As 2024 concludes, financial markets are witnessing significant shifts, particularly within the world of cryptocurrency. As crypto investors profit, many cash out from more volatile assets, such as Bitcoin, to safer options such as real-world asset (“RWA”) tokens—tokenized representations of tangible assets traded on a blockchain, and stablecoins—assets pegged to traditional currencies like the U.S. dollar. The regulation of digital currencies is an ongoing focus for federal and state regulators (previously discussed here, here, and here). As stablecoin and RWA token products gain popularity with consumers, it will be interesting to see how consumer finance regulators choose to address the novel risks that these products pose.

Stablecoins in particular are increasingly seen as critical financial infrastructure, a trend evidenced by several major fintech companies launching new stablecoin-related products. Stablecoins are often deployed by investors on decentralized finance (“DeFi”) platforms to generate yield as part of a fixed income strategy.

As markets rise, investors tend to spend more and seek ways to amplify their gains. This is evident in crypto, where borrowing to increase exposure—known as leveraging—is becoming increasingly popular. In traditional finance, this might mean taking out a margin loan; in crypto, DeFi platforms allow users to borrow stablecoins like USDC against their crypto holdings. These loans often offer high interest rates for lenders, sometimes exceeding 10%. Another way to leverage in crypto is through perpetual contracts—a type of financial product similar to options but without expiration dates. The cost of maintaining these contracts for users is called the funding rate, which reflects the market’s appetite for going long on an asset. The demand for leverage keeps funding rates consistently high.

Synthetic Dollar Products

Synthetic dollar products—which combine exposure to market dynamics, like asset price movements, with a USD-pegged derivative—take advantage of investor demand for long positions. By bundling exposure to long positions with a USD-pegged derivative, they can offer returns of around 25%, far outpacing the 10-15% seen on popular DeFi platforms. This approach mirrors traditional financial tools like derivatives but adapts them for the crypto space. The success of synthetic dollar-structured products is evident, with the total assets of one such product surging to $4 billion in just a year.

The Future of Crypto and Stablecoins

As investors seek to lock in their gains, the growing wealth from crypto investments is expected to flow into lower-risk assets, including stablecoins and RWA tokens. Commenters speculate that the stablecoin market, currently valued at over $200 billion, could potentially grow to $500 billion or even $1 trillion by the end of 2025, driven by the technology’s increasing role in both retail and institutional finance.

Despite this growth, the crypto market remains inefficient, with unclear pricing and limited regulation. For example, the stablecoin project currently holding the largest share of the stablecoin market expends little effort to comply with regulatory frameworks. Nevertheless, the recent crypto boom is reshaping financial markets, creating new opportunities and challenges as the gap between traditional finance and crypto is bridged.

*Disclaimer: This article is for informational purposes only and is not investment advice. Please consult a qualified financial advisor before making any investment decisions.

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 Alexander Lazar also contributed to this article.