Economies around the world are facing a motley of challenges caused by rising inflation. High inflation devalues national currencies, which, in turn,
Economies around the world are facing a motley of challenges caused by rising inflation. High inflation devalues national currencies, which, in turn, pushes up the cost of living, especially in scenarios where earnings remain unchanged.
In the United States, the government has responded aggressively to inflation. The nation hit a 9.1% inflation rate in June, prompting the Federal Reserve to implement a series of fiscal countermeasures designed to prevent the economy from overheating. Hiking interest rates was one of them.
Soaring Fed interest rates have consequently slowed down consumer spending and business growth in the country.
The counter-inflation approach has also strengthened the value of the U.S. dollar against other currencies due to tight dollar liquidity checks. As 79.5% of all international trades are undertaken using the dollar, many countries are now paying a premium for imports to compensate for the dollar’s rising value, worsening inflation in those importing countries.
Subsequently, citizens in some flailing economies have started to convert their money into more stable foreign currencies to safeguard their money against value depreciation, and many of them are turning to stablecoins to achieve this.
Whitney Setiawan, a research analyst at the Bitrue crypto exchange, told Cointelegraph, “With the U.S. dollar recording steep appreciation against other fiat currencies, most crypto-savvy users have a special interest in holding stablecoins.”
Setiawan also predicted that the stablecoin sector was likely to disrupt the remittance industry in the near future due to the medley of benefits that stablecoins offer.
“With interest in stablecoins being fueled by various factors, I can predict it will be a matter of time before this asset class topples the remittance industry by a significant margin,” she said.
On this last point, remittance companies have indeed been taking notice and have, in recent months, made moves to claim a share of the stablecoin market. MoneyGram, for example, recently partnered with Stellar to offer stablecoin remittance services on its network.
What are stablecoins?
A stablecoin is a digital currency whose value is often pegged to an asset or regulated by an algorithm to maintain a stable value.
Collateralized stablecoins are the most popular and are backed by reserves of their underlying assets. In most cases, their value tracks that of popular national currencies such as the U.S. dollar, the British pound or the euro.
This category of stablecoins is used extensively by crypto traders looking to avoid crypto market upheavals and users looking to protect their money against inflation.
Other types of stablecoins include commodity-backed, crypto-backed and algorithmic stablecoins.
Why stablecoins are ideal as instruments against inflation
Stablecoins are ideal as instruments against inflation for numerous reasons. One of them is their immutable and borderless nature.
The decentralized nature of blockchain technology on which stablecoins operate allows them to travel across borders that may otherwise be closed to cross-border financial activities.
Stablecoin transactions are also fast and cost-effective when compared to fund transfers made via commercial bank networks. This makes them convenient for people looking to send and receive money and a hedge against inflation.
Another disruptive property that stablecoins possess is their capacity to cater to the unbanked. Approximately 2 billion people in the world today lack a bank account. Stablecoins have demonstrated the ability to reach this marginalized demographic by allowing anyone with a device that can host a digital wallet, like a smartphone or laptop, to use stablecoins.
In some developing nations, many people lack the necessary documentation to open a bank account, and so they are shut out of their nation’s main financial systems. Using stablecoins allows this group of users to send and receive money easily and use their monetary assets to hedge against inflation when the need arises.
Brian Pasfield, chief technology officer of Fringe Finance — a crypto lending platform that provides lending opportunities to stablecoin holders — told Cointelegraph:
“Banks have strict monetary policies that generally taper down the dollar’s supply. This trend makes stablecoins an attractive option for those aiming to access the USD’s value, as they are generally accessible with little barrier to entry.”
He also underscored that governments had the ultimate power when it comes to mainstream stablecoin adoption.
“The likelihood of them (stablecoins) becoming commonplace and therefore disruptors lies in the hands of governments themselves, which may seek to implement their own solutions or censor the existing avenues,” he said.
While governments have been slow to adopt official policies regarding stablecoins, or may even undercut private stablecoins with the advent of central bank digital currencies, there are several countries in…
cointelegraph.com