Future State of Stablecoins

Future State of Stablecoins

The Acceptance of Crypto-Assets

Emergence of Stablecoins

Stablecoins are digital currencies that transact on a digital ledger and rely on cryptographic validation techniques otherwise known as blockchain.

They were born from the broader more volatile cryptocurrencies to achieve “stability”, hence the term “Stablecoin”.  No different from traditional markets and fiat currencies, they were mainly used by traders to hedge against volatility, allowing cryptocurrency traders to move funds frequently, in and out of exchanges at low costs.

Stablecoins attempt to achieve stability in value by tying it to one or more assets.  The stabilization mechanisms can be broadly broken out into two categories 1) asset-linked Stablecoins are issues that are backed by physical or financial assets in order to maintain a stable value (e.g. currency, commodity, cryptocurrencies or a basket of any one of those) 2) algorithmic based Stablecoins attempt to maintain a stable value using protocols that control the supply based on changes in demand.

Stablecoins broadly have the potential:

· For a more efficient payment system where cost of managing cash is high

· To promote financial inclusion because there is no need for consumers to have a bank account

· To facilitate efficient cross-border payment

· To encourage further innovation in the financial service sector

· To reduce financial crime

· To enhance privacy of digital transactions

If the benefits of Stablecoins mentioned above were to get leveraged by the global community, it could spark mass adoption of other crypto-assets by legitimizing its use cases.

Growth of Stablecoins

A new class of cryptocurrency has been on the rise and it has amassed over $25 billion this year; up nearly 300% year-to-date.

The recent growth in Stablecoins can be attributed to several factors.

· Relative to other cryptocurrencies, Stablecoins are a safe place to park ones’ assets without cashing out to fiat currency and incurring fees.

· The popularity of Decentralized Finance (DeFi) due to offerings of high yield by a variety of decentralizes exchanges such as Uniswap and Curve.

· With geo-political uncertainty, Stablecoins may be seen as a way to mitigate volatility in ones’ investment portfolio (individual or corporate).

Top Technology firms, Banks and Cryptocurrency exchanges see the benefits of Blockchain and race to its use case in the payment industry.

Large technology firms such as Alibaba, Amazon, Apple, Facebook and PayPal have increasingly moved into payments drawing on their vast network of customer data to introduce innovative profit-generating payment services. Facebook, the largest social media platform in the world, created its own digital coin “Libra” which continues to be experimental today but plans for it to be a type of Stablecoin that leverages the distributed ledger technology. U.S. regulators have expressed concerns, including Jerome Powell (Chair of the Federal Reserve), as to how Libra would deal with money laundering, consumer protection and financial stability. Despite the regulatory hurdle, this instills the belief that if Facebook is able to successfully address regulators concern, Libra can potentially be adopted to empower billions of people by providing access to safe and affordable financial services. JP Morgan, the largest U.S. bank, created its own digital coin “JPM” and it is currently being used commercially for the first time by a large undisclosed technology client to send payments around the world. Recently, JP Morgan has also created a new business unit called Onyx with over 100 members as a result in the major shift in the financial service industry.

JP Morgan has also rebranded what was formerly known as “Interbank Information Network” to “Liink” to create production grade, scalable, peer-to-peer blockchain based network of over 380 banks and corporations. These commitments have exemplified JP Morgan’s support in blockchain and its application to financial services.

Only July 11, 2019 president Donald Trump tweeted in the past that if Facebook and other companies wanted to become a bank, they must seek a new banking charter and become subject to all banking regulations. On September 2020 Kraken, one of the largest cryptocurrency exchanges, did exactly that and became the first digital asset company in U.S. history to receive a bank charter recognized under federal and state law, and will be the first regulated, U.S. bank to provide comprehensive deposit-taking, custody and fiduciary services for digital assets. Avanti Financial has followed a month later to become the second bank to be granted a bank charter and plans to issue “Avit”, a programmable electronic currency that is redeemable at par with a U.S. dollar.

Central Bankers becoming Digital Bankers

Central Bankers are starting to rethink the fundamentals of the payment system in light of the rise of Stable coins and blockchain technology. A recent Federal Reserve paper by Wong and Maniff explores the potential benefits Central Bank Digital Currencies can have and discuss how programmable digital assets may change monetary policy. Terms such as “programmability” and “smart contracts” were once only used by the “Ethereum” community, a cryptocurrency native asset. Despite the growth in the value of outstanding Federal Reserve notes in circulation over the last two decades, Wong and Maniff imply that cash may be at elevated risk as there has been an acceleration in declining cash use in some countries while the growth and adoption of digital currencies has not slowed. On the backdrop of a pandemic induced financial crisis, the U.S. recently printed more money in June than in the first two centuries leading the budget deficit to be more than $3 trillion dollars with $2 trillion worth of Federal notes in circulation.

Leaders of the largest economies in the world notice the rise of Stablecoins

The world’s largest economies have also been noticing the rise of Stablecoins and its risk to the stability of the global financial system and the existing regulatory, supervisory and oversight approaches. With the assumption Stablecoins continue its adoption across multiple jurisdictions with substantial volume, the G20 has mandated the Financial Stability Board (FSB) in June 2019 to address the potential risks raised by Global Stablecoins (GSC). As a result, in April 2020, the FSB proposed recommendations (Appendix A) to address the risks which are the first steps of the broader roadmap to enhance cross-border payments commissioned by the G20.

Conclusion

Despite the negative opinions of Cryptocurrencies by the media, the activities mentioned in this report by top institutions and regulatory bodies are encouraging and should give some credence that the momentum will continue. Macroeconomic events will continue to be a key tailwind driving interest and investment around the world. Stablecoins, and more broadly Cryptocurrencies, are continuing to be developed by the growing community for various use cases and the adoption and usage of underlying networks have been rapidly growing. We expect the industry to continue to mature over the next several years and believe digital assets will be further adopted by the individuals, corporations and governments.