The term stablecoin has suddenly gained popularity recently. Let's first look at the first event: on May 21, Hong Kong passed the stablecoin regulatory draft. At the same time, the U.S. Treasury Secretary also stated that the U.S. is fully suppressing cryptocurrencies, and stablecoins will create a demand of $2 trillion in the short term.
So what exactly are stablecoins, and what are they used for? How do they differ from sovereign currencies and cryptocurrencies?
Today, let's challenge ourselves to explain clearly without using jargon, so that all beginners can easily understand.
In the world, there was originally only one type of currency, which is the sovereign currency of various countries, such as the U.S. dollar that is mainly used now. The U.S. dollar, which is now the mainstream currency internationally, is hard currency in reality, recognized everywhere, and can be used to buy what you want. However, since the emergence of Bitcoin, the world now includes not only the previously mentioned dollar but also a term called virtual currency. The representative of this is Bitcoin.
Around 2008, an electronic currency generated by open-source P2P software based on algorithms emerged, which is a type of online virtual currency that can be cashed out. Moreover, its credit is not supported by any individual, organization, or country, but is based on natural algorithms, making it a form of natural credit currency.
So, how did Bitcoin actually come about?
In fact, it remains an unsolved mystery, but over the past few years, there have been supporters. Therefore, a profit effect has formed: the more profit it generates, the more participants there are, gradually. Besides Bitcoin, various types of virtual currencies have emerged. Currently, the top three countries supporting virtual currencies in the world before 2024 are Dubai, Switzerland, and Singapore. Recently, the U.S. has also begun to significantly strengthen its friendliness towards virtual currencies.
If we say that real-world currency is intended for speculation and profit, it would be invested in markets like the foreign exchange market, stock market, and bond market. In the virtual world, if you want to use virtual currency for speculation and profit, it actually exists in what is called the cryptocurrency space. So, you can understand the cryptocurrency space as a stock market in the virtual world, but the risks of trading cryptocurrencies are relatively high, as everyone knows, due to significant volatility. Therefore, at this time, cryptocurrency communities and private companies developed a concept called stablecoins. The earliest can be traced back to 2014 when a U.S. virtual currency company issued a stablecoin called USDT. Later, national credit took notice and quickly leveraged the concept of stablecoins.
Why was it invented?
As the name suggests, it is used for stablecoin circles. The Americans also mentioned that there are currently too many various coins, and the volatility is particularly high. If you sell one to buy another, it is very inconvenient. Therefore, issuing a stablecoin as an intermediary serves as a general equivalent in the virtual world, where the value of this coin is stable, remaining almost unchanged compared to the fluctuations of various coins.
Therefore, if you want to speculate on coins in the future, first convert our real-world currency into stablecoins in the virtual world, and then use the stablecoins to speculate and trade various currencies. This will be much more convenient.
It is equivalent to establishing a 'central bank' in the virtual world. If you want to make money here, you must use the stablecoins issued by this 'central bank' for transactions. Therefore, stablecoins have emerged accordingly.
What impact will this stablecoin have?
This depends on how stablecoins convert real money into virtual money. First, the Americans stipulate that for stablecoins to be stable, they must be backed by U.S. dollars and U.S. Treasury bonds, similar to game currency. If you want to buy equipment in a game, you must first convert your currency into game currency. The same rule applies to stablecoins: one dollar can buy one unit of stablecoin, and then you can use the stablecoin to play the game.
Thus, the first impact of stablecoins is to consolidate the position of the U.S. dollar and U.S. Treasury bonds.
Didn’t you all say you want to de-dollarize?
Alright, after Trump took office, the first thing he did was tell you that our whole family has issued its own virtual currency. After that, people around the world realized that trading these coins is much more profitable than trading stocks. So, with popularity, the profit effect was also consolidated. If you want to participate, you have to buy our dollars first, which increased the value of the dollar to some extent, or increased the value of U.S. Treasury bonds, which is the most significant impact.
For example, in the U.S., there are also stablecoins pegged to gold, but such stablecoins have not been explicitly approved. Currently, the only ones that can be played with must be pegged to U.S. dollars and U.S. Treasury bonds.
Here is a set of data for everyone to compare. Currently, the scale of stablecoins in the U.S. that are pegged to the U.S. dollar and U.S. Treasury bonds is $200 billion. In contrast, stablecoins pegged to gold amount to only $750 million. So, it's clear that the profit effect of virtual currencies ultimately translates into the demand for U.S. dollars and U.S. Treasury bonds. This is why the U.S. has generally been friendly towards virtual currencies.
Especially after Trump took office, he strongly supported many people who said that the dollar would be pegged to Bitcoin in the future. In fact, this is impossible; virtual remains virtual, and it still serves to maintain the hegemony of the dollar. Hence, the resulting impact can be traced. It is beneficial for the U.S. dollar and U.S. Treasury bonds, while conversely, it is certainly detrimental to gold. Secondly, besides the overall perspective, stablecoins also bring tangible convenience, mainly reflected in cross-border payments.
In reality, there are national borders, so cross-border payments are mainly conducted through banks in various countries. Although it is now quite convenient, it cannot be compared to virtual currencies. The reason is that the virtual world has no borders, with fewer audits and lower costs, lower fees, and faster speeds, thus increasing efficiency. Therefore, in the future, cross-border transfers can be directly completed through stablecoins in the virtual world.
Finally, there is the so-called currency competition. Objectively speaking, the role of the dollar in the real world is indeed irreplaceable in the short term, and it can be considered hard currency in reality.
So, who really has the say in the virtual world? Which stablecoin will unify the market?
Currently, while the scale of stablecoins in the U.S. is the largest, we are also riding the wave. For example, Hong Kong has recently launched a draft regulation for stablecoins, and the first batch of stablecoin issuers has been announced. It is now also entering the second phase of sandbox testing.
In fact, it's not just the U.S. and us; many other countries are also working on stablecoins. However, it seems that the U.S. has indeed developed them the earliest and on the largest scale.
So, when you talk about the importance of stablecoins, it can indeed sound quite mysterious, but behind it, it is still pegged to the sovereign currencies of various countries. It's just that, after years of effort, a trading platform for virtual currencies has been established, adding a channel that supports sovereign currencies.