In July of 2023, the market dominance of stablecoins dropped to 11.6%, continuing an 18-month decline in the total market capitalization of the stablecoin sector. Pax Dollar (USDP), USD Coin (USDC) and Binance USD (BUSD) all saw decreases, yet Tether (USDT) kept on growing. The causes behind this exodus remain unclear, however, several factors play a role in the decrease.
One of these factors is the suspension of fiat currency deposits on Binance.US following a lawsuit from the United States Securities and Exchange Commission, as well as MakerDAO’s move to drop USDP from its reserves. Stablecoin trading volumes rose 10.9% to $406 billion in August, yet overall trading volumes are still “on track” to decline in September.
The SEC lawsuits against leading cryptocurrency exchanges Binance and Coinbase and the race to list a spot Bitcoin (BTC) exchange-traded fund (ETF) have had an impact on stablecoin trading volumes. The yield on 10-year U.S. Treasurys has been surging, reaching 4.25%. Kadan Stadelmann, chief technology officer of blockchain platform Komodo, believes that investors are more likely to choose T-bills over stablecoins due to their perceived riskiness.
The drop in the market capitalization of the stablecoin sector could significantly influence the broader cryptocurrency market, as stablecoins are often used as a medium of exchange and a store of value. Becky Sarwate, head of communications at cryptocurrency trading platform CEX.IO, noted that several projects experienced “noticeable fluctuations” this year, such as USDC, Binance’s flagship stablecoin, BUSD, and TrueUSD (TUSD).
Thomas Perfumo, head of strategy at cryptocurrency exchange Kraken, believes that the market capitalization for stablecoins “corresponds with market demand” and that the circulating stablecoin supply has grown from ~$5 billion to ~$115 billion. Pegah Soltani, head of payments products at fintech firm Ripple, said that back in 2020, when interest rates in traditional finance were low, there were “little opportunity costs of holding money in non-yielding stablecoins”.
In August, global payments giant PayPal unveiled a new stablecoin called PayPal USD (PYUSD). Erik Anderson, senior research analyst at ETF firm Global X, believes that PayPal’s launch has the potential to make the technology feel more accessible and less intimidating to a massive user base. Ripple’s Soltani expressed that tokenized assets have greater utility over nontokenized ones and that tokenized fiat is the future.
Overall, it appears that the incentive to hold stablecoins has been dropping, while the incentive to hold cash and other fixed-income securities in traditional finance has been growing. Whether the move to fixed-income securities is temporary or indicative of a long-term trend remains to be seen. PayPal’s stablecoin could help the sector recover and lower the barrier of entry for crypto. Whether it will be successful or not is yet to be determined.
