Regime Change in the Stablecoin Market - TOKEN2049 Singapore 2023

wow um thanks so much for the invitation it's uh an incredible pleasure to be here so uh we're today we're touching on such a topical uh topic uh stable coins and particularly changes in the stablecoin market so I think to really understand stable coins you have to understand Euro dollars so I think there's a lot of historical parallels between stable coins and Euro dollars so we're going to dig into that and I think we're going to learn about the future of stable coins based on the historical lessons from Euro dollars then we're going to look into the reality of stable coins today uh kryptos killer app I think that's unambiguous and then we're gonna look into the future of stable coins what's happening the direction the Market's going so what is a euro dollar the euro dollar market emerged in the 1950s as a reaction to restrictions in the U.S banking market and a desire to transact in dollars in offshore Banks mainly European Banks so euro dollar is a dollar denominated liability of a Bank located outside the U.S today there's more Euro dollars than there are onshore dollars right so the euro dollar market is bigger than the domestic dollar market what is a stable coin a stable coin is a normally dollar denominated liability of an issuer typically outside the U.S which circulates on a public blockchain so if you actually look at the numbers most stable coins are tokenized Euro dollars 75 percent also the emergence of stable coins is very similar to the emergence of Euro dollars they emerge for similar reasons so let's dig into that okay why did Euro dollars get created in the first place so Russia created some of the first Euro dollars in French banks in the 1950s they were worried about the U.S seizing their dollar assets but they still wanted to transact in dollars and so they created dollar liabilities in European Banks later on London became the center of this right so Euro dollars were a reaction to you know the fear of asset seizures in the U.

S okay why did stable coins get created stable coins were first created because bitfinex was having trouble banking right they were having trouble settling dollar transactions with their clients and they decided okay well we don't want to do Bank wires every time we want to settle up a transaction with our exchange clients let's just deal with the banking system once and then we'll keep the dollar assets on chain we'll be able to transact thereafter so stable coins emerged due to this fear as well of the US interfering in the settlement rails between crypto exchanges and their clients now of course stable coins are much bigger than this but the you know the key thing that has powered the growth of stable coins this is a desire to transact freely outside the highly politicized and restricted domestic banking sector okay why did stable coins sorry Euro dollars why did they grow so quickly in the 60s and 70s they did because there were restrictions in the U.S in terms of interest that could be paid and so the higher yields that were available in European dollar deposits that grew the euro dollar market uh very quickly right uh stable coins stable coins grew very quickly in 2021 22 because crypto yields at the time were higher than Trad file yields that's another parallel more generally why do people like Euro dollars they're more flexible you can transact with less restriction less surveillance why do people like stable coins exactly those same reasons you can transact on an open interoperable public transactional space that's Global in nature next up Euro dollars presented a huge opportunity for certain Financial hubs to grow their stature England after 1957 the Suez Crisis the pound was no longer no longer Global Reserve currency England saw the opportunity to become the Hub of the euro dollar market and that massively grew London stature and Ashley stable coins it's an opportunity for specific jurisdictions to grow their clout within the crypto space we're seeing it here in Singapore Hong Kong Bermuda Dubai you're still talking about dollar instruments just outside of the US presenting a unique opportunity for new jurisdictions to compete and lastly this hasn't happened yet for stable coins but Euro dollars were peripheral at first the US government was fearful of them at first they were skeptical of them but after 1973 after the oil shock after the oil Market became very dependent on Euro dollars the U.S Central Bank created swap lines with foreign central banks to shore up the euro dollar market to ensure that there would always be sufficient liquidity in dollars so ultimately as that market reached sufficient scale and size it became geopolitically important for the US to acknowledge it to stop being fearful to stop trying to inhibit its growth and to actually embrace the market I predict that will also happen with the stable coins right now the US is fearful of them they're trying to suppress them ultimately it'll reach a sufficient scale where the US has no choice but to embrace them okay so let's look at the scale of stable coins today so I want you to remember this chart right so this is the market share of Bitcoin eth other l1s and stable coins by market cap right stable coins today are 10 of crypto market cap they peaked at 20 they're only 10 percent today right now though if you look at the market share by transactional volume by the amount of dollar settlements happening on chain stable coins are 70 to 80 percent of all settlement activity on public blockchains 70 to 80 percent right so public blockchains are all about moving Dollars around that is what we have discovered that's what the data says there's some activity on the other L ones but it's all about moving dollars right so stable coins have emerged in the last few years to be utterly dominant on public blockchains now importantly as the crypto markets have sold off as enthusiasm has ebbed away from the markets stable connectivity has remained incredibly robust if you look at monthly active users it's just up and to the right even throughout this bear market so it's decoupled from exchange volumes very significantly this shows that there's some key utility that's happening with stable coins that's quite different from the speculative exchange activity in the crypto markets it's a very important thing to remember it shows that stable coins have a utility and volumes that's not necessarily correlated to the market Cycles in crypto I think it's a very important thing to understand and now if you look at what stable coins are doing compared to traditional Financial settlement networks they've almost reached parity with Visa last year Visa settled about 10 trillion dollars stable coins last year settled about nine trillion dollars so in the space of about six years stable coins have gone from nothing to being a major fan Financial settlement Network in line with the big leagues in line with the big guys so it's a it's a globally uh important settlement network of consequence now you might be asking yourself okay well is it just for exchange transfers like what are people doing with this stuff it's actually much more comprehensive than this stable coins are a Global Financial back end they power a lot of Neo Bank activity a lot of remittance activity a lot of fintechs especially in Emerging Markets especially in Latin America if you look at the fintech apps these are mostly latam so these look like traditional fintech experiences but the whole thing is powered by stable coins you're seeing major merchants and global payment processors adopting stable coins to settle transactions into bank because it's more efficient and faster than ordinary clearing you're seeing remittance some of the largest remitters players in the world are now adopting stable coins meaningfully because it's just fundamentally more efficient than using the correspondent banking system the problem is this year the United States has been extremely hostile to the stable coin space it's been a very tough 2023 for the global Center of all stable coins which is the US in January the major Financial Regulators told the banks they couldn't touch stable coins and also in January they told uh stablecoin issuing bank custodia that they weren't allowed to get access to the Federal Reserve the U.S basically destroyed important Fiat clearing infrastructure which powered stable coins namely Cygnet and the silvergate exchange Network that was a key part of the stablecoin liquidity provision and throughout the process of the sales of those banks that infrastructure was left for dead more recently in August the Federal Reserve told stablecoin issuers they told Banks rather that well yeah you can you know if you get a letter from US you can do stablecoin stuff but effectively it's a Prohibition so unfortunately in the U.S the center of you know dollar activity they've been incredibly hostile to stable coins meanwhile in the rest of the world you're seeing Regulators Embrace stable coins you're seeing stablecoin legislation getting passed right in particular in Singapore just recently you had a regulatory framework finalized for stable coins that include Foods the possibility of using dollars you have Japan lifting their ban on foreign issued stable coins you've Hong Kong allowing for the Hong Kong dollar stable coin uh first digital which is a USD stable coin so you have this incredible contrast that's happening right now in the US you have hostility fear and the desire to suppress stablecoin infrastructure overseas it's being perceived as an opportunity and right now sitting here in Singapore it's so apparent to me that there really is a key opportunity even if we're talking about dollars stable coins not even local currency stable coins so if you look at the data again this is the market cap of offshore stables in the red and the market cap of onshore stables that's in U.

S domiciled stable coins in the blue they were almost a parody before FTX almost at parity right and then after FTX after the US launched its attack on the crypto space which I call operation choke point 2.0 after the collapse of SBB which caused usdc to depeg temporarily you saw the market share of onshore stable coins decline precipitously the offshore stable coins the huge beneficiaries so U.S financial policy their aggression aggression uh their desire to suppress the stable coin space it hasn't meant that there's been any fewer stable coins all it's meant is that stable coins offshore have been massively advantaged and U.S stable coins have been disadvantaged now I put together a map showing where tokenized dollars are being issued from and token as treasuries as well so it's pretty incredible actually all the new jurisdictions that have embraced stable coins and tokenized treasuries you have the BVI you have Bermuda which is a very um aggressive jurisdiction in trying to build support and uh you know be a favorable location for crypto projects you have Switzerland you have Germany Netherlands and then of course you have Singapore here in Hong Kong and then there's some issuers where we don't exactly know where they're domiciled but we know that they're offshore right so the US's failure is the opportunity of these other jurisdictions worldwide and we're seeing this happen in real time so what this means is dollars are being exported to the world globally outside the supervision of the US and treasuries themselves tokenized treasuries tokenized yields are being exported to the entire Globe so it's encouraging to see this but it also shows the failure of U.S policy on the stablecoin front now another Trend that I wanted to talk about is the emergence of crypto-backed USD stable coins right so you could of course back the stable coin with dollar assets but now it's becoming clear that you're able to back stable coins with crypto Assets in particular the fact that ethereum is now interest bearing that means that you have a much larger design space to create crypto-backed USD denominated stable coins so for instance the project Xena they created a synthetic US Dollar by combining a long stake teeth position with a short East Futures position and the whole thing creates a synthetic dollar position and it's also interest bearing because both sides of that trade generally pay positive yield additionally you're seeing uh staked eth being used as a collateral for over collateralized stable coins similar to dye many of these are also interest bearing right and so you know I think this is a key development because it shows that people are trying to create more decentralized structures that are more stable than the decentralized stable coins of yesteryear and the fact that eth now has this native yield means that you can use eth to create a USD stable coin of course this is all these projects are all also more outside of the reach of U.

S regulation which shows I think this is a reaction to you know U.S regulatory winds turning extremely hostile so with all this in mind right we've talked about uh you know historical parallels in the euro dollar market we've looked at the data we've seen that stable coins are the prime killer app they dominate from a transactional perspective on public blockchains and we've looked at some new uh you know new types of projects emerging yield bearing stable coins so let's make a couple predictions so right now the US dollar is the unit of account for 99 of all stable Coins Plus that's obviously much more than the US dollar share of international uh foreign currency reserves or International Trade it's pretty remarkable that stable coins are so dollarized but they are so I would predict that that would continue to be the case that they would maintain uh you know at least 95 market share in terms of stable coins being dollar denominated specifically next up we have the emergence of interest bearing Stables so right now Stables basically don't pay interest and you're talking about 550 basis points of opportunity cost the fact that major Stables don't pay interest I think is what has caused a lot of the contraction in the stablecoin sector so now that there's interest bearing stable coins that exist I think you're going to see immense disruption in that market and the incumbents are going to be forced to start to pass some of that interest along to the holders it's just not technically difficult to do there's no reason they shouldn't do it that's going to happen however interest bearing stable coins cannot really be issued out of the US so this is another Trend that's going to accelerate the offshoring of stable coins for regulatory reasons interest bearing Stables are probably going to have to be issued offshore and that's what we're seeing so far next up we're going to see the rise of crypto collateralized USD stables and I think this is a great thing because you're harmonizing crypto assets as a store of value and stable coins as that Medium of exchange right so it's a very crypto native thing and it kind of unifies our goals here so I think within about two years you're going to see 25 of USD stable coins being issued against crypto collateral not uh you know dollar assets today it's less than five percent next up the dollarization of public blockchains right um basically public blockchains are all about moving Dollars around as I said I think you're going to continue to see that happen there's good tax reasons why it makes much more sense to transact uh with a stable unit of account as opposed to volatile crypto collateral so I think it's very fair to Guess that that's going to continue to be the case and lastly and this kind of ties everything together crypto Euro dollarization right so people do want USD Stables but the US is a hostile place for them right now and you're going to continue to see those USD Stables being issued overseas in places like Singapore Hong Kong Bermuda Dubai right because entrepreneurs have that desire to create these products and create valuable experiences for their clients but right now they're stymied in the US and this is my big prediction again taking it back to Euro dollars once that market reached sufficient size in this early 70s the uh you know U.S Central Bank had no choice but to create swap lines with their counterparties in the euro dollar market if you look at inflation-adjusted the stablecoin market is the equivalent of 1967 in the euro dollar market right so we haven't quite reached that inflection point in terms of stable coins it's only 130 billion dollars worth of stable coins that exist uh but I think that will come and the uh challenge to uh the crypto Community is to continue to integrate stable coins into global settlement infrastructure create something that's so compelling that the governments of the world have no choice but to fold those markets in and to acknowledge them as legitimate so I want to thank my data Partners on this presentation coinmetrics and allium you've been incredible and uh thank you to the organizers for the opportunity it's been my pleasure