How Stablecoins are impacting traditional financial services and becoming part of the global economy
Stablecoins were once used primarily for trading cryptocurrency. But today, they have become a versatile tool for everyday use. In a new report, analytics company Chainalysis noted that transactions with stablecoins account for ⅔ of the total transaction volume in the crypto market. Experts pointed out that this type of cryptocurrency is a crucial element in the process of integrating blockchain products into the financial system and economy.
“They provide a reliable medium of exchange, a store of value tool, a bridge between traditional finance and cryptocurrency. Stablecoins power much of the activity in decentralized finance (DeFi), cryptocurrency exchanges and cross-border payments,” the report noted.
Stablecoins are cryptocurrency tokens whose rate is pegged to an asset, such as a dollar, euro, or an ounce of gold. Companies use securities, national currencies or other crypto-assets as collateral to ensure that the exchange rate is tied to the underlying asset. The best known stable tokens are issued by Tether (USDT) and Circle (USDC).
Chainalysis is an organization that provides exchanges, crypto services, government agencies, and law enforcement agencies with tools to track blockchain transactions and helps private companies identify fraudulent wallets.
The company's solutions are also used by many major crypto exchanges and AML services to markup and scoring crypto wallets and determine the “purity” of cryptocurrency. Chainalysis has already earned about $85 million from government contracts and grants in the US. Approximately 65% of its revenue comes from the public sector globally.
Chainalysis has pinpointed the main areas where stablecoins have proven to be a major use case in the crypto market.
DeFi
Stablecoins have become the basis for many decentralized financial applications, facilitating the lending process. The stability of being tied to the exchange rate of a currency or asset makes them ideal for maintaining efficiency in such markets.
The stability of the exchange rate of such coins also provides access to financial products for users in economically unstable regions. For example, in some countries in Latin America and Africa, users use stablecoins as a hedge against inflation of their national currencies.
“In these regions, retail adoption is driven by their practicality for low-cost money transfers, the safety of savings in regions with unstable currencies, and the accessibility of DeFi,” Chainalysis analysts wrote.
P2P transactions
According to analysts' observations, stablecoins are increasingly being used for everyday payments and P2P transfers. Experts attribute this to the ability to process transactions quickly and cost-effectively. And often with minimal fees relative to traditional banking systems.
P2P transfers (peer-to-peer or person-to-person) are money or other transfers from one user to another, without the involvement of any intermediaries, such as a bank. Stablecoins have thus become a simple and secure way for people to exchange value between people.
“This is especially valuable in regions with limited access to reliable banking systems,” the report stated.
Money transfers
Stablecoins provide a faster and cheaper tool for remittances relative to traditional options, which often involve high fees and slow processing times, Chainalysis wrote.
“Migrant workers, who often have little or no access to banking services, use stablecoins to send money home to their families, and businesses use them to pay international bills,” the report wrote.
The analysts also concluded that they simplify transactions for importers and exporters, providing a stable and transparent environment for international trade, especially in regions with limited access to foreign currency. In their view, stablecoins circumvent the inefficiencies of traditional banking systems by facilitating international integration.
Illegal transactions and Stablecoins
Due to global adoption, stablecoins have become a high priority in the crypto market for regulators around the world. Governments and regulators are faced with the challenge of creating an environment to support innovation while ensuring quality standards to combat money laundering and terrorist financing.
Although Chainalysis estimates that less than 1% of all transactions relate to illegal activity they are still used in terrorist financing, sanctions evasion, theft and hacking, cybercrime and scams.
“Their stability and global availability make them attractive tools for criminal actors seeking to circumvent financial controls and avoid detection,” the report wrote.
Chainalysis believes that illegal use of stablecoins is a bad idea because of the transparent nature of blockchain as a public registry of cryptocurrency transactions. This architecture allows any participants to track cryptocurrency transactions and the movement of funds between wallets online and at any point in time.
In addition, many centralized stablecoins have tools to lock down assets on a particular wallet precisely at the blockchain level. Thus most centralized steiblcoin issuers have the ability to freeze or permanently delete (“burn”) cryptocurrencies on users' wallets. Stopping illegal transactions and helping to recover stolen funds.
According to analysts, all of these features make it possible to consider stablecoins an asset with the potential to transform the economy and financial system: “Their continued evolution will play a central role in determining the future of cryptocurrencies and traditional finance.”
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