Global Stablecoin Adoption Points to Increased Dollarization

Crypto usage in countries with unstable currencies could rise further if there’s a world downturn or if inflation continues to rise


Blockworks Exclusive Art by Axel Rangel


key takeaways

  • High inflation and unstable currencies place stablecoins as an alternative to maintain value in emerging or developing countries
  • As stablecoins are predominantly US-dollar pegged, dollarization is set to increase in these economies

Cryptoassets may be volatile, but they have also gained worldwide attention as alternatives to unstable fiat currencies. In particular, experts believe that high inflation coupled with a potential world recession could boost dollar-pegged stablecoins adoption in emerging or developing markets, accelerating dollarization. 

Maxim Ermilov, the founder of Overnight, which launched an interest-bearing stablecoin on Polygon’s proof-of-stake chain called USD+, told Blockworks that “people try to protect their savings against high inflation and potential devaluation and often choose to save in dollars.” 

But that’s not always easy. In some countries, banks have a high risk of default and stockpiling dollars in cash is a costly and risky strategy.

“Stablecoins are solving those problems in emerging markets: It is hard currency, easier to store than cash, not prone to banks’ failures, [and] can be used to generate yield,” Ermilov said. 

Inflation is a hot topic in advanced economies, where it has been unusually high, but it’s nothing new to some emerging or developing economies. In inflationary environments, some national currencies depreciate, particularly so when a country’s central bank has no independence from political power. 

“Stablecoins have been growing independently of market cycles”, said Hugo Volz Oliveira, secretary-general of the New Economy Institute, a nonprofit founded by leading Web3 companies and backed by the Near blockchain, the web browser Brave and several Portuguese universities.

He told Blockworks Tether (USDT) was launched in 2014, but “only became widely adopted during the 2017 boom.” Even in the Covid-induced crash in March 2020, “stablecoin supply increased while crypto prices dropped, implying that bearish periods indeed contribute to a rise in stablecoin adoption.”

Even the International Monetary Fund (IMF) acknowledged that an economic turmoil could result in further dollarization of economies, especially with its digital versions like USDT or USD Coin (USDC) which are easily available worldwide. 

“It is possible that national currencies issued by their central banks, particularly currencies seen as less convenient to use or volatile in value, could be displaced by stablecoins — private cryptocurrencies issued by multinational corporations or global banks and usually backed by US dollars to maintain stability — or by CBDCs issued by major economies,” IMF’s economists wrote in a publication released in June.

“Even a volatile cryptocurrency such as Bitcoin might, in addition to enabling capital flight, be preferred to the local currency during economic turmoil,” the IMF noted.

However, where bitcoin became successful as an alternative to local currency in the past, stablecoin adoption might come faster as the population is more familiar with the underlying technology driving crypto markets, in part thanks to bitcoin. 

“This adoption will also increase substantially if these stablecoins and cryptoassets can improve financial inclusion in places where banking is inefficient and transaction costs are high,” Volz Oliveira said. 

One practical example of this is when workers in the developing countries work for employers in wealthier countries, being paid digitally without dealing with employers’ cumbersome financial systems is an asset. The same goes for remittances from family members abroad. 

Stablecoins don’t protect populations against bans or seizures

If the problem isn’t depreciation of the currency but an authoritarian regime, stablecoins won’t be the answer. Unlike bitcoin, ether, and a handful of other cryptoassets which are decentralized by design, stablecoins tend to be centralized. That means “their users are liable to bans or seizures by rogue governments, whereas bitcoin and some other projects are resistant to such attacks,” Volz Oliveira said. 

In June, many human rights advocates highlighted how cryptoassets could be a tool for political dissidents in many countries around the world. In a letter to the US Congress quoted by CNBC, 21 human rights supporters from 20 different countries explained how these digital assets are important where “local currencies are collapsing, broken, or cut off from the outside world.”

“We do not claim that Bitcoin and stablecoins solve every problem, or that they are entirely positive or without risk,” they recognize. Yet, “this open and decentralized monetary network will help defy tyranny and strengthen democratic movements abroad.”.  

The letter cites places such as Nigeria, Turkey, and Ukraine where, according to 2021 data from CryptoCompare, crypto activity has increased significantly — in Turkey (+85.4%) and Ukraine (+218%). In both countries, stablecoin dominance rose above the euro’s dominance, for example.

“Moreover, our data shows a growth in crypto activity this year, despite the downward trend in price action,” says Jacob Joseph, research and data analyst from CryptoCompare.

In Nigeria, the trend goes in the opposite direction. The crypto trading volume has declined by 97.7% during the same period, which can be attributed to the central bank’s warning against cryptocurrency in February last year. 

As this analysis is based on the transaction volume between stablecoin and fiat pairs, it’s not possible to conclude that there is more or less capital moving into stablecoins in these countries, even though it does indicate more interest in the assets generally.

Is it really a safe asset?

The reality is not all stablecoins are created equal, of course. TerraUSD (UST) is only the latest example of how an apparent safe asset can go off the rails. The collapse raised skepticism around stablecoin adoption, although experts think the setback will be temporary. 

“Many people got enticed by high-interest rates Anchor offered on [algorithmic stablecoin] UST and put their savings there. Unfortunately, a lot of people got deceived by the term ‘stablecoin’ when referring to UST,” said Ermilov.

“There are stablecoins and stablecoins…it takes specialists or regulators to tell the difference and explain to the consumer that only [some] types are safe.” 

But there may be a silver lining. “Even if many are currently cheering at the downfall of Terra and the potential insolvency of Celsius, one can’t forget these centralized projects don’t represent the industry and that the potential of this technology to improve the world’s financial system and benefit the lives of the many still stands strong,” Volz Oliveira said. 

Regulation may help, and progress is being made both in the European Union and the US Congress to address cryptoasset rules. 

“It’s only natural that most of the regulation concerns stablecoins, and the control of its issuance in ways that promote financial stability and avoid contagion in case of a crisis,” Volz Oliveira added, predicting that this “should bring more confidence into the system, both in Europe and abroad, as EU regulation is often followed by other countries and regional blocks.”

Ermilov also believes that future European crypto regulation will “clearly differentiate between different types of stablecoins,” therefore supporting and promoting “compliant stablecoins” instead of “algorithmic” stablecoins.

“Had it been in place earlier, the UST disaster could have been avoided or minimized,” he said.

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