Monica Singer CA(SA) Blockchain Evangelist for Consensys
Stablecoins promise to make transacting as easy as using social media. Payments are not just about sending money to each other, but about connecting to other people, just like we do on social networks. Stablecoins integrate into our digital lives in ways that fiat currency (currency issued by a central bank) cannot.
Stablecoins are crypto-assets that maintain a stable value against a target price (such as USD). Stablecoins are designed for any (decentralised) application that requires a low threshold of volatility to be viable on a blockchain. Volatility prevents the widespread adoption of cryptocurrencies as a store of value. Because they are subject to huge fluctuations, they do not represent a proper means of exchange nor unit of account. Indeed, no business would ever be likely to accept digital currency when their value can drastically drop the day after.
Volatility also makes it harder for anyone to accept a currency as a ‘unit’ since there is no common acceptance on how much it may be worth or will be worth. A measuring unit, by definition, should remain stable. Volatility transforms what were meant to be cryptocurrencies into speculative crypto-assets. With less volatility, crypto-assets will reach a much broader audience. Anyone that wants to benefit from advantages of blockchain technology (transparency, security, immutability …) without losing guarantees (for example trust and stability) provided by fiat currencies needs a stable cryptocurrency.
New forms of money and their adoption will greatly depend on two things: if they can be used as a store of value and if they can be used as a means of payment.
Stablecoins have developed into a competitor to traditional bank accounts. Stablecoins are very attractive as a means of payment because they solve some very basic and important problems, that exists with today’s payment systems: cost, reach, speed and openness. They offer lower costs to send money anywhere in the world, almost instantly and an open architecture that allows us to embed them, into digital applications. They solve all the things that closed and proprietary legacy banking systems cannot. They have the potential to reach millions of people that never had access to financial services.
It will be essential to ensure that the collateral being used for the creation of the stable coin is in fact in existence and revalued on an ongoing basis to match one to one to the Fiat or other form of collateral that has been tokenised in order to create the stable coin.
Facebook announced Libra. Walmart is prepping for the Walmart Coin. USDC issued by Coinbase is available in 85 countries. JP Morgan created a digital asset for settling transactions between institutional clients. Binance announced Venus.
In the short term, fiat-collateralised stablecoins will dominate. In the future, we’re going to have digital wallets that can store any Fiat, Walmart, Facebook, Google, Apple, Alipay, WeChat, etc, currencies.
The Upshot
- The IMF has said that ‘stablecoins are a threat to banking and cash’.
- The use of stablecoins will reduce the influence that central banks currently have in setting monetary policy in each country.
- I recommend that central banks issue their own digital stablecoin backed by the fiat currency they issue. Stablecoins should be regulated by clarifying which financial instrument the particular stablecoin represents.
- Banks may lose their place as intermediaries if they lose deposits to stablecoin providers. Banks should get involved in creating and or using stablecoins for transaction banking.
