Since Bitcoin’s inception in 2009, the world’s fascination with cryptocurrencies has reached new heights. However, a recent sharp and painful downturn has prompted calls for more rigorous regulatory measures.
In May 2022, the values of TerraUSD and Luna, two prominent cryptocurrencies, plummeted by a staggering 99% in just two days, resulting in a collective loss of confidence in the crypto markets and a substantial financial setback of $41 billion.
This abrupt crash, following a two-year period of remarkable growth, has sparked concerns that a cryptocurrency market collapse could spill over into the broader economy. Even staunch cryptocurrency enthusiasts acknowledge the issue at hand – the absence of investor safety nets. Consequently, concerned investors are now imploring for assistance and advocating for regulatory intervention.
So, how should governments respond to this growing challenge? Recent market turbulence has prompted the United States, the United Kingdom, and numerous other countries around the world to contemplate the establishment of regulations and guidelines aimed at safeguarding cryptocurrency investors.
Opponents of regulation argue that such measures would run counter to the free and decentralized principles of digital currencies. Nevertheless, acknowledging the risks and finding ways to mitigate them is seen as essential.
Stablecoins, which function as digital equivalents of traditional currency on the blockchain, have seen their circulation volumes surge by a staggering 500% in 2020. Investors utilize these blockchain-based tokens as a bridge to facilitate trading within cryptocurrency markets. For every $1 million worth of stablecoins in circulation, the issuer maintains real assets worth an equivalent value. Thus, as long as the underlying assets remain stable, so does the value of the stablecoin.
The Prospects of Stablecoins
When fully collateralized, stablecoins offer a relatively stable alternative to cryptocurrencies like Bitcoin. The extent to which nations embrace stablecoins depends on the maturity of their economies and payment systems.
In emerging markets, stablecoins can function as a substitute for sovereign currencies in countries grappling with high inflation and macroeconomic instability. Furthermore, they have the potential to bolster financial inclusion by providing an alternative means of saving and transacting without the need for a traditional bank account.
In contrast, developed economies like the United States and Europe find the notion of maintaining a lightly regulated stance more appealing. The advantages of digital currencies, such as the ability to bypass the traditional banking system, remain a compelling proposition.
The responsibility now rests with authorities to chart a path forward in this evolving landscape of digital currencies and stablecoins.
