Digital currencies like stablecoins are getting increased attention from governments and international communities alike. Let’s take a look at why this is the case.
There are a few factors driving the search for a global digital currency: the volatility of national fiat currencies, the increased demand for banking the unbanked, and the need for more cost-effective solutions for cross-border transactions are probably the three strongest factors. Large corporations like Facebook and Google, as well as independent projects like EOSDT, have been working for several years now to introduce their stablecoin solutions. Even some governments are investigating their own potential approaches.
Will this search for an improved currency come to fruition? Will the new global currency be stable and blockchain-based?
This article provides an independent opinion on whether an existing stablecoin can become an international means of payment like the US dollar, and at which price do the stablecoins have the potential to go to the distance.
Becoming the next US dollar
Let’s look at the practical benefits that stablecoins offer as an asset class.
A stablecoin is a digital currency backed by an asset reserve in order to maintain price stability. Stablecoins essentially combines the benefits of everyday stable assets with the benefits of cryptocurrency.
Despite being called “currencies,” cryptocurrencies (like Bitcoin and Ethereum) generally struggle to meet that definition, as they’re not backed by any real-world assets. This results in extreme volatility and unexpected price jumps. It makes crypto assets attractive for high-risk investment and speculation, but hardly applicable for day-to-day transactions.
However, cryptocurrencies aren’t the only assets that suffer from a lack of stability: multiple national currencies (especially those from developing countries) are prone to extreme volatility provoked by political and economic events. Recent examples include the Venezuelan bolivar (which suffered a 95% devaluation), the Zimbabwean dollar, and the Turkish lira, among others. This volatility has a disastrous effect on the daily lives of the people in these countries — they can never be sure how much their morning coffee will cost, much less manage their big-picture finances effectively.
Lower transaction costs
Wire transfers through banks or online payment systems commonly require high fees, which can be unbearable for people working abroad to earn a living for their families.
Those high costs come from financial institutions that act as intermediaries to process the transaction on both sides. Each one takes its own bite out of the transferred sum. But with blockchain-based currencies, those fees can be significantly reduced, as the technology enables every transaction to be carried out on-chain, in an automatic peer-to-peer manner.
International money transfers are slow. They can take up to three days to process. With distributed ledger technology, those transactions can be settled in a matter of minutes, no matter where the parties are based.
Who are the challengers?
Stablecoins offer a number of benefits that make them a great fit for the international payment. However, it’s still early, and there are some questions remaining on the table: will one stablecoin emerge to be the prevailing digital currency? What will it take to get there?
There are so far three main categories of players working on stablecoin solutions. Each one has its own advantages and drawbacks.
Central Bank Digital Currencies
The world is slowly getting rid of cash payments: countries like Korea, Finland, and Sweden are already predominantly cashless. So, central banks don’t want to miss out on the digital currency game — instead of letting citizens use third-party currencies that they don’t control, the question for big banks becomes: why not introduce their own digital currency?
- In January 2020, president of European Central Bank Christine Lagarde stated that her organization is bullish on digital currencies and their potential for improving payments in the European Union.
- In December 2019, France announced its plans to test a central bank digital currency for financial institutions. (The country had previously taken active measures against Facebook’s Libra stablecoin.)
The list of countries that have confirmed (or hinted) that they will introduce their own digital currencies includes China, Russia, Sweden, and the Bahamas, among others. National stablecoins would probably be highly controlled and centralized, enjoying only a portion of benefits that the distributed ledger technology can offer.
Stablecoins by large corporations
Several large international corporations have made moves in the stablecoin department. But for the most part, they’re doing this to solve particular business problems:
- JP Morgan issued its own dollar-backed stablecoin for instant money transfers, making it the first bank to do so.
- The Swiss stock exchange SIX has announced that it’s developing a digital franc to settle securities trading.
These developments mark great practical applications for stablecoins, but they are hardly aimed at becoming a means of payment to operate on a global scale.
In June 2019, the Libra project was announced in partnership by Facebook, eBay, Uber, Booking.com, and other corporations. Libra represents an attempt to launch an international payment system with a stablecoin at the center of the picture, backed by a basket of currencies for use by billions of Facebook users. The concept was so troubling for financial institutions (they would be removed from the process entirely) that it was met with severe resistance from governments and eventually came to a halt.
A number of independent projects like EOSDT, MakerDAO, and USDT are currently focused on creating stablecoins, and each approaches questions of stability and transparency differently. These smaller entities are more flexible than large governments and corporations, so they can offer a variety of unbiased solutions.
EOSDT, for example, is a USD-pegged stablecoin by Equilibrium that leverages EOS collateral to bring new liquidity to the cryptocurrency market. Equilibrium also used its own capital to establish a “Stability Fund” consisting of more than $23 million of capital, ensuring that users will get their funds back in case of extraordinary market events. It’s a figurative insurance policy that protects its users from a lack of market stability.
Whether by governments, corporations, or financial technology startups, a number of stablecoin solutions are in the works. Yet, it seems like transparent, community-based stablecoins created by independent market players that have the most to offer for the daily needs of regular people.
Cheap and speedy transactions that use stability mechanisms to tackle volatility issues make stablecoins perfect for daily payments and international money transfers.