Economies around the world face a variety of challenges stemming from rising inflation. High inflation leads to a devaluation of national currencies, which in turn leads to a rise in the cost of living, especially in scenarios where profits remain unchanged.
In the United States, the government responded aggressively for inflation. Nation Inflation rate reached 9.1% in June, prompting the Federal Reserve to implement a series of fiscal countermeasures designed to prevent the economy from overheating. One of them was raising interest rates.
Higher federal interest rates have slowed consumer spending and business growth in the country.
The anti-inflation approach also boosted the value of the US dollar against other currencies due to tight dollar liquidity constraints. Since 79.5% of all international trade takes place using dollars, many countries are now paying a premium on imports to offset the appreciation of the dollar, exacerbating inflation in those importing countries.
After that, citizens of some distressed economies began converting their money into more stable foreign currencies to protect their money from devaluation, and many of them are turning to stablecoins to achieve this.
Whitney Setiawan, research analyst at cryptocurrency exchange Bitrue, told Cointelegraph, “With the US dollar soaring against other fiat currencies, most crypto users have a particular interest in owning stablecoins.”
Setiawan also predicted that the stablecoin sector is likely to disrupt the remittance industry in the near future given the variety of benefits that stablecoins offer.
“With interest in stablecoins fueled by various factors, I can expect 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 already taken notice and, in recent months, have taken steps to claim a share of the stablecoin market. MoneyGram, for example, Recently in partnership with Stellar To provide stable currency exchange services on its network.
What are stablecoins?
A stablecoin is a digital currency whose value is often tied to an asset or regulated by an algorithm to maintain a constant value.
Collateralized stablecoins are the most popular and are backed by the reserves of their underlying assets. In most cases, its value follows the value of popular national currencies such as the US dollar, the British pound or the euro.
This class of stablecoin is widely used by cryptocurrency traders looking to avoid the volatility of the cryptocurrency market and users looking to protect their funds from inflation.
Other types of stablecoins include commodity-backed stablecoins that are backed by cryptography and algorithms.
Why stablecoins are ideal as anti-inflation tools
Stable currencies are ideal as anti-inflation tools for many reasons. One of them is its unchanging and limitless nature.
The decentralized nature of the blockchain technology that powers stablecoins allows for cross-border travel that might otherwise be closed to cross-border financial activities.
Stablecoin transactions are also fast and cost effective when compared to money transfers made through the networks of commercial banks. This makes it suitable for people looking to send and receive money and hedge against inflation.
Another disruptive characteristic that stablecoins have is their ability to cater to the unbanked. Nearly 2 billion people in the world today lack a bank account. Stablecoins have demonstrated the ability to reach this marginalized population by allowing anyone with a device that can host a digital wallet, such as a smartphone or laptop, to use the stablecoin.
In some developing countries, many people lack the necessary documents to open a bank account and are thus excluded from the major financial systems of their country. Using stablecoins allows this group of users to easily send and receive money and use their cash assets to hedge against inflation when needed.
Brian Passfield, chief technology officer of Fringe Finance – a crypto-lending platform that provides lending opportunities to stablecoin holders – told Cointelegraph:
Banks have tight monetary policies that generally reduce the supply of dollars. This trend makes stablecoins an attractive option for those aiming to gain access to the value of the US dollar, as they are generally accessible with few barriers to entry.”
He also emphasized that governments have the ultimate power when it comes to adopting the dominant stablecoin.
“The potential for[stablecoins]to become commonplace and thus disruptive factors lies in the hands of governments themselves, who may seek to implement their own solutions or censor existing avenues,” he said.
While governments have been slow to adopt official policies regarding stablecoins, or may even undermine private stablecoins with the advent of central bank digital currencies, there are many countries where citizens have taken matters into their own hands by using stablecoins to protect their savings.
Venezuela has experienced an average inflation rate of about 3711% since 1973. The bolivar has lost so much of its value over the past four decades that it has had to be reconverted several times. From a perspective perspective, the country has had to remove 14 zeros from its currency over the past 14 years to simplify the monetary scale.
Since the Venezuelan bolivar is volatile and has a value that fluctuates throughout the day, it is common for merchants to list the prices of goods and services in US dollars. Customers without dollars are usually expected to pay using Bolivar, but at the prevailing exchange rate relative to the dollar.
However, dollar bonds can, at times, be scarce, and this gap is currently being filled by stablecoins. With the Internet penetration at around 72% according to the statistics of 2020, online payment companies that support the use of stablecoins have already started setting up shop in the country.
Companies include Reserve, a startup backed by Coinbase. Its own app now Widely used in Venezuela to buy and sell stablecoins.
Even the US government has joined the foray into the stablecoin and is increasingly using the US dollar (USDCA stable currency to circumvent corrupt government institutions when providing assistance to Venezuelan citizens.
Earlier this month, Turkey’s annual inflation rate reached 80%, with the Turkish lira losing nearly 27% of its value against the US dollar so far this year. In 2021, the lira lost 44% of its value against the dollar. Its sharp drop has led to a surge in demand for stablecoins as people move to protect their money from inflation.
According to data from CryptoCompare, the Turkish Lira is the second highest fiat value to Tether (USDT) is a trading pair and currently accounts for about 21% of all national currency swaps. Tether is a stable currency denominated in dollars and backed by a basket of different assets.
The lira is also the second most traded stablecoin pair on Binance USD (BUSD) and is used in about 5.2% of trades. Binance USD is the dollar-denominated stablecoin from the major cryptocurrency exchange Binance.
The growing popularity of cryptocurrencies in the country has, in the recent past, led to concerns about monetary control and The authorities prompted the ban Using cryptocurrencies as a means of making payments.
However, the cryptocurrency utility is still high despite the ban.
Nigerians have started using stablecoins to mitigate the effects of rising inflation.
According to the latest statistics from the National Bureau of Statistics (NBS), the country’s inflation rate reached 19.64% in July – the highest level in 17 years.
According to the National Bureau of Statistics report, the cost of necessities such as food, transportation, fuel and clothing has risen sharply as a result.
This situation was brought about by climate change, the economic fallout from the coronavirus and growing insecurity. The matter was further complicated by the Russian invasion of Ukraine, which disrupted the supply of essential imports from the two countries. Nigeria imports more than $2 billion worth of basic commodities annually from both Russia and Ukraine.
Inflation problems are forcing many Nigerians to start using stablecoins to prevent a drop in the value of their savings. According to data from Google Trends, Nigeria ranks among the countries with a high interest in stablecoins. Research stats indicate that the country has the highest interest in the search for the Tether stablecoin in the world.
USDT is currently the most traded stablecoin.
Argentines are increasingly turning to US dollar stablecoins to protect their money from high inflation. The country’s inflation rate is expected to reach 95% by the end of the year.
Recent developments that highlighted the demand for stablecoins include the stablecoin buying frenzy for July caused by the resignation Economy Minister Martin Guzman.
The major cryptocurrency exchanges serving Argentine citizens recorded a surprising surge in stablecoin sales in the wake of the announcement, with purchases jumping more than 200%.
The news also caused the Argentine peso to depreciate by about 15%.
Today, Argentine traders quote dollar prices for high-value goods due to the high volatility that has hit the national currency. The Argentine peso has lost more than 30% of its value so far in its year.
The prevailing US dollar trading restrictions also helped increase the demand for stablecoins.
There are several restrictions that prevent the widespread use of stablecoins as a hedge against inflation. One is the changing regulatory landscape that threatens to prevent their use in some jurisdictions. The European Union, for example, is looking to ban the use of dollar-pegged stablecoins in the region in the near future. Such a ban is likely to limit the use of stablecoins as a hedge against inflation.
Moreover, most countries lack detailed policies that are necessary to legalize the cryptocurrency industry. For now, the stablecoin sector will have to deal with comprehensive anti-money laundering, tax policy and fraud prevention regulations in order to truly launch into the mainstream, but many countries are not ready to go that far given the sheer complexity of such operations.
This has led some countries, such as China, Algeria, and Egypt, to ban cryptocurrency trading altogether.