What is a Singapore dollar-backed stablecoin, and how does it work?
Coinbase users can trade XSGD, the only Singapore dollar-backed stablecoin, from Wednesday
[SINGAPORE] Stablecoins have been around for more than a decade now.
Currently valued at US$250 billion, the stablecoin market is 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 and Standard Chartered.
XSGD will also serve as the underlying currency for OKX Pay transactions, through which 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?
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What are stablecoins?
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.
Stablecoins largely fall 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. Stablecoins such as XSGD, USDT and USDC fall under this. Each fully reserved stablecoin issued is backed by an underlying asset, which helps stabilise its price.
In XSGD’s case, this means 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 of stablecoins are 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; they are burned when it trades below the peg.
BlackRock, the world’s largest asset manager, said the stablecoin market makes up about 7 per cent of the global cryptocurrency market share.
What is StraitsX, the XSGD issuer?
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 of 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.
Why use a stablecoin at all? Are there risks?
Compared with 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$0.10 per international transaction) and inclusivity.
Kenneth Worthington, JPMorgan equity analyst, said stablecoins 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 attempts to withdraw billions in deposits.
In the crypto world, the algorithmic stablecoin TerraUSD collapsed in 2022, marking the first major run in the crypto space.
Instead of being pegged to the US dollar 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, driving TerraUSD’s value down further.
JPMorgan said such collapses could spill over to other markets, destabilising the traditional banking system as well.
What does the future hold for stablecoins like XSGD?
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 said 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 for traditional fiat currency, McKinsey noted.
When it comes to XSGD, Danny Chong, co-chair of the Digital Assets Association (DAA) Singapore, said that 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,” he said, 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 added that the path to widespread adoption could be slow.
The Singapore dollar itself has far lower foreign exchange demand (and thus utility) compared with currencies such as the US dollar, while XSGD will also have to compete with widely used digital banks such as Revolut and overcome the inertia that applies to any new technological product.
Chong’s fellow co-chair at the DAA, Chia Hock Lai, added that XSGD is unlikely to change the market dynamic where stablecoins are largely used for cryptocurrency trading instead of real-world payments.
BIS said stablecoins also fail three tests when their ability to become a mainstay of the monetary system is assessed.
It pointed to issues with integrity, saying that stablecoins have been the “go-to choice for illicit use”.
Public blockchains’ pseudonymity 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 that 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 such as 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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