Imagine a world of complete cashless transactions; not the kind that our central banks promise us, but the kind offered by blockchain technology. With cryptocurrency, we exist in an ecosystem that is trustless, transparent and secured.
Even though most die-hard coiners see cryptocurrency as a colonial master that will take over the traditional system, in reality, the cryptocurrency market and the financial market are more of the same than different.
Wondering how? Let’s dive in:
A quick rundown before we hit the deal; the cryptocurrency market basically consists of digital assets distributed on a decentralized network which may serve many purposes; from utility to governance to NFT, and stablecoins. Each category carries its own value and use case.
In relation to the crypto market; the financial market embodies the exchange of assets like bonds, stocks foreign exchange (forex) and derivatives.
To most, the crypto and financial market seem to be parallel entities; but this is not completely true. Reserve-backed stablecoins like USDT and USDC serve as the bridge that connects the highly volatile crypto market to the traditional financial market.
Stablecoins are digital assets (crypto tokens) that are pegged to a fiat currency; which in this case is the US dollar. If you have 1 USDT in your crypto wallet and I have $1 in my leather wallet; we are basically holding the same value, only that one is paper and the other is digital. In essence, a stablecoin is your fiat on the blockchain.
What then backs this stablecoins?
According to Tether’s last quarterly attestation report; the stablecoin USDT is backed by a diverse mix of reserves including – cash, Treasury bills, commercial papers, cooperate bonds, loans and some other digital currencies. Unlike USDT, Circle’s USDC is backed by cash and short-term government bonds.
With these points above, it proves that reserve-backed stablecoins may possess influence over the commercial papers and treasury market. According to crypto.com; data from January 2020 to November 202 proves that:
One standard deviation increase in stablecoins issuance on any given day may result to:
- An increase in commercial paper issuance by 10.7%
- More purchases on commercial paper which leads to a decrease in its yield by 20 basis points.
- A decrease in Treasuries yields by 15 basis points.
In essence, the rapid growth and adoption of these stablecoins (USDT and USDC) have caused the issuers to purchase more commercial papers and treasury to secure the price stability of their token.
With the little volatility that comes with stablecoins; investors prefer filling their portfolio with stablecoins rather than highly volatile cryptocurrencies. Due to this, the demand for coins indirectly affects traditional private money; higher demand for stablecoins equals higher amounts of commercial paper issuance.
- Report on how the crypto and financial market are connected: How the Cryptocurrency and Financial Markets Are Connected.
- Stablecoins: What Is Tether? How USDT Works and What Backs Its Value.