Bitcoin recently experienced a three-day rally, pushing its price near $30,400. At the time of writing, the leading cryptocurrency trades around $30,100, marking a 20.5% gain over the past week. This surge represents a significant recovery, with Bitcoin breaking through the $30,000 barrier for the first time in months and reaching its highest level since mid-June.
Data provider Glassnode highlighted that Bitcoin’s illiquid supply has hit a new all-time high of 15.2 million BTC. Meanwhile, exchange balances have dwindled to 2.3 million BTC, the lowest since July 2018. This trend suggests a growing preference for long-term holding among investors.
Ethereum has also seen impressive growth, surging nearly 59% year-to-date to approximately $1,900. The collective cryptocurrency market capitalization now stands at $1.2 trillion, rebounding from a low of $1.06 trillion in early June following regulatory actions by the U.S. Securities and Exchange Commission (SEC).
Edward Moya, a senior market analyst at OANDA, remarked, "If BlackRock is making moves, who needs regulatory clarity?" This sentiment echoes the renewed confidence among traders and investors, driven by a wave of spot Bitcoin ETF filings from institutional giants like BlackRock, Fidelity, Citadel, Charles Schwab, and Invesco.
Despite the positive shift in market sentiment, Bitcoin’s performance remains somewhat tethered to traditional markets. For sustained growth, the crypto asset needs momentum that lasts longer. Additionally, cryptocurrencies have trailed traditional stock markets for a while, though Bitcoin is now catching up.
The resurgence of institutional interest, coupled with the upcoming Bitcoin halving in April next year, could potentially fuel the next bull market.
Regulatory Scrutiny Extends to Stablecoins
U.S. regulators have intensified their focus on the cryptocurrency market this year, targeting not only exchanges and digital assets but also stablecoins. On Wednesday, Federal Reserve Chair Jerome Powell acknowledged cryptocurrencies as a lasting asset class.
During a hearing before the House Financial Services Committee, Powell stated, "Crypto assets appear to have staying power as an asset class." He also mentioned that Fed staff are actively engaged in discussions with bipartisan lawmakers on crypto legislation.
Powell recognized the potential of stablecoins as a viable form of money and emphasized the central bank’s role in oversight. "We do see payment stablecoins as a form of money, and in all advanced economies, the ultimate source of credibility in money is the central bank," he said.
Responding to concerns from Representative Maxine Waters (D-CA), Powell warned against allowing stablecoin issuers to register directly with states, which could weaken the Fed’s role. He argued that enabling private money creation at the state level would be a mistake.
Powell has previously advocated for stablecoin regulation similar to money market funds and bank deposits. In the same hearing, he addressed central bank digital currencies (CBDCs), noting that the U.S. is still far from implementing a digital dollar. He clarified that the Fed has no interest in managing individual retail accounts, leaving that to the banking system.
Chris Giancarlo, former chairman of the Commodity Futures Trading Commission (CFTC), criticized proposed legislation for potentially allowing licensed agencies to deny services to legally operating but politically disfavored businesses. He called this a "glaring omission" that could subject stablecoin transactions to shifting political winds.
Investment bank Berenberg suggested in a research note that stablecoins and decentralized finance (DeFi) are likely the next targets for SEC enforcement. The report indicated that targeting stablecoins, the lifeblood of DeFi, could undermine the ecosystem. Analysts noted that Bitcoin, recognized as a commodity, might benefit from such a crackdown.
USDT: The Leading Stablecoin
Stablecoins are cryptocurrencies designed to minimize volatility by pegging their value to stable assets like fiat currencies. The U.S. dollar is the most popular benchmark for these digital assets.
The total stablecoin market capitalization is currently $129.69 billion, with a daily trading volume of $47.97 billion. Tether (USDT) dominates this space, boasting a market cap of $83.2 billion. Its trading volume surged 16.4% to $36.59 billion in the last day. In comparison, USD Coin (USDC) saw only a 10.3% increase in volume, reaching $7.74 billion.
Tether recently responded to media reports about its past holdings of securities issued by Chinese state-owned enterprises. The company called the coverage "hasty" and lacking attention to current facts, noting that the data was over two years old. Tether clarified that its exposure to Chinese commercial paper was liquid, rated A1 or higher, and all issuers were stable. The firm emphasized that it reduced its commercial paper holdings to zero last year.
Additionally, Tether expanded USDT’s presence by issuing it on the Kava blockchain to enhance cross-chain liquidity. USDT is currently supported on Ethereum, Bitcoin via Omni, Tron, Binance Smart Chain, and Solana.
Beyond the U.S., Hong Kong is committed to introducing stablecoin regulations by next year. The city is also reviewing rules for crypto derivatives as part of its effort to become a global digital asset hub. In January, the Hong Kong Monetary Authority (HKMA) announced plans to implement a mandatory licensing regime for stablecoin-related activities. The Securities and Futures Commission (SFC) is collaborating with HKMA on this framework.
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USDC: The Most Liquid Stablecoin
While USDT is the dominant stablecoin by market cap, data from analytics firm Kaiko reveals that USD Coin (USDC) is the most liquid stablecoin on centralized exchanges (CEXs). USDC has approximately $38 million in bids preventing a 1% price deviation.
Tether follows closely with about $26 million in bids, though it traded below $1 this week due to the ongoing Curve-Aave lending incident. Binance USD (BUSD), True USD (TUSD), and Dai (DAI) trail behind in liquidity.
Kaiko noted that despite efforts by issuers like Circle and Tether to maintain pegs, decoupling can still occur in spot markets, making them crucial for price discovery. USDC briefly lost its dollar peg in Q1 2023, dropping to $0.88 during the U.S. banking crisis. However, it has since stabilized.
At the start of the year, USDC and DAI were not widely used on CEXs, primarily circulating within DeFi ecosystems. This changed as Coinbase now offers a 4% reward on USDC holdings, doubling previous returns. Circle, the issuer of USDC, recently resumed purchasing U.S. Treasuries as reserve assets after selling them during the debt ceiling impasse.
Jeremy Fox-Geen, CFO of the Circle Reserve Fund managed by BlackRock, stated that the fund is increasing its direct holdings of Treasuries while retaining repurchase agreements. As of late May, Circle had shifted all its holdings to major banks and added $2.2 billion in Treasuries to the fund by mid-June.
Reshuffling the Rankings: DAI and BUSD
Binance USD (BUSD) was once the third-largest stablecoin but has slid to fourth place amid regulatory scrutiny of Binance. Its market cap stands at $3 billion, down 29% from $4.26 billion a month ago. Since peaking at $23 billion in November 2022, BUSD has been in a decline, with circulating supply dropping over 74% this year.
DAI, a decentralized stablecoin issued by MakerDAO, now ranks third with a market cap of $4.43 billion. Interestingly, DAI’s 24-hour trading volume fell 22% to $212 million, while BUSD’s rose 9.3% to $3 billion.
MakerDAO recently voted to increase the DAI savings rate from 1% to 3.49%, aiming to redefine the DeFi landscape. Additionally, the protocol purchased $700 million in U.S. Treasuries, boosting its reserves to $1.2 billion. This move is part of its "Endgame Plan" to diversify assets backing DAI.
In April, the community approved a proposal to raise the investment cap in short-term government bonds to $1.25 billion. This vault, managed by Monetalis, helps ensure DAI maintains its $1 peg. Allan Pedersen, CEO of Monetalis, noted that diversifying collateral through U.S. Treasuries allows Maker to leverage the current yield environment.
Frequently Asked Questions
What are stablecoins?
Stablecoins are cryptocurrencies pegged to stable assets like fiat currencies to minimize price volatility. They are widely used for trading, remittances, and as a store of value in crypto markets.
Why is USDT the dominant stablecoin?
USDT has the largest market cap and trading volume due to its early entry, widespread exchange support, and extensive use in trading pairs. Its liquidity and established presence contribute to its dominance.
How do regulators view stablecoins?
Regulators increasingly see stablecoins as a form of money that requires oversight. Concerns include consumer protection, financial stability, and compliance with anti-money laundering laws. Policies are evolving to address these issues.
What is the difference between USDT and USDC?
USDT is issued by Tether and has the largest market share, while USDC is issued by Circle and is known for greater transparency and regulatory compliance. USDC often exhibits higher liquidity on centralized exchanges.
Can stablecoins lose their peg?
Yes, stablecoins can temporarily deviate from their peg due to market stress, liquidity issues, or loss of confidence. However, issuers typically intervene to restore the peg through arbitrage or reserve adjustments.
What is the future of stablecoin regulation?
Expect more comprehensive frameworks requiring licensing, reserve audits, and compliance standards. Authorities aim to balance innovation with consumer protection and financial stability.