The obvious growth of stablecoins has fueled the emergence of crypto-deposit rates and decentralized finance (DeFi).
The stablecoin industry is growing and has topped $137.7 billion up from $20 billion a year ago. According to the lead cryptocurrency strategist at Morgan Stanley (NYSE: MS), Sheena Shah, the banking industry and financial institutions are likely to capitalize on the demand for stablecoin deposits, as the industry continues on its uptrend journey.
Stablecoins are digital tokens whose value is pegged on a ratio of 1:1 with a fiat currency, with the United States Dollar being the most prominent of all. Unlike other known digital currencies, the prices of stablecoins do not fluctuate and make them suitable as a reserve asset for the burgeoning digital currency trading ecosystem.
The obvious growth of stablecoins, according to Shah, has fueled the emergence of crypto-deposit rates and decentralized finance (DeFi), most of which rivals what traditional financial institutions are offering at present. According to the strategist, the 5% interest rate most stablecoin or DeFi platforms offer is bound to attract interest from regulators whether now, or later.
The advent of COVID-19 upturned the financial and economic capabilities of most markets, with many Central Banks around the world introducing a 0% interest rate. Investors have largely turned to DeFi service providers in hopes of getting a better return on their investments. Per Shah’s positioning, market regulators are likely to start wielding their powers in this regard very soon.
Shah also pointed to a number of other trends in the nascent digital currency industry including the soaring interests of corporate Bitcoin buyers. Shah notes that “institutional investor interest in participating in the upward price momentum is building,” adding that bitcoin’s dominance is slipping as “alternative coins outperform due to their lower USD prices and potential use cases.”
Why do Financial Institutions See Crypto as a Threat?
Long before now, mainstream market players have often considered Bitcoin and altcoins as a direct threat to banking. The Chief Executive Officer of JPMorgan Chase & Co (NYSE: JPM), Jamie Dimon has often pointed to the enormous competitive threat that Fintech, which encompasses digital currencies poses to legacy financial institutions.
“Banks already compete against a large and powerful shadow banking system. And they are facing extensive competition from Silicon Valley, both in the form of fintechs and Big Tech companies (Amazon, Apple, Facebook, Google, and now Walmart), that is here to stay. As the importance of cloud, AI and digital platforms grow, this competition will become even more formidable. As a result, banks are playing an increasingly smaller role in the financial system,” Dimon said in an Annual shareholder’s letter published earlier this year.
The concerns are genuine as cryptocurrencies provide better transaction speed, and at a much cheaper cost without the oversight of any centralized authority. At the current rate of adoption, the redundancy of the banks is billed to be further heightened, a situation that Shah appears confident market regulators will help avert.