By Nizar Hneini, Hanno Dachwitz, Jeroen Gillekens and Anish Shivdasani

Stablecoins are cryptocurrencies pegged 1:1 with a national currency such as the US dollar. Stablecoins were invented to enable traders to buy and sell cryptocurrencies on centralized exchanges. However, advances in blockchain technology, combined with adverse macroeconomic factors such as hyperinflation in some countries, have resulted in stablecoins evolving into a convenient medium for payments, remittances and even savings.

Having amassed more than USD 215 billion in total market capitalization, stablecoins today represent an increasingly viable alternative to traditional banking and payment services, offering faster, cheaper and direct transactions. Stablecoins make it possible to transfer money internationally in a matter of seconds and at minimal cost. As such, they have the potential to disrupt traditional financial services – from payments and remittances to core banking services such as checking accounts.

Although stablecoins have now found product-market fit, several challenges to their adoption remain. These primarily relate to the stability of the reserves upon which stablecoins are backed, integration with traditional financial services, user experience and regulatory acceptance. Stablecoin issuers, blockchain players and regulators are making progress in addressing these challenges. To remain competitive, traditional financial players such as banks and credit card providers need to assess how and when to integrate stablecoins into their service offering, while central banks and regulators should evaluate which guardrails to put in place to maintain stability without stifling innovation.

The advent of stablecoins demonstrates that the future of money is subject to a continuous process of evolution. Traditional financial institutions need to adapt as a matter of urgency.

Impact of stablecoins on the global financial system

Stablecoins are rewriting the rules of finance, offering speed, transparency and cost savings that legacy systems are unable to match. This will have significant disruptive impact on the traditional global financial system, impacting money transfer, payments and potentially even the core banking business model itself – bank accounts, deposits and loans.

Stablecoin activity has continued to grow despite the volatile and cyclical nature of the crypto market. Figure 2 illustrates that stablecoins are not just a passing trend: Unlike crypto’s volatile market cycles, stablecoin activity remains steadily growing. The number of monthly stablecoin-sending addresses (which represents the number of users sending stablecoins) continues to rise, even as spot crypto trading volumes have declined. This indicates that stablecoins are being used for much more than just trading.

Explore our report on how stablecoins have the potential to transform the financial system, we look at the rise of stablecoins as a rival to other global payment methods, highlight the stablecoin adoption challenge along with the key considerations for banks, payment providers and regulators.