Stablecoins: a tale of two markets

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Let's continue where we stopped! Before we dive into the differences in regulation and institutions across Latam and Asia, we need to have a clear picture of the market and economic structures that underpin it! Stablecoins provide the perfect case-study for this! ?

The a16z crypto State of Crypto report (click here for the full report) emphasizes the pivotal role of stablecoins in the cryptocurrency ecosystem.?

Let's deep dive to understand their contrasting impacts in Latin America (LATAM) and Asia.

Quick recap on stablecoins:?

Stablecoins are a type of cryptocurrency designed to maintain a stable value by pegging their worth to a reserve asset, such as a fiat currency (like the U.S. dollar) or commodities (like gold). This peg aims to reduce the volatility commonly associated with other cryptocurrencies, making stablecoins more suitable for everyday transactions and cross-border payments.

Key Features of Stablecoins

Pegging Mechanism: Stablecoins are typically backed 1:1 by a reserve of the asset they are pegged to. For example, for every stablecoin issued, an equivalent amount of fiat currency is held in reserve.

Types of Stablecoins:

• Fiat-Backed: These are the most common, pegged to traditional currencies. Examples include Tether (USDT) and USD Coin (USDC).
• Crypto-Backed: These are backed by other cryptocurrencies, often over-collateralized to account for volatility.
• Commodity-Backed: Pegged to physical assets like gold or silver.
• Algorithmic Stablecoins: Use algorithms to control supply and demand without being directly backed by reserves.

Importance of Stablecoins

Stablecoins bridge the gap between traditional finance and the crypto world by offering:

• Reduced Volatility: They provide a more stable alternative for transactions compared to volatile cryptocurrencies like Bitcoin.
• Accessibility: Users can hold and transfer stablecoins without needing a bank account, facilitating financial inclusion.
• Programmability: Being digital assets, they can be easily integrated into various applications and financial services.

Adoption drivers and the Different Roles of Stablecoins in Latam and Asia

Source: Stablecoins in Latin America and the Caribbean (LAAC): status of use and policy reflections (del Valle et al., 2023)

Stablecoins serve as a crucial financial instrument, providing stability and a hedge against volatility in regions grappling with economic challenges. In LATAM, countries like Argentina and Brazil have seen a surge in stablecoin usage as citizens seek to protect their savings from rampant inflation and currency devaluation. For example, in Argentina, stablecoins accounted for over 61.8% of crypto transactions, with many using them to navigate an inflation rate that soared to 276%. This reliance underscores stablecoins' function as financial lifelines amid economic instability, allowing users to maintain purchasing power and engage in cross-border transactions more efficiently.

Stablecoins in Latin America: A Tool for Economic Integration

In LATAM, many countries have a long history of capital controls and economic instability, leading to high inflation and currency devaluation. Stablecoins have emerged as essential tools for individuals seeking to navigate these challenges. For instance, in Argentina, where inflation soared to 143% in 2023, stablecoins like USDT and USDC provide a much-needed hedge against the depreciation of the Argentine peso. This reliance on stablecoins allows citizens to protect their savings and conduct transactions more seamlessly, facilitating international integration despite local economic turmoil.

Moreover, stablecoins enable efficient cross-border payments and remittances, which are vital for many families in LATAM reliant on funds sent from abroad. As these digital assets gain traction, they promise to enhance financial inclusion by offering alternatives to traditional banking systems that often fail to serve the unbanked population effectively. The potential for stablecoins to streamline payment processes and reduce transaction costs positions them as crucial components in transforming LATAM's financial landscape.

Effects in Latin America

In LATAM, stablecoins are particularly beneficial for:

• Hedging Against Inflation: Citizens use USD-pegged stablecoins to safeguard their wealth from local currency devaluation.
• Facilitating Remittances: Stablecoins are increasingly used for remittances, transforming how money is sent and received across borders.
• Supporting Financial Inclusion: They provide access to digital financial services for unbanked populations, addressing inefficiencies in traditional banking systems.

However, the region also faces risks associated with stablecoin adoption, including regulatory challenges and potential market volatility due to reliance on backing assets.

Stablecoins in Asia: Supporting Export-Oriented Economies

Conversely, in Asia, particularly in export-oriented economies like South Korea and Japan, stablecoins serve different purposes. Here, they are primarily utilized by institutional investors and corporations for trading and investment activities rather than as a direct response to economic instability. The use of stablecoins facilitates large transactions and arbitrage opportunities in a highly competitive market environment.

Asian countries benefit from robust regulatory frameworks that support the adoption of stablecoins for international trade settlements, enhancing liquidity and efficiency in cross-border transactions. This focus on stablecoins aligns with the region's economic strategies aimed at maintaining export competitiveness while leveraging blockchain technology for greater operational efficiency.

Effects in Asia

In contrast, Asia's interaction with stablecoins tends to be influenced by different dynamics:

• Institutional Adoption: Countries like South Korea and Hong Kong are experiencing increased institutional interest in stablecoins, driven by regulatory clarity and technological advancements.
• Market Stability: The focus is often on using stablecoins for trading and investment rather than as a direct response to economic instability. In Eastern Asia, stablecoins facilitate large transactions and arbitrage opportunities among professional investors1.

While stablecoins are emerging as vital tools in both LATAM and Asia, their effects are shaped by the distinct economic landscapes of each region. In LATAM, they act primarily as a safeguard against inflation and a means of enhancing financial inclusion. In Asia, the emphasis lies more on institutional adoption and market stability. As both regions continue to evolve, the role of stablecoins will likely expand, addressing unique challenges while also presenting new risks that require careful management.

A special look at Southeast Asia

Beyond the mentioned institutional use-cases, this particular region has some populational dynamics that are worth highlighting as they are closer not only to Latam but to the drivers of stablecoin adoption in the global south:

1. Financial Inclusion: Southeast Asia has a significant portion of its population unbanked or underbanked. Stablecoins provide an accessible alternative for financial transactions, enabling users to engage in cross-border payments without needing traditional banking services.
2. Remittances & Cross-Border Transactions: The region is primed for rapid adoption of stablecoins as a means of facilitating international trade and remittances. In 2022, remittances into the Asia-Pacific region reached approximately $130 billion, with stablecoins offering lower transaction costs compared to traditional methods.

Key Numbers

• Digital Wallet Usage: Approximately 46% of the Asia-Pacific online population uses digital wallets, with projections suggesting that this could rise to 58% among Southeast Asia's unbanked by 2025.
• Transaction Volume: In Singapore alone, nearly $1 billion was processed in crypto payments during the second quarter of 2024, showcasing the increasing acceptance of stablecoins for everyday transactions.
• Trade Financing Gap: The Asian Development Bank estimates a trade finance gap in Asia of about $510 billion, which stablecoins could help address by facilitating quicker and cheaper transaction settlements.
• Market Growth: The adoption of stablecoins is reflected in significant transaction volumes. For instance, the number of USDC wallets with balances over $10 increased by 59% in 2023, reaching about 2.7 million, with 595 million transactions recorded in the first 11 months of that year.

Convergence of Use Cases

Despite the differing contexts in LATAM and Asia, there is potential for convergence in the use cases of stablecoins. Both regions can leverage these digital assets to enhance financial interoperability. In LATAM, stablecoins can bridge gaps created by economic instability, while in Asia, they can streamline trade processes and bolster institutional investment strategies.

As both regions continue to evolve their approaches to cryptocurrency adoption, stablecoins may serve as a common ground where the needs for financial stability in LATAM intersect with the demands for efficiency and liquidity in Asia. This duality underscores the transformative potential of stablecoins as they adapt to meet diverse economic challenges across global markets.

What comes next?

We are just starting to scratch the surface. We are eager to dive into these very different regions in terms of culture, regulation and institutions. For this we need to have a clarity on how the different markets and economic incentives shape the different political systems and regulatory structures we will dive into! We are just starting!

What do you think?

• Are these the only differences between stablecoin use-cases in the region?
• What is missing and what other stories need to be told?
• How does this reflect or is influences by the different regulations?

Share your insights in the comments below!

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