If there is a global recession or if inflation continues to climb, crypto adoption in nations with weak currencies might increase.
Cryptoassets may be volatile, but as alternatives to unstable fiat currencies, they have received international interest. In particular, analysts fear that a combination of high inflation and a probable global recession might increase the adoption of dollar-pegged stablecoins in emerging or developing nations, hence increasing dollarization.
Maxim Ermilov, the creator of Overnight, which created an interest-bearing stablecoin dubbed USD+ on Polygon’s proof-of-stake chain, told Blockworks that “people attempt to preserve their funds from rising inflation and future devaluation by investing in dollars.”
But this is not always simple. In certain nations, banks have a significant danger of insolvency, making dollar hoarding an expensive and hazardous tactic.
“Stablecoins are resolving these issues in developing markets: It is a hard money, simpler to keep than cash, not susceptible to bank failures, and can be used to create income,” said Ermilov.
In rich countries, where inflation has been extraordinarily high, inflation is a big subject, but in emerging and developing economies, inflation is nothing new. Some national currencies fall under inflationary situations, especially when a country’s central bank lacks political independence.
Hugo Volz Oliveira, secretary-general of the New Economy Institute, a charity formed by prominent Web3 firms and supported by the Near blockchain, the web browser Brave, and numerous Portuguese institutions, said that stablecoins have grown irrespective of market cycles.
According to him, Tether (USDT) was introduced in 2014, but “was only extensively embraced during the 2017 boom.” Even during the Covid-induced meltdown in March 2020, stablecoin supply grew as crypto prices fell, indicating that gloomy situations do lead to an increase in stablecoin usage.
Even the International Monetary Fund (IMF) agreed that an economic downturn might result in more dollarization of nations, particularly given the global accessibility of digital versions of the dollar such as USDT or USD Coin (USDC).
“It is possible that national currencies issued by their central banks, especially those deemed less convenient to use or more volatile in value, could be replaced by stablecoins — private cryptocurrencies issued by multinational corporations or global banks and typically backed by US dollars to maintain stability — or by CBDCs issued by major economies,” IMF economists wrote in a June publication.
“Even a volatile cryptocurrency like Bitcoin may, in addition to facilitating capital flight, be favored over the local currency amid economic instability,” the IMF observed.
However, if bitcoin has been effective as a substitute for local currency in the past, stablecoin adoption may occur more quickly as the community becomes more acquainted with the underlying technology that drives crypto markets, in part due to bitcoin.