Stablecoins have been around for over a decade, beginning with the launch of the now-defunct BitUSD token in 2014. Today, they are in the spotlight once more thanks to the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act), which was signed into law in July and provides a regulatory framework for their adoption and issuance.
“Stablecoins seem here to stay. A few years ago, we probably would have debated the accuracy of that sentence. Not today,” said Teresa Ho, head of U.S. Short Duration Strategy at J.P. Morgan.
What exactly are stablecoins, and what are their pros and cons compared with other forms of cryptocurrency?
What are stablecoins?
A stablecoin is essentially a cryptocurrency designed to maintain a stable value relative to a certain asset. While there are many types of stablecoins, they typically fall into one of two categories: fully reserved stablecoins and algorithmic stablecoins.
What is the size of the stablecoin market?
Today, the U.S. dollar-denominated stablecoin market, which makes up around 99% of the global stablecoin market, has grown to $225 billion, accounting for roughly 7% of the broader $3 trillion crypto ecosystem tracked by J.P. Morgan Global Research.
And the sector continues to grow. “The market cap of the basket of stablecoins we track ended June +2% higher month over month, sustaining seven consecutive months of positive market cap growth despite a more volatile crypto market year-to-date,” added Kenneth Worthington, a Brokers, Asset Managers and Exchanges equity analyst at J.P. Morgan.
Looking ahead, J.P. Morgan Global Research projects the stablecoin market could hit $500–750 billion in the coming years. “There are reports out there that say stablecoins could grow to $2 trillion by the end of 2028, which we believe is a little bit optimistic. A more realistic scenario is that the market could grow two to three times from where we are right now in the next couple of years, which is equivalent to $500 to $750 billion. Admittedly, this is just our best estimate,” Ho said.
This is largely because the stablecoin ecosystem is still nascent, and new infrastructure will take time to build out. In addition, more conservative liquidity investors — whether retail or institutional — may not immediately seek out stablecoins as a cash alternative. “Overall, while adoption is poised to grow further, it might be at a slower pace than what some might anticipate,” Ho added.
What are the pros and cons of stablecoins?
Stablecoins offer users several advantages. For starters, they are designed to maintain a stable value, making them less volatile than other cryptocurrencies. They are also programmable, which means they can be automatically managed and controlled. This makes them a relatively reliable medium of exchange within the blockchain universe.
“Stablecoins are a digital, on-chain form of fiat money. They are easy to self-custody and transact, and they are also fast, particularly in the context of cross-border money movement. One could even consider them a better form than fiat, as they can move quicker and less expensively across existing financial infrastructure in certain circumstances,” Worthington said. As such, they are well-suited for the traditional financial services system, where the movement of cash needs to keep pace with transactions that are increasingly executed outside of usual business hours.
On the flip side, stablecoins could pose a threat to financial stability. For instance, stablecoins could have significant run risks, in which a large group of investors redeem their holdings simultaneously. “The collapse of TerraUSD in May 2022 highlights just how quickly a run can occur, in an asset class that trades 24/7,” Ho remarked. The effects of a massive liquidation could spill over to other markets, destabilizing the traditional banking system.
In addition, the Bank for International Settlements (BIS) posits that stablecoins fall short on three key tests for money:
How do stablecoins compare with deposit tokens?
In a nutshell, a deposit token (or tokenized deposit) is a digital representation of a bank deposit that operates on blockchain-based payment rails. Unlike stablecoins, which are typically backed one-to-one by fiat currency or equivalents, deposit tokens are underpinned by the same liquidity frameworks as traditional bank deposits.
While both stablecoins and deposit tokens offer 24/7, near-instant settlement, they have different applications. Today, stablecoins primarily have retail use cases, including crypto trading, remittances and merchant payments. These are all fairly low-value transactions, which might have lighter compliance requirements.
On the other hand, deposit tokens are geared toward institutional use cases, such as cross-border business-to-business (B2B) payments, digital asset settlement and on-chain liquidity management. As they are backed by traditional banks, they are governed by more stringent regulatory requirements.
“The GENIUS Act could further accelerate stablecoin adoption, moving this asset class more mainstream and further fueling the growth of this market.”
Teresa Ho
Head of U.S. Short Duration Strategy, J.P. Morgan
How might the GENIUS Act impact stablecoins?
The passing of the GENIUS Act could lend legitimacy to stablecoins amid surging interest. “This could further accelerate stablecoin adoption, moving this asset class more mainstream and further fueling the growth of the market,” Ho said.
Essentially, the GENIUS Act creates both a state and federal pathway for various players — including non-banks, subsidiaries of insured depository institutions (IDIs) and state-chartered entities — to be approved as permitted payment stablecoin issuers. Issuers are prohibited from offering yield or interest, however, making stablecoins less competitive with interest-bearing bank deposits and money market funds.
In addition, the bill establishes strict reserve requirements, mandating that each stablecoin be backed one-to-one with U.S. dollars, short-term Treasuries and other high-quality assets. However, it is unclear whether non-bank stablecoin issuers will have access to the Fed’s balance sheet, which is critical when it comes to addressing run risks.
“Clearly, these developments are still very much in their nascent phase. But one thing is for certain — there is more to come as the industry continues to explore product innovation to integrate stablecoins into the traditional financial system,” Ho said. “It’s still too early to know how this will play out, but it could potentially challenge how we think about liquidity in the money markets over the longer term.”
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