In the latest installment of the world's largest fintech festival, the Singapore Fintech Festival (SFF), the Monetary Authority of Singapore (MAS) revealed the issuance of stablecoin licences to three entities.
If well regulated, "stablecoins can potentially play a useful role as digital money alongside central bank digital currencies and tokenised liabilities”, said Ravi Menon, managing director of the Monetary Authority of Singapore.
Market observers have long championed the use cases for stablecoins. However, the recent endorsement from a globally respected regulator signals the legitimised role of this digital currency, solidifying its presence in the financial landscape.
Stablecoins, commonly backed by fiat currencies such as the US dollar or Euro, offer numerous prospects for financial markets and payment services, say Leonard Hoh and James Kow of Bitstamp. The MAS's decisive action, deemed crucial by the duo, has propelled the technology forward.
Since the creation of the world's first stablecoin, BitUSD, in 2014, industry experts have recognised the potential for these assets to bridge traditional fiat currencies and cryptocurrencies. It is seen as a form of money that combines the stability of traditional currencies with the feature set provided by blockchain technology, offering the best of both worlds.
Kow, the head of business development at Bitstamp in Asia Pacific, highlights three critical challenges financial institutions face today. These challenges include settlement risks, counterparty and credit risk exposure, and the costs associated with settlement inefficiencies through traditional financial intermediaries and systems in the foreign exchange market.
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This means that the cost of global cross-border trading fees remain high, often taking longer with a mismatch in settlement time zones, increasing risks that the counter party may not fulfil its part of the deal and may default on the contractual obligations, says Kow, who has spent over two decades working in foreign exchange and equities in the traditional financial markets prior to joining Bitstamp.
In the real world, inefficient forex markets and intermediated remittance structures lead to elevated costs. This poses a substantial financial burden for individuals remitting money to their home countries. Referring to a World Bank report, Kow says the average cost of sending $200 was 6.2% in 4Q2022, exceeding the sustainable development goal of 3%.
Given the on-chain nature of stablecoins, which tackles numerous challenges in forex markets and simplifies payment flows, the cost of remittances can be markedly reduced. “We think stablecoins can reduce that cost to almost 1%, that’s a 500% cost saving,” he adds.
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The potential of stablecoins
At its inception, stablecoins provided investors an efficient avenue to transfer value between crypto exchanges and into the physical world as it is “pegged” or stabilised by a fiat currency, shielding assets from the volatility often a function of cryptocurrency markets.
Market participants had historically used stablecoins to interact with the digital assets ecosystem that had been de-banked by the financial system. Hoh, the Asia Pacific general manager for Bitstamp, says that stablecoin assets today provide the “primary quote currency” for trading in crypto markets.
“Stablecoin-denominated trading pairs now exceed fiat-denominated trading pairs in terms of volume traded; that just says that stablecoin adoption in trading crypto markets has exceeded fiat,” says Hoh.
Although a large portion of trading volume is still concentrated in offshore trading venues with limited domestic banking options, he adds that this validates one viable and important use case for stablecoins.
But Hoh says that stablecoins have not yet fulfilled its promise for remittances, and this is partly due to a lack of support for stablecoins pegged to other major currencies, with US-backed stablecoins enjoying dominance in the market today.
Data by Coingecko, an independent cryptocurrency data aggregator, shows a 98% US dollar dominance in the stablecoin market. “Stablecoins are really [US] dollar dominated at this point,” adds Hoh. “To facilitate remittance, you need a liquid, accessible, multi-currency forex market, which doesn’t yet exist for these participants today.”
Hoh notes that the limited availability of stablecoins in other major trading currencies and the ability of crypto exchanges to provide connectivity to the services being built are “a little bit clunky” today.
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For the market to be confident in developing non-US dollar-denominated stablecoins, having a robust regulatory framework is key, Kow opines. This is apparent with the tide of incoming regulations for issuers — in which several regional and global jurisdictions have released and or begun enacting frameworks around stablecoins.
Last June, Japan passed legislation that recognises stablecoins as a form of digital money. In July, the European Union’s crypto governing association, Markets in Crypto-Assets Regulation (MiCA), issued a legal framework for stablecoins, which will come into effect in June 2024. Closer to home, Hong Kong is looking to begin its stablecoin regime by mid-2024.
This is expected to lift the similarly regulated players in the ecosystem to build more optionality and connected infrastructure for the remittance market.
“The sooner we have that, the sooner we will see a proliferation of these non-US dollar stablecoins,” says Kow. “Given the MAS’s issuance of the licence to three stablecoin issuers, suddenly you have certain legitimacy for these assets, which will bring about a wider adoption.”
Meanwhile, exchanges such as Bitstamp continue to act as facilitators for regulatory clarity and uniformity among regulators to build a trusted and globally connected market for stablecoins. As of Dec 6, Bitstamp has partnered with Societe Generale-FORGE, to list the first institutional euro stablecoin, EUR CoinVertible on the exchange.
Facilitating stablecoin market expansion
Since its establishment in 2011, Bitstamp has concentrated on providing a cryptocurrency exchange with institutional-grade service and a mission to propel the mainstream adoption of cryptocurrencies and blockchain technology.
This has resulted in the firm doing the atypical — the exchange had a keen foresight early on to go about the regulatory route. In 2016, Bitstamp obtained its payment institution licence from Luxembourg's well-renowned financial services centre, making it the world’s first crypto exchange licensed across the European Union.
It also obtained its BitLicence from the New York State Department of Financial Services in 2019, followed by a Financial Conduct Authority registration in the UK in 2023. It is working towards its in-principle licence under the Payment Services Act (PSA) by the MAS to secure its operating footprint across the top three global forex markets.
As a globally regulated exchange with over 50 licences and registrations and 20 banking partners globally, Hoh says Bitstamp is a crucial market infrastructure for institutions building innovative services for the everyday consumer.
“We're working with bank and non-bank quality stablecoin issuers and hopefully regular regulated ones to list on our exchange,” he says. “Moreover, the liquid stablecoin markets we are forming on our exchange and partnerships with institutions are purposed with creating trusted on-chain remittance services for the mass market.”
Through working with foundations and projects that are maintaining the networks that stablecoins can run on, Hoh believes that the technology will also be able to deliver faster transactions at a lower cost across multiple chains.
With 80 quality assets listed globally on its exchange, Bitstamp boasts a thorough process in selecting a high technical and operational level of maturity in the assets they list.
As private wealth management company Bernstein projects that the stablecoin market will grow to almost US$3 trillion in the next five years, Bitstamp’s Hoh believes that the exchange is naturally positioned to list and facilitate the expansion of these markets.
“It’s worth noting that stablecoins are already actively being used today. It's not something that’s happening in the future. It’s something that’s happening now,” says Kow. “But we see the potential for it to grow much more."
