~ 5 min read
Following the 2008 financial crisis, the white paper for what would become known as Bitcoin was published. Ever since then, it has opened the flood gates to all different types of cryptocurrencies that are created to solve a niche, specific use case. One of these is stablecoins.
What is a stablecoin? There are a few types of stablecoins but the most popular are Collateralized Stable coins. According to Coinbase, "They are type of cryptocurrency whose value is pegged to another asset, such as a fiat currency or gold, to maintain a stable price". For example, leading stablecoins pegged to the U.S dollar such as Tether (USDT) and USD Coin(USDC) hold very liquid traditional assets. These would include short-term government debt securities, treasury bills and cash. Essentially, for every USDT or USDC in circulation, it means that the issuers must maintain an equivalent amount in a mix of highly liquid and low risk assets(mentioned above).
As of the latest report, in sept 2024, USDC is backed by a reserve primarily composed of two main components: short-dated U.S. Treasury securities and cash. The breakdown is approximately 80% in U.S. Treasuries and 20% in cash. To drive this point home, I want to compare to when the US was on the gold standard. The gold standard monetary system where the value of a country's currency is directly linked to a specified amount of gold.
For every dollar in circulation (in real life), there was a equal amounts of gold in government vaults and central banks. It act as a means to limit inflation by restricting the amount of money that can be printed. However, the downside was that it limited the flexibility of monetary policy, especially during economic downturn.
Stablecoins are a modern embodiment of this monetary system where it solves both the issues of traditional crypto currencies and fiat currencies. A major concern with holding assets in cryptocurrencies is their high volatility, which is a valid issue. And the issue with traditional fiat currencies is that they are very centralized. Your dollars, for better or worse, are held in custody by a bank. Stablecoins provide the both of both worlds where they solve the volatility issue by pegging to real world assets (RWAs) and provide the decentralized nature by being on the block chain and allow self custody through smart wallets.
If you are reading this, I'm going to make the assumption you are in the West, where we have very strong financial institutions and infrastructure. With USD being the reserve currency of the world, and CAD being a rather strong currency. Paired with modern day tools like Venmo, Paypal, e-transfer. We take these things for granted. In countries where this is not the case, especially among Latin American countries such as Argentina, stablecoins are starting to make an impact.
For example, in Argentina where in 2023, the inflation was a WHOPPING 133.49%. To put that into perspective, if you lived in the Argentina and held $100 Argentine Peso(ARS), you would end the year with around 42.8$(ARS). You would need $233.49(ARS) to purchase the same amount of goods and services.
If you thought about simply converting your ARS into USD, the Argentinian government has strict currency controls that limit the amount of U.S dollars individuals can legally purchase each month. There is also a significant difference between the official exchange rate and the (or "blue") market rate. People can access dollars on the blue market, but it is technically illegal and carries risks.
This is compounded by the fact that the Argentine government has faced recurring dollar shortages due to high demand for USD and limited foreign currency reserves. Not to mention, if you thought about simply buying US stocks, that's also a tedious and complicated process. Argentinians have to open accounts with international brokers that provider access to U.S. However, opening these accounts may require compliance with international banking and regulatory requirements, including providing identification and proof of income.
Due to the strict currency controls previously mentioned, the legal limit of U.S dollars that can be legally purchased each month. Imagine the headache locals have to deal with to simply prevent their money's purchasing power to decrease more than 100% every year.
This where stablecoins shine, anyone in Argentina with a phone can create an account on a trusted centralized exchange where it allows users to buy stablecoins in ARS. The user can either choose to keep it on a centralized exchange where it's custodied for you or download an app like Phantom Wallet or Metamask which allow self custody. Now you hold the world's reserve currency and you can do it under 15 minutes.
However, there are still barriers that Argentinians must overcome to use stablecoins. The main issue is that not all merchants accept USDT; therefore, the use of stablecoins is more common in tech-savvy or informal sectors. As well as the exchange rate from USDT to ARS can also be very volatile due to market conditions.
There are also workarounds to the issues mentioned above, peer-to-peer payments can be transferred directly between digital wallets seamlessly. This is commonly used for transactions such as paying for freelancers, splitting bills, or informal sales. Another medium that is rising in popularity are apps that allow you to find others wanting to swap USDT to ARS and vice versa.
These are turning to be real solutions because Argentina leads the world in Crypto Adoption. A Forbes report highlights that Argentinians are increasingly turning to cryptocurrencies as a hedge against their inflating local currency. The rate of crypto adoption in the country surpasses that of any other in the Western Hemisphere.
According to Forbes, analysis using SimilarWeb indicates that 2.5 million of the 130 million users on the top 55 crypto exchanges are from Argentina. Keep in mind that Argentina has a population of around 46 million, while the global population is approximately 8 billion. Argentina's share of crypto adoption (1.92%) is about 3.34 times or 334% higher than its share of the world population (0.575%).
Adoption of anything on a global scale will undoubtedly take time and incredible amounts of effort from the brightest of minds. However, it is undeniable that crypto is not only the future, but it is a bright future.