What a Rising Dollar Means for Global Stablecoin Adoption

Escalating geo-political tensions and a rising dollar has complicated the conversation about stablecoin reserve selection. 

article-image

Blockworks exclusive art by Axel Rangel

share

key takeaways

  • Dollar dominance remains strong as Euro falls below parity with USD.
  • If the uncertainty persists and USD continues to appreciate against other fiat currencies, it might have an effect on regulatory requirements and the pace of worldwide stablecoin adoption.

Since the failure of algorithmic stablecoins like Iron Finance’s IRON and Terra Luna’s UST, the conversation around stablecoins has changed. Rather than debating which type of stablecoin is best, the focus has now shifted to what type of auditing and reserve system could be most beneficial.

This narrowing consensus is an important shift because it could allow for broadly-accepted regulatory standards. But as the dollar continues to rise (meaning other fiat currencies continue to fall), finding a stable benchmark that will satisfy regulators becomes more difficult. 

Wallex, the creators of the Euro stablecoin EURST believe that using USD exclusively for their reserves is the best way to establish trust with users and regulators. In this article, we sat down with their experts, to learn how the FX market will likely impact stablecoin regulation and how their approach can help with adoption.  

The current state of stablecoin regulation

It is a matter of time before stablecoins will be regulated. Many argue that algorithmic stablecoins aren’t safe and could be banned altogether. Some crypto-collateralized stablecoins have worked so far, but if the cryptocurrency backing a stablecoin is labeled an unregistered security or is associated with criminal activity, it will cause further complications. 

The new US sanctions against the crypto mixer, Tornado Cash represents a new precedent that could indicate stricter enforcement from regulators. For example, mixed crypto collateralized stablecoin issuers like MakerDAO are required to exclude any collateral connected to the addresses on that sanctioned list.

If these risks move regulators to ban algorithmic stablecoins and crypto-collateral stablecoins, that leaves us with fiat-collateralized stablecoins. But in this potential scenario, regulators will still need to provide more clarity on auditing and reserve standards.   

The rising dollar complications for fiat-backed stablecoin standards

For a stablecoin to remain stable, it must maintain its 1-1 peg at all times. Any sustained variation from the coin’s intended value could cause investors to lose confidence and sell their holdings. This risk follows the same pattern of a bank run and can happen to any stablecoin. 

When the value of the US dollar surges, it increases these risks for stablecoins that rely on non-USD fiat reserves. In this scenario, a non USD stablecoin could experience sell pressure across exchanges. This tends to cause the price of the stable to temporarily drop on the exchange – which then increases demand for 1:1 redemptions directly from the stablecoin issuer. If demand is extreme enough and the issuer’s reserves are not adequately supplied, redemptions could be delayed, potentially causing more fear and increasing sell pressure.   

The potential for this type of liquidity crunch is why Wallex believes that overcollateralization is helpful in times of uncertainty. It inspires greater confidence in the peg which can protect against a fear spiral. If stablecoins are only backed by the fiat they represent, then there is a greater perception of risk.

How Will USD-backed stablecoins Like EURST Impact Adoption?

The Euro stablecoin EURST promises a 1:1 backing in USD reserves. They also provide real-time proof-of-reserve attestations through Armanino, one of the top 25 largest independent accounting firms in the US.

Simone Mazzuca, the founder of Wallex, described the organization as a “digital asset ecosystem built on the idea of the future of banking using digital assets. We built an infrastructure that has all the functionality that a traditional bank has, but is adapted to digital assets as well.”

He went on to say, “While being a Euro stablecoin, EURST is backed by US dollars. This has proven to be a successful strategy, given the recent fall in the EUR/USD trading pair.” Forex markets have been volatile lately, with the Euro falling to a two decade low of 0.9903 against the U.S. dollar. The Euro began 2022 at a ratio of about 1.14 Euros to 1 Dollar.  

In fact, EURST has become overcollateralized due to its USD backing. As Mazzuca stated, “Today we have around 8-9% more in our collateral due to the fact that the Dollar has risen against the Euro.” In this way, a stablecoin like EURST can provide protection against inflation while still shielding investors from volatility, he added.

Even though the Euro can return to a higher price, the experts at Wallex argue that the overcollateralization from using a global reserve currency is more important in times of geo-political and economic uncertainty. There tends to be greater risks of bank runs during these periods. 

Another point Mazzuca mentioned was the insurance backing Wallex’s stablecoin reserves. He noted that Wallex’s “custody account for collateral is protected with FDIC insurance. That is two times more than the insurance of the central bank of Europe.” When asked how they managed to achieve this, Mazzuca replied “We have a custody account with our own escrow and every account is insured by FDIC insurance for $250,000. This is another key part to our strategy. [We have a] very macro-economic plan on a large-scale and over a long period.”

In pursuit of their goal of working with both traditional and crypto businesses to enable easy-to-use stablecoin payment gateways, Wallex plans to launch an additional 12 stablecoins by the end of this year.

This content is sponsored by Wallex.


Don’t miss the next big story – join our free daily newsletter.

Tags

Upcoming Events

Hilton Metropole | 225 Edgware Rd, London

Mon - Wed, March 18 - 20, 2024

Crypto’s premier institutional conference returns to London in March 2024. The DAS: London Experience: Attend expert-led panel discussions and fireside chats Hear the latest developments regarding the crypto and digital asset regulatory environment directly from policymakers and experts.

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Top Icon.png

Research

Osmosis thrived in H2 2023 on the back of increased DeFi activity deriving from recently launched Cosmos-related projects and better market conditions. With new value accrual mechanisms for the native token, Osmosis is well-positioned to continue its strong performance in 2024.

/

article-image

Do Kwon may miss the start of the March 25 trial in the SEC’s case against the former executive and Terraform Labs

article-image

Riot Platforms bought 31,500 more mining machines while CleanSpark has begun operating in Mississippi

article-image

Dencun was activated on all testnets, a blog post Tuesday said

article-image

Hut 8 also announced it broke ground on a Texas mining site

article-image

Uniswap aims to become a “complete platform for swapping” following its latest product releases

article-image

Continued demand for bitcoin ETFs coupled with greater demand for bitcoin from exchanges is contributing to price moves, analysts say