The stablecoin market is in for a diversification boom | Opinion

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The greenback has long played a starring role in the stablecoin market, but for how long can it hold on? Many of my peers see the dollar as untouchable. Still, governments around the world are waking up to the importance of local fiat-backed stablecoins, and we’ll soon see true diversification as more and more currencies enter the market as a result. In fact, I’m going to go out on a limb and predict that we’ll see 50% of all global currencies featured in the market by next year.

Summary

• The U.S. dollar still dominates the $100B stablecoin market, but nations are racing to launch local fiat-backed coins — with half of all global currencies expected to appear in the market by next year.
• After banning crypto in 2021, China is now promoting yuan-backed stablecoins to expand the Renminbi’s global reach — a sign that stablecoins have become tools of economic strategy, not rebellion.
• As stablecoins power faster, cheaper payments, governments recognize they must issue or regulate local versions to preserve sovereignty, compete internationally, and avoid dependence on dollar-pegged assets.

The latest evidence for this is coming from China, a country that completely turned its back on digital assets in 2021. In fact, it’s their change of course that has cemented my prediction. Just a few years ago, China’s policymakers declared all cryptocurrency transactions illegal, but now its State Council is on a mission to increase the Renminbi’s usage around the world, and yuan-backed stablecoins are its tool of choice.

It’s a monumental policy change that reveals a fundamental truth: stablecoins are becoming increasingly important for global economies. It may seem a bold claim, but I genuinely believe that countries’ economic success will soon depend on them.

The truth is that these digital assets are now incredibly important for countries seeking a strong presence in the international payments market. That is, at least in part, why China is weighing its use.

Stablecoins are faster, more transparent, and in many cases cheaper than legacy cross-border payment methods, so it’s no surprise their use has doubled in the last 18 months. They will soon become the go-to option, making them a non-negotiable for governments with big currency ambitions. Those who want their local currency to go up against the likes of the dollar and the euro now need a stake in the stablecoin market.

But that’s not all — there’s another driver of local currency-pegged coins, this time on a more domestic level. As the use of these tokens by ordinary individuals also grows, governments will need stablecoins pegged to their local currency to preserve monetary sovereignty.

You only have to look at Wyoming’s rollout of a state-issued, dollar-pegged token, Frontier, to see how stablecoins could become an essential part of day-to-day payments. While small in scale, the project encourages the use of stablecoins in everyday life and demonstrates just how common they could become. But what if consumers don’t have access to a trusted, reliable stablecoin that is pegged to their local currency? What if they turn to coins pegged to foreign currencies, increasing their circulation instead?

Well, frankly, it could jeopardize entire financial systems. Central banks would lose significant control over monetary policy, becoming dependent on that of others, and anti-money laundering regulations and capital controls would end up seriously undermined.

These risks are beginning to hit home for global players as the use of stablecoins grows. They will continue to realize that, as individuals begin choosing these digital assets to pay for their groceries or businesses start paying contractors with stablecoins, local fiat-backed tokens will be crucial.

So you see, policymakers around the world are waking up to their importance, and they’ll soon begin facilitating their development in any way they can. Before long, we’ll see a rapid diversification of the market, with a wide variety of fiat currencies featuring in a way they haven’t before.

It must be said that there is still a long way to go — the dollar is still king when it comes to this particular market, and the US’s recent piece of stablecoin legislation, the GENIUS Act, will no doubt strengthen its dominance.

But, while dollar-backed, US-issued stablecoins will certainly prove tough competition to any who wants to muscle into the market, America isn’t the only country legislating. Many more have got the ball rolling on stablecoin regulation over the last year or so, including Hong Kong, Singapore, and the UAE.

These efforts are evidence that governments around the world want to spur stablecoin innovation at home, with many concentrating their efforts on regulating stablecoins pegged to local fiat currencies. They are setting out transparent, firm guardrails that give issuers the clarity they need to roll out new coins.

Global players are finally conscious of the threat the dollar’s dominance poses, and mark my words, China’s move toward stablecoins is just one piece of the puzzle. Digital assets are no longer a nice-to-have, and local fiat-pegged stablecoins are fast becoming an economic imperative.

Soon, we’ll see half of all global currencies featured in the market — a diversification boom is well and truly underway.

Fiorenzo Manganiello

Fiorenzo Manganiello is the co-founder and managing partner of investment firm LIAN Group. At LIAN Group, he has built and funded many successful technology companies across cryptocurrency, blockchain, digital infrastructure, and healthcare. Outside of the day-to-day of LIAN Group, Manganiello is an enthusiastic art collector and is particularly interested in contemporary and digital art. He is also a professor of blockchain technologies at Geneva Business School.