Challenged and put under tremendous pressure by the arrival of digital currencies, the landscape of banking and money will not be the same again. Therefore it needs to innovate to stay relevant in a society it has been serving for centuries, or die fighting with its boots on.
While digital currencies haters would use the volatility issue as a basis to pour dirt on bitcoin, stablecoin seems to have won the hearts and minds of some prominent experts. They say that stablecoin’s minimal price volatility relative to cash makes it slightly better and can help it to be easily exchanged.
Stablecoins’ interesting and unique features have the potential of attracting consumers gloally to adopt it as a means of payment.
“Low costs, global reach, and speed are all huge potential benefits,” two International Monetary Fund (IMF) agued last month.
“Moreover, stablecoins could allow seamless payments of blockchain-based assets, and can be embedded into digital applications thanks to their open architecture, as opposed to the proprietary legacy systems of banks,” Tobias Adrian and Tommaso Mancini-Griffoli explained.
However, these also come with notable risks that require prompt regulatory action.
Welcome to central banks?
One possible regulatory path forward is to give stablecoin providers access to central bank reserves. This also offers a blueprint for how central banks could partner with the private sector to offer the digital cash of tomorrow—called synthetic central bank digital currency (sCBDC), the IMF said.
Another approach is to require stablecoin providers to fully back coins with central bank reserves – the safest and most liquid assets available, Adrian and Mancini-Griffoli suggested.
“The People’s Bank of China, for instance, requires giant payment providers AliPay and WeChat Pay to do so.
“And central banks around the world are considering giving fintech companies access to their reserves – though only after satisfying a number of requirements related to anti-money laundering, connectivity between different coin platforms, security, and data protection among others.”
Store of value
The two IMF experts strongly believe that doing so will enhance the attractiveness of stablecoins as a store of value.
“It would essentially transform stablecoin providers into narrow banks, institutions that do not lend, but only hold central bank reserves. Competition with commercial banks for customer deposits would grow stronger, raising questions about the social price tag.”
But there are also clearer-cut advantages. Chief among these is stability, as backing is in perfectly safe and liquid assets. Another is regulatory clarity, as narrow banks would fit neatly into existing regulatory frameworks.
Furthermore, different stablecoins could be seamlessly exchanged thanks to the central bank settling all transactions. This would enhance competition among stablecoin providers, according the IMF’s ‘’From Stablecoins to Central Bank Digital Currencies’’ blog report.
Additional benefits include support for domestic payment solutions in the face of foreign-currency stablecoins offered by monopolies that are hard to regulate.
There is also better monetary policy transmission if pressure on currency substitution was alleviated, and interest rates were paid on reserves held by stablecoin providers—however distant the prospect.
Stablecoin projects
Currently, there are over 100 stablecoin projects being at various stages of development, Forklog reported back in April, citing figures from CoinMarketCap.
The US dollar remains the most popular peg currency among traditional and alternative stablecoins, according to CoinMaketCap, and with a share of the market hovering 75%, Tether seems to be dominating the stablecoin market despite competitors’ success.
Tether is a blockchain-based cryptocurrency whose cryptocoins in circulation are backed by an equivalent amount of traditional fiat currencies, like the dollar, the euro or the Japanese yen, which are held in a designated bank account.
Tether tokens, the native tokens of the Tether network, trade under the USDT symbol, according to Investopedia.
Pic credit: Edge App
