In a 2022 research paper titled The Fallacy of Stablecoins, Dr. Vasil Gechev heavily criticized stablecoins, calling them a threat to global financial stability and urging every government to expel them from their financial landscapes. Fast forward to today, do Vasil’s words still ring true?
From a fringe asset class to the forefront of financial innovation, stablecoins are now central to adapting to the fast-evolving financial landscape. This sentiment is being echoed in major financial centers, from Wall Street to the Tokyo Stock Exchange.
This proves one thing: stablecoins are not merely the subject of idle gossip. Rather, they are the paradigm shift every financial guru is discussing.
A little over three years ago, we witnessed a crypto bloodbath with the collapse of prominent crypto platforms, wiping out billions of dollars of investor funds. Clearly, the year Vasil put pen to paper was the crypto industry’s annus horribilis—especially because it was marked by a contagion that reverberated across the entire ecosystem.
That was the year in which TerraUSD (UST), a non-collateralized algorithmic stablecoin, broke its peg, and its parallel cryptocurrency plunged from an all-time high of $119.51 to $0 in the space of one week, wiping out a market value of nearly $60 billion.
Months earlier—in March, to be precise—Cashio, a stablecoin on the Solana blockchain, was hit by a $28 million heist resulting from a smart contract vulnerability. The following month, a more devastating hack was reported: The Beanstalk Protocol Stablecoin suffered a flash loan attack, resulting in a $182 million loss.
While all these events were unfolding, fiat-backed stablecoins were being propelled to remarkable heights by what I describe as the stable trio—USDT, USDC, and MakerDAO's DAI. Two years before Vasil urged governments across the world to ban stablecoins, they already had a total market capitalization of $4 billion. By 2024, that number had grown to over $175 billion, recording over 1300% growth.
Stablecoins, Vasil would argue, have nothing truly backing them and are castles built on sand. According to Vasil, the vague collateralization of stablecoins, whether vague or transparent, is undeniably one of their deficiencies. The others being susceptibility to cyberattacks, exposure to money laundering, and value meltdown.
The composition of the total reserves of stablecoins is something issuers tend to keep under wraps for the most part. For instance, it took a court order for Tether USDT to release all the relevant documents needed to audit its reserves, and things almost came to a head in 2021 when the New York Attorney General accused Tether USDT of misleading the public on the true composition of its Total Reserves(TR).
The White Knight of Finance
It's undeniable that despite the shortcomings of stablecoins in a maturing regulatory landscape, they hold immense potential for disrupting traditional payment systems, offering a cheap, fast alternative—and are not a threat to global financial stability as Vasil postulated. If anything, stablecoins are a tipping point fueled by increased institutional adoption and real-world use cases.
Most importantly, stablecoins today represent a quiet $245 billion revolution led by Tether USDT and USDC, its closest competitor. And now, with the passing into law of the GENIUS ACT, the revolution is about to get a lot more disruptive. Banks will issue stablecoins to stay afloat, and many fintech platforms will soon realize that resistance is futile. When Amazon and Walmart decide to create their own stablecoins, you know it's the end of the road for fee-hungry middlemen.
What are your thoughts on the potential for stablecoins to reshape the financial industry in the coming years?