Silvergate Capital's recent decision to close its instant settlement service SEN, which has been a popular vehicle for institutional investors to transfer USD to crypto exchanges, is expected to increase the role of stablecoins in crypto trading, according to a report by market research firm Kaiko.
The closure of SEN has led to multiple firms, including Coinbase, Circle, Paxos, Binance.US, Galaxy Digital, and Gemini, suspending transfers and operations with Silvergate, which is a key banking partner to many digital asset firms.
Kaiko predicts that instead of depositing USD to crypto exchanges using banking rails, traders will transfer money to stablecoin issuers to obtain stablecoins and then deposit them to exchanges. However, the report notes that stablecoin issuers still need access to a crypto bank, so the risk is now further concentrated.
Stablecoins like Tether's USDT and Circle's USDC have become the cornerstone of crypto markets, replacing government-issued fiat currencies such as the USD to buy and sell cryptocurrencies. The report states that the number of fiat trading pairs has declined globally as stablecoins have grown.
Moreover, the role of the USD in crypto trading has been steadily dropping, with the number of new dollar trading pairs on exchanges falling to 326 from 400 in 2021, according to Kaiko data. USDT's dominance in bitcoin (BTC) trading volumes has recently reached an all-time high of 93% compared to the USD, a significant rise from only 3% in 2017.
Despite this, the report notes that for now, the USD and dollar-pegged stablecoins remain the foundation of the crypto-economy. However, growing complications with USD payment rails could upend this trend.
Overall, the Kaiko report suggests that Silvergate's struggles may have inadvertently given stablecoins a boost and that they will likely become even more ubiquitous among traders in the future.
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