Preparing for the stablecoin revolution

The spectacular collapses of digital currency exchange FTX and blockchain payment platform Terra have significantly shaken the crypto market, exposing deep vulnerabilities within both decentralised and centralised platforms.

These dramatic failures demonstrated critical structural weaknesses that regulators and market participants could no longer ignore. However, rather than marking the demise of digital assets, these events have catalysed substantial reforms in stablecoin regulations, setting the stage for transformative developments in global finance.

Real World Asset Tokens (RWAs) emerged as crypto’s pragmatic solution to volatility, pegged to tangible assets and cashflows to maintain price stability. Stablecoins can be seen as an RWA pegged to fiat (government-issued) currency and swiftly became instrumental in enabling efficient, transparent and cost-effective cross-border transactions, reshaping global financial interactions.

Nevertheless, the collapse of Terra, an algorithmic stablecoin, exposed fundamental risks, highlighting its dependence on market sentiment rather than genuine asset reserves. At its peak, Terra’s market capitalisation soared to nearly $18bn, before its dramatic implosion, illustrating the dangers inherent in confidence-driven mechanisms.

The collapse of Terra, an algorithmic stablecoin, exposed fundamental risks, highlighting its dependence on market sentiment rather than genuine asset reserves

Concurrently, the FTX exchange’s downfall underscored severe deficiencies within centralised crypto platforms, particularly around transparency, asset custody, governance and regulatory oversight. Investors and regulators alike discovered substantial gaps in financial disclosures and asset management practices, revealing a troubling lack of accountability and transparency.

Reformers on the rise

Responding decisively, regulators globally, spearheaded by jurisdictions like the US, swiftly enacted robust regulatory measures. The US GENIUS Act mandates comprehensive reserve requirements for stablecoins, stipulating that issuers must maintain 100 per cent asset-backed reserves strictly limited to cash and short-term US Treasuries. Moreover, issuers are required to conduct mandatory monthly independent audits, significantly enhancing transparency and investor confidence.

Other jurisdictions, such as Hong Kong, have also implemented detailed licencing frameworks for stablecoin issuers, accompanied by real-time monitoring mechanisms through blockchain-based smart contracts. This global push for greater regulatory scrutiny imposes strict redemption obligations, transparent disclosure of issuance and reserve compositions, and frequent independent audits, collectively setting a high global standard for regulatory compliance.

These regulatory shifts are significantly reshaping the competitive landscape, reinforcing transparency, trust and systemic security within the stablecoin environment, and setting clear operational boundaries for issuers and platforms alike.

Transforming global finance

Rather than impeding innovation, stricter regulation has cemented stablecoins as critical financial infrastructure, profoundly impacting trading, settlement and clearing systems.

Enhanced transparency and reliable auditability have bolstered institutional confidence, accelerating their integration into blockchain and Web 3.0 platforms. This integration bridges traditional finance and decentralised finance (DeFi), driving substantial innovation and facilitating more streamlined, compliant and cost-efficient financial transactions.

Rather than impeding innovation, stricter regulation has cemented stablecoins as critical financial infrastructure, profoundly impacting trading, settlement and clearing systems

Stablecoins now enable continuous, real-time global settlements, drastically reducing transaction times and costs compared to traditional banking systems. The ability to conduct instant cross-border transactions at minimal costs provides an attractive alternative for small to medium-sized enterprises and individuals, particularly in regions with weak banking infrastructures or volatile local currencies. This significant reduction in friction fosters greater economic inclusivity and efficiency.

Laying the road ahead

Stablecoins are increasingly viewed as tools for sovereign currency innovation. The proactive regulatory approaches adopted globally illustrate how jurisdictions strategically leverage digital assets to enhance their currencies’ global influence.

Regulated stablecoin hubs offer critical infrastructure for currency internationalisation, facilitating broader adoption in international trade and financial markets.

The emergence of stablecoins pegged to various sovereign currencies provides novel mechanisms for integrating these currencies into global financial networks, especially within blockchain-based platforms and decentralised finance ecosystems. Such innovations not only enhance transaction efficiency but also potentially elevate the role of multiple currencies in global financial settlements.

Looking forward, the stablecoin market is poised for increased diversification, featuring a range of regulated stablecoins pegged not only to major fiat currencies but also to commodities and other real-world assets. This diversification will likely foster a multi-polar stablecoin ecosystem, enabling nuanced and balanced global financial flows.

Such a market structure could offer sovereign states enhanced tools for economic governance, international cooperation, and strategic currency management, reducing dependence on a small number of “global currencies”. With greater adoption, we expect greater market stability, fostering sustained economic innovation and resilience.

Web 3.0’s new frontier

Ultimately, the crises triggered by FTX and Terra have acted as catalysts rather than mere cautionary tales, driving robust regulatory reforms that have laid the foundation for stablecoins to become secure, trusted instruments within mainstream finance.

Enhanced regulatory standards and compliance not only restore confidence but have also accelerated blockchain’s integration with traditional finance, marking an inflection point for Web 3.0. In this evolving landscape, stablecoins are not merely digital currencies but critical financial infrastructures enabling greater transparency, efficiency, and accessibility.

Charles Chang (top) is director of the Fintech Research Center and professor of finance, Yvonne Dai is an assistant researcher at Fudan University’s International School of Finance in Shanghai

 



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