturing further and have a promising future in the global market.[FinTech News SG].

Why the Sudden Growth in Stablecoins

Stablecoins have been gaining traction among investors and traders ever since the crypto market staggered from volatility to controversies. It stabilises the crypto ecosystem, which substantially offers the prospect of profits to regular investors and venture capitalists. Here are some attributable factors that contribute to stablecoins’ burgeoning popularity.

 

A. Stability Amidst Volatility in the Crypto Market

Stablecoins offer a safe place to store assets whenever there are crashes in the cryptocurrency market. Investors and traders can quickly and easily convert unpegged cryptocurrencies to stablecoins, eliminating the need for a fiat currency switch. This is a cost-effective solution which also takes payment processing providers out of the equation.

B. Successful Asset Raise

Asset raise is important to help keep a business afloat and this goes similar to investing in a crypto market. With the total market capitalisation of all cryptocurrencies rising from USD1 billion in 2013 to a high of USD800 billion in 2018, this exponential growth signals a community demand and well-informed investors are also interested in using stablecoins as well.

C. The Occurrence of Non-Fiat Crypto Exchanges

When new non-fiat crypto exchanges were introduced in the crypto market, bank account opening became much simpler. Investors and traders no longer have to go through stressful processes with high transaction fees. Instead, they only need a stable medium (like stablecoins) to trade their cryptocurrencies. This gives opportunities for investors to set up an offshore company with easier access to bank accounts for businesses. 

Related: Cryptocurrencies in Thailand: From Regulation to Application

What’s Happening to the Banking Sector?

Despite Stablecoin’s rising popularity, investors and traders remain apprehensive of its financial stability, congruence with monetary policies, effectiveness and competitiveness in the current environment. While stablecoins seem like a good idea, the presence of risks can still occur and one of the sectors that may be facing these challenges is the banking industry. 

That is why policymakers place restrictions and limitations in order to maintain a healthy and competitive market for businesses. Here are some potential effects that may happen to the banking sector and the solutions to manage these risks.

Intermediaries No More

Banks may lose their role as financial intermediary institutions if they lose deposits from stablecoin providers. That’s why they need to compete with stablecoins by offering their latest innovations with higher interest rates. Banks should also encourage stablecoin providers to move their funds into the banking system or engage in lending deposits themselves.

Monopoly or Oligopoly

Since this is the era of the digital economy, tech giants could use their networks to monetise information and shut out competitors, which include banks. Banking services need to be interoperable to facilitate entry, control and data protection, especially when there is such an exponential increase in demand for near-instant transactions, complete transparency and thorough tracking, and compatibility with any currency or asset type in the global payment industry.

Threats on Weaker Currencies

USD-backed stablecoins are the most active, have the lowest attrition rate, and are commonly used in countries with high inflation rates. This new form of “dollarisation” might undermine financial development, monetary policies, and economic growth. As a result, countries with weaker currencies are developing restriction policies on foreign-currency stablecoins to mitigate the potential threats that it may bring.

Related: Digital Bank Licensing in Singapore

DesFran’s Cross-border Banking Solutions

With only 30 percent of the total number of announced stablecoins live, the remaining 70 percent are either under development or have been shut down permanently [Blockdata, PDF]. Without a good understanding of the concept of stablecoins, there is a possibility that any potential investor may fall into the wrong stablecoin provider. 

At DesFran, we help investors and educate our partners to understand the various limitations to consider before utilising stablecoins as digital money for offshore banking. If you are considering to venture into the crypto market, our DesFran experts are here for you.

Contact us today to learn more about stablecoins and cross-border banking solutions. We provide corporate advisory solutions to help businesses with their banking needs.

References

What are Stablecoins and Why Is it Growing in Asia, Fintechnews.sg

The Rise of Stablecoins & What Are The Different Types Out There, Hackernoon.com

Digital Currencies: The Rise of Stablecoins, Blogs.IMF.org

Stablecoins: Currency for the Digital Age, Lexology.com

Stablecoins, Blockdata.Tech

About the Author

Claudia Nio is Strategic Communications and Research Intern at DesFran. Claudia has a keen interest in the area of communications, and has always been on the lookout for opportunities to build her experience in this field. She is currently a sophomore in Business Management at Singapore Management University, majoring in Communication Management. Claudia’s interest in communications can be seen in her past student appointments as Marketing Director for school events, and President of the university’s Communication Management Society. Without prior academic exposure to strategic communications, Claudia hopes this internship will allow her to better define her academic pursuit and choice of major.

Terence Tay is Strategic Communications and Research Executive at DesFran. Terence has more than six years of experience in the banking industry, with a keen interest in wealth and customer relations management. Having committed more than 15 years in the entertainment and performing arts scene in Singapore, Terence wishes to develop himself further in both the finance and communications realms by pursuing career and academic opportunities related to strategic and business communications. Terence holds a Bachelor’s degree in Management and Human Resource Management, and will be studying Master of Science in Communication Management at the Singapore Management University in 2020.

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