How stablecoins affect the forex market

20. März 2021

Danger for US Dollar? How stablecoins influence the foreign exchange market

Stablecoins are increasingly establishing themselves in the crypto market and beyond. In terms of trading volume, Bitcoin has long since ceased to be the No. 1 cryptocurrency, but Tether USDT is. But how much do stablecoins now also influence the foreign exchange market and can they pose a threat to central banks‘ monetary policy? The Friday Commentary.

Since stablecoins in most cases merely replicate a fiat currency or commodity one-to-one, or at least attempt to do so, they do not serve as speculative objects themselves, but are merely a means to an end. They bring stability to the otherwise The News Spy volatile crypto-financial market. For decentralised financial applications of all kinds, they are essential to enable applications outside of speculation. Conversely, this raises the question of what influence stablecoins can have on their underlying value.

Anyone who acquires a classically backed stablecoin such as Tether (USDT) also creates a demand for US dollars. After all, at least according to the promise, every USDT is supposed to be backed by a US dollar equivalent. Besides bank deposits, this can also be government bonds. The demand for a stablecoin, when physically deposited, also has a corresponding feedback effect on the respective underlying asset.

US dollar for the world

So far, the US dollar has been the undisputed reserve currency. Even the euro, the world’s No. 2 reserve currency, has no chance against the so-called greenback. In the crypto market, this lead is even significantly greater. The largest stablecoins according to market capitalisation and trading volume are all based on the US dollar: Of the ten largest stablecoins by market capitalisation, nine are US dollar stablecoins. If you look at trading volume, there are still eight out of ten.

So if there is one stablecoin that can influence its base fiat currency, it is the US dollar stablecoins. However, the US dollar is also the largest currency in the world. The market capitalisation and trading volume of the stablecoin must be correspondingly high in order to have a real influence.

The market comparison: USDT and Co. against the original

The daily trading turnover of the entire foreign exchange market (all fiat currencies) is around 6.5 trillion US dollars. The US dollar is involved as a currency counterparty in about 40 per cent of all foreign exchange transactions. The currency pair euro / US dollar accounts for the largest share of this. Its currency turnover amounts to almost 30 per cent of the total market, i.e. about two trillion US dollars daily.

In contrast, the USD stablecoins have a daily turnover of around 200 billion US dollars, if the trading volumes of the previous days are taken as a basis. Of course, the volume can fluctuate greatly depending on the market phase. 100 billion USD is just as realistic as 300 billion USD daily turnover in USD stablecoins. Over 90 per cent of this is attributable to Tether’s USDT stablecoin.

If you compare the USD stablecoin volume with that of the underlying, you still get 7.7 per cent of the total US dollar trading volume in one day (200 billion USD divided by 2.6 trillion USD, which results from the 40 per cent of 6.5 trillion USD).