In a statement released on Monday, the European Central Bank acknowledged the rapidly growing stablecoin economy, noting that they possess inherent vulnerabilities that could pose risks to the stability of the global financial system.
Currently, the market capitalization of stablecoins exceeds $280 billion, accounting for about 8% of the total crypto market. According to a recent report by Bank of New York Mellon, the stablecoin market could reach a $1.5 trillion market capitalization by the next five years.
USD-pegged stablecoins represent 99% of the total supply, with Tether (USDT) leading with $184 billion (63%) and Circle (USDC) accounting for $75 billion (26%). This leaves other stablecoins, including the euro-pegged stablecoins, playing a minor role with a total supply of €395 million (which is approximately $445 million).
Some of the key catalysts behind the rapid adoption of stablecoins, particularly among institutions, include clearer regulatory frameworks. The EU’s implementation of the Markets in Crypto-Assets Regulation (MiCAR) and the U.S. Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act) are some notable examples. Several regions in Asia and Africa have also begun pursuing clearer stablecoin regulations.
However, despite the growing global interest in stablecoins and the development of new use cases, the ECB’s report states that crypto trading remains the primary utility of stablecoins. Retail transactions and cross-border remittances constitute a minor share of total stablecoin volume.
According to the European Central Bank, crypto trading as the major use case of stablecoin is a major vulnerability. In a situation where investors lose confidence in the token, it could trigger a depegging event, which would have widespread market implications given their large share of total crypto liquidity.
‘…the use of stablecoins seems to be primarily driven by their role within the crypto-asset ecosystem, and it remains to be seen whether stablecoins will be adopted widely across other use cases.’
Moreover, the depegging of USD-pegged stablecoins could trigger a sell-off of their dollar reserves, potentially affecting the U.S. Treasury market. The report also notes that the concentration of the majority of stablecoin market capitalization in the hands of just two organizations, Tether and Circle, further exacerbates these risks.
The European Central Bank also emphasized that a significant growth in the stablecoin market would result in proportionally large-scale retail outflows, leading to diminishing funds for traditional banks. Also, this could lead to an increase in stablecoin holdings, replacing a portion of traditional bank deposits.
What This Means for the Stablecoin Market in Africa
Africa is one of the fastest-growing regions for stablecoin adoption, accounting for 9.3% of global adoption.
The region has also witnessed institutional adoption of stablecoins at an unprecedented rate, with traditional finance institutions mirroring global trends and advancing towards blockchain adoption and integration.
Notably, the governor of the Central Bank of South Africa has expressed concerns that widespread adoption of blockchain and stablecoins could undermine the continent’s monetary sovereignty.
In an interview with CNBC Africa, Lesetja Kganyago stated,
“The creation of stablecoins, especially the dollar stablecoins, is being used to undermine African currency. People are using those to short the currencies, and we see the rise in the use of stablecoins on the African continent in countries that are experiencing a shortage of foreign exchange.”
This trend has been particularly evident in Nigeria, where stablecoin adoption surged in 2022 during the naira devaluation, and stablecoins were widely sought as a hedge against currency depreciation and high inflation.
However, attitudes toward stablecoins and blockchain across Africa have shifted recently. Government agencies and traditional financial institutions are increasingly exploring stablecoins as tools to address unique regional challenges such as low financial inclusion and slow cross-border settlement.
Recently, the African Continental Free Trade Area (AfCFTA) adopted a new digital initiative that involves the use of stablecoins for regional trade settlement for standardization, cost-efficiency, and instant transactions.
There have also been attempts to develop stablecoins backed by African national currencies, such as cNGN in Nigeria and ZARP, ZARC, and yZAR in South Africa.
These initiatives represent efforts to harness the benefits of stablecoins within the African region while reducing dependency on the U.S. dollar.
Africa’s renewed approach to stablecoin and blockchain development involves a collaborative strategy among stakeholders, government bodies, and private institutions to explore their transformative potential for the continent.
