[SINGAPORE] Stablecoins have been around for more than a decade now, with the first – BitUSD which was created in 2014 – now defunct.
With the stablecoin market – currently valued at US$250 billion – and estimated to grow two to three times by 2028, investors and governments are taking notice of this rising interest in digital payments.
A Singapore dollar-backed stablecoin, XSGD, was launched on the Coinbase cryptocurrency exchange on Wednesday (Oct 1) in partnership with its issuer, StraitsX. It is pegged to the Singapore dollar at a one-to-one rate and is fully backed by reserve assets held by DBS Bank and Standard Chartered.
XSGD will also serve as the underlying currency for OKX Pay transactions, where users in Singapore will be able to use USDC and USDT stablecoins at GrabPay merchants by scanning SGQR codes.
So, what is a stablecoin, and what does it mean for one to be backed by the Singapore dollar?
As the name suggests, a stablecoin is a form of cryptocurrency designed to maintain a stable value relative to a certain asset. Its volatility is far lower than other cryptocurrencies and largely comes under two categories.
Fully reserved stablecoins are generally backed at a one-to-one ratio by liquid assets such as fiat currencies or short-term government securities. This is where stablecoins like XSGD, USDT or USDC fall under. Each fully reserved stablecoin issued is backed by an underlying asset, which helps to stabilise its price.
In XSGD’s case, this means that Standard Chartered and DBS hold a real-world asset of equivalent value for every unit of XSGD issued. That means that for every one XSGD in circulation, there is one Singapore dollar held in reserve accounts by the banks.
The second type is algorithmic stablecoins. These maintain their peg not at a fixed one-to-one ratio, but instead through smart contracts that respond to imbalances in supply and demand by minting or burning tokens. Coins are minted when an algorithmic stablecoin’s price is above the peg, while they are burned when it trades below the peg.
The stablecoin market currently makes up about seven per cent of the global cryptocurrency market share, said the world’s largest asset manager, BlackRock.
Singapore’s StraitsX, established in 2019, provides regulated stablecoin payment infrastructure, issuing the XSGD, XUSD and XIDR stablecoins. It is part of the South-east Asian fintech group Fazz.
The company was part of the fintech company Xfers. Xfers was founded in 2012 and three years later became one the first Singapore-based startups to be incubated by Y Combinator.
In 2024, StraitsX received multiple major payment institution licences from the Monetary Authority of Singapore (MAS). Its XSGD stablecoin has been issued since 2020 and is acknowledged by MAS to be substantively compliant with the upcoming Single Currency Stablecoin regulatory framework.
Compared to other cryptocurrencies, stablecoins have significantly lower volatility. Their programmability also means they can be automatically controlled or managed.
Stablecoins can bypass fixed banking hours and global borders, offering improvements such as speed (nearly-instant versus traditional finance’s one to five business days), cost (as little as US$0.1 per international transaction) and inclusivity.
Kenneth Worthington, JP Morgan equity analyst, said: “They are easy to self-custody and transact, and they are also fast, particularly in the context of cross-border money movement.”
“One could even consider them a better form than fiat, as they can move quicker and less expensively across existing financial infrastructure in certain circumstances,” he added.
Still, not everything is rosy with stablecoins. They face run risks, in which a large group of investors redeem their holdings simultaneously.
A fiat example of a bank run occurred when Silicon Valley Bank collapsed in 2023 after billions of deposits were attempted to be withdrawn. In the crypto world, the algorithmic stablecoin TerraUSD collapsed in 2022 and marked the first major run in the crypto space.
Instead of being pegged to the USD directly, TerraUSD was pegged to US$1 worth of Luna, a native coin found on the blockchain Terra. However, as investors raced for the door, it lost its US$1 peg and caused a death spiral where more Luna coins were printed at increasingly lower value, which drove TerraUSD’s value down further.
Such collapses could spill over to other markets, destabilising the traditional banking system as well, JP Morgan said.
The role of stablecoins in the future of financial transactions is an “open question”, said the Bank for International Settlements (BIS) in June.
In July, McKinsey & Company said that stablecoin circulation has doubled over the past 18 months but still facilitates only about US$30 billion of transactions daily, or less than 1 per cent of global money flows.
Despite their advantages, they are still employed mostly as an “intermediary”, requiring abundant liquidity and venues for exchanging digital assets to traditional fiat currency, added McKinsey.
When it comes to XSGD, Danny Chong, co-chair of the Digital Assets Association (DAA) Singapore, said he is adopting a “wait-and-see” approach.
“I think what we are seeing with XSGD is a potential next step into what we see as liquidity into the weekends,” said Chong, pointing to stablecoins’ ability to fulfil cross-border transactions while banks are shut.
While he agreed that there is a strong theoretical use-case for it, he said the path to widespread adoption could be slow. The Singapore dollar itself has far lower foreign exchange demand (and thus utility) compared to currencies like the US dollar, while XSGD will also have to compete with widely-used digital banks like Revolut and overcome the inertia that applies to any new technological product.
Chong’s counterpart at the DAA, Chia Hock Lai, added that XSGD is unlikely to change the market dynamic where stablecoins are still largely used for cryptocurrency trading instead of real-world payments.
Stablecoins also fail three tests when assessing their ability to become a mainstay of the monetary system, said BIS.
It pointed to issues with integrity, saying that stablecoins have been the “go-to choice for illicit use”. Public blockchains’ psuedonymity can preserve privacy but also bypass integrity safeguards. Access to the crypto ecosystem directly through unhosted wallets where the user has complete control over their private keys and assets also means know-your-customer standards can be circumnavigated.
Next, stablecoins that are traded in secondary markets might also be transacted at a slight deviation from the fiat currency they are pegged to, lacking settlement functions provided by a central bank. This means they “fare poorly on singleness”.
Finally, they also lack elasticity, as the issuer’s balance sheet cannot be expanded at will due to a full cash-in-advance constraint. This is because stablecoins are backed by a nominally equivalent amount of assets.
Still, stablecoins like XSGD are expected to “coexist” with the traditional financial system and should end up primarily serving institutional use-cases that require speed and round-the-clock availability. But the level of their success still remains to be seen, as does the timeline until any such success is achieved.
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