The TerraUSD (UST) debacle has cast a dark shadow on the stablecoin sector. Its downward spiral has wiped billions worth of liquidity from the digital currency market. In addition, the failure of the decentralized UST stablecoin has adversely impacted the ‘too big to fail’ centralized tether (USDT), its investors redeeming over $7 billion from its reserves.

Consequently, the USDT market cap has dropped from a peak of $83 billion market cap to its current $76 billion. However, what is outstanding about this event is that the withdrawals did not cause any “run on the bank” event on USDT.

Tether honored every redemption in full, saying that it had established a liquid portfolio that could assure USDT holders of redemptions even in falling markets.

The USDC stablecoin, on the other hand, has become the big winner in the ongoing crash, its market cap growing from $48 million on May 11 back to its March 2022 highs of $53 billion. The resilience that these distributed ledger assets have displayed amidst massive market fear, doubt, and uncertainty is proof that stablecoins may indeed be the future of money.

Regulators focus on stablecoin regulation.

Months before the Terra debacle, a handful of regulators had issued alarm over the growth of the stablecoin market. At their peak, these assets had a $170 billion market cap. The demise of the UST stablecoin has plunged its market cap to $159 billion.

Regulators such as the Fed had ramped up their stablecoin regulation efforts with Jerome Powell, the Federal Reserve Chairman, saying that stablecoins can be efficient, useful, and consumer serving tools of the financial system as long as they are properly regulated.

Powell had also warned that stablecoins have the scaling potential absent in the mainstream cryptocurrencies such as bitcoin. The Fed chair said that stablecoins could create “a payment network that was immediately, systemically important that didn’t have appropriate regulation and protections.”

The U.S. Securities and Exchange Commission Chair, Gary Gensler, also showed increased concern over growing stablecoin use in the crypto sector. “Maybe less well known to this audience, though, is that we already have an existing stablecoin market worth $113 billion”, Gensler said in his speech at the Aug 2021 Aspen Security Forum.

“The use of stablecoins on these platforms may facilitate those seeking to sidestep a host of public policy goals connected to our traditional banking and financial system,” he added.

Jerome Powell also called for stablecoin regulation, saying that these digital assets threaten the financial system. He noted that stablecoins could become systemically important to the payments system.

“We have a pretty strong regulatory framework around bank deposits or money market funds. That doesn’t exist currently for stablecoins, and if they’re going to be a significant part of the payments universe – which we don’t think crypto assets will be, but stablecoins might be – then we need an appropriate regulatory framework, ” he said.

Regulators only pay this level of attention to what they regard as systemically important sectors of the financial system.

The dusk of the age of cash

The Covid-19 pandemic has shifted the world to contactless and digital payments, accelerating the end of the cash. According to a McKinsey survey, at least 82% of American consumers have switched to contactless and digital payments.

Then, one in five Americans own crypto assets. At least 41% of American adults would use cryptocurrencies if their functions were easier to fathom. McKinsey refers to this feature as ‘an indication of additional room for growth.

Stablecoins function like fiat currencies, but their transactions are blockchain-based. They are easy to understand since one 1 USDT or USDC is worth $1. Stablecoins, however, eliminate the need for payment service providers such as PayPal and operate without the intervention of the banking system.

They offer users an open, free, and easy to access instant electronic cash settlements via free-to-download apps and crypto-wallets. Any person can send a digital dollar across the world at lightning speed or swap it for another cryptocurrency.

These bearer assets can settle real-world payments for goods and services as well. Most regulators have seen the critical value of stablecoins. They are in a race to establish their native KYC’ed central bank digital currencies (CBDCs) to curtail the rapid growth and influence of the stablecoin sector.

It remains to be seen whether users will be as receptive to CBDCs as they are to the growing stablecoin market. But then, CBDCs have incredibly high security and resilience bars, meaning that it will be years before a function CBDC is in place in the western hemisphere. They could also have limited programmability and functionality, lowering their adoption rates.

Banks are likely to lose their position in the payments system at the turn of the decade as centralized stablecoins become more receptive to regulation. It is also safe to say that cash could be as foreign to Gen Z as checks are to the millennial by the close of the decade. Over 300 million people worldwide now use cryptocurrencies and stablecoins, and 94% of them are either Gen Z, millennials, or Gen X.

Stablecoins, an evolution of private money

Stablecoins are a natural evolution of the financial system’s private money system. They recreate the old concept of private money, a system that funds at least 95% of all business and household payments.

Banks have created seamless access to private money, and regulation has ensured that all private money has a constant value to public money. However, faith in private money underwent stringent testing in the 2008 financial crisis, leading to the launch of the first cryptocurrency, bitcoin.

Therefore, private money is not a new concept, and the public relies on it more than central bank money. Consequently, any regulator that delays stablecoin adoption by emphasizing public cash, such as CBDCs, could lose out on the ongoing innovation, market benefits, and the ongoing competition in the stablecoin market.

Overemphasis on the public approach could drive away fintechs that will give any country a competitive edge in the oncoming Web3 ecosystem. Europe, for instance, is collecting the scraps that the established consumer and industrial technology players in Silicon Valley, Japan, and China left behind because of an unfriendly regulatory landscape and lack of support during the rise of the internet’s  “powerful commercial engine.”

Any country that wishes to position itself for the oncoming digital payments wave will embrace technology-neutral regulation and the healthy competition between public and private money, making stablecoins the future of money.