Ripple announced its plans to launch a stablecoin, pegged 1:1 to the US dollar (USD). Ripple’s stablecoin will be 100% backed by US dollar deposits, short-term US government treasuries, and other cash equivalents. These reserve assets will be audited by a third-party accounting firm, and Ripple will publish monthly attestations.
“This is a natural step for Ripple to continue bridging the gap between traditional finance and crypto,” said Brad Garlinghouse, Ripple CEO, in a statement. “Institutions entering this space are finding success by partnering with compliant, crypto-native players and Ripple’s track record and resiliency speaks for itself, as we launch new products and acquire companies through multiple market cycles. This move is also monumental for the XRP Ledger community, driving more use cases, liquidity and opportunities for developers and users.”
At launch, the stablecoin will be available on the XRP Ledger (XRPL) and Ethereum (ETH) blockchains, with plans to expand to additional blockchains and decentralized finance (DeFi) protocols and apps over time.
Monica Long, Ripple president, said in a statement: “The XRP Ledger’s native capabilities, including a decentralized exchange and automated market maker, were built to utilize XRP as the bridge asset. Bringing a trusted stablecoin onto XRPL will drive more adoption and development, contributing to a vibrant ecosystem.”
Market context according to ESMA
In a recent TRV analysis, the European Securities and Markets Authority (ESMA) wrote that as of December 2023, stablecoins represented a combined market capitalization of around $130 billion, equivalent to 8% of the overall crypto market. The largest stablecoins were Tether ($95 billion), USD Coin ($25 billion) and Dai ($5 billion).
The once third largest stablecoin, Binance USD, has almost disappeared in 2023, after the US SEC accused its issuer, Paxos, of offering unregistered securities and it was ordered to stop minting new tokens. Euro-denominated stablecoins remain negligible at present, with a combined value below €500 million.
“The stablecoin market is thus highly concentrated, similarly to the overall crypto market, with Tether alone accounting for around 70% of the market capitalization and 80% to 90% of the trading volume (relative to all stablecoins),” wrote ESMA. “It should be noted that Tether has repeatedly faced controversies regarding the opacity around its reserves, and some analysts even claimed it was not fully backed by assets.”
Despite their promise to keep a stable value, stablecoins frequently deviate from their peg, especially in situations of wider crypto market stress. One notable situation occurred with the collapse of the Terra-Luna ecosystem in May 2022, which exposed the inherent fragilities of algorithmic stablecoins and caused contagion in the wider crypto market. Tether temporarily fell about 5% below its peg.
In March 2023, USD Coin faced a similar liquidity crunch and temporarily lost its peg when its issuer revealed a sizeable exposure to the failing Silicon Valley Bank. It took USD Coin three days to recover its peg. Smaller and less traded stablecoins, such as TrueUSD, seem to de-peg frequently. These events raise considerable concerns regarding stablecoins’ implicit promise of price stability.
Moreover, stablecoins should be scrutinized closely as they can act as risk transmission channel between crypto and traditional markets. The EU’s Markets in Crypto-Assets (MiCA regulation) has a particular focus on stablecoins and introduces a comprehensive set of rules for stablecoin issuers.