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Will stablecoins be able to sail into the mainstream?

The main barrier for cryptocurrencies earning mainstream use has been the volatility of their value; frequent news stories of Bitcoin’s value falling significantly over a short space of time no longer cause any kind of surprise.

A key driver for the volatility in cryptocurrency markets is the fact that many cryptocurrencies derive their value from Bitcoin, Ethereum, or other well established cryptocurrencies. This means that one of the established coins crashing can, and frequently does, have a massive knock-on effect on the whole market.

Stablecoins aim to solve this through being backed by a stable entity to decouple their value from other cryptocurrencies, retaining the cryptocurrency benefits of speed, low cost and global reach while mimicking the stability of traditional money.

The majority of examples use fiat currencies for their backing, such as Bangkok-based THBEX, a stablecoin aimed at international transfers to neighbouring countries for SMEs, which is derived from the value of the Thai Baht (THB).

THBEX is just one of many examples across Asia, where the concept seems to have found its feet remarkably well. Inversely, the European and American response to Facebook’s Libra project have demonstrated that this part of the world is not ready to embrace the concept just yet. So the question remains, are projects such as Facebook Libra destined to fail, or is there hope yet for stablecoins?

 

Use Cases

While Facebook’s Libra announcement has been a key driver in bringing stablecoins to the awareness of the mainstream, several other players, from banks to smaller FinTechs, have been developing their own stablecoins for various use cases:

  1. Growing spend in developing countries: Facebook Libra, USD Coin and others are aimed at mainstream use, with an objective to enable spending in developing countries
  2. Simplifying cross-border B2B payments: Wells Fargo, JP Morgan Chase and others have developed their own stablecoins to harness the benefits demonstrated by the likes of Ripple in making cross-border B2B transactions much faster and cheaper
  3. Simplifying recurring payments: Using stablecoins enables the use of smart, automatically fulfilled contracts, promising to greatly simplify payments for loans, subscriptions, rent and salary payments. Combining this with the international reach that stablecoins can offer also provides benefits for migrant workers needing fast and reliable salary payments
  4. Stablecoin-as-a-service: Danish FinTech Aryze is an example of a company whose aim is to enable individual companies to launch their own private stablecoin. Their vision, which does not require too much imagination, is to enable individual retailers to create their own network of private stablecoins to incentivise repeat custom

 

Righting the ship in the storm of critics

Libra and other stablecoins have come under substantial criticism recently, highlighting several headwinds that need to be navigated:

Trust in the issuing organisation: Tether, the largest stablecoin and the 4th largest cryptocurrency overall, has been accused of issuing more currency than its financial reserves allow it to, i.e. if everyone suddenly sold in a panic they could not return everyone’s money. When asked to provide an audit of its reserves, Tether also refused. The company issuing the stablecoins needs to demonstrate that it is managed responsibly, from both a funding and operational perspective.

Concerns around fraud prevention: The UK’s Financial Conduct Authority (FCA) was the most recent to join the trend of criticising Libra. The FCA recently raised concerns that Libra could increase money laundering and suggested that Facebook needs to share data and be more collaborative if it wants the FCA to accept it. PayPal’s withdrawal from the project has also been linked to Facebook’s lack of action to address concerns about fraud. Stablecoin providers need to be open, collaborative and willing to adhere to existing regulatory frameworks.

Demonstrating stability: Hearing that these cryptocurrencies are “pegged” to the value of established fiat currencies probably provides more assurance than it should. NuBits was a famous example of a stablecoin that was unable to maintain its peg to the US Dollar, after investors switched en masse to jump on a rise in Bitcoin’s value. Even Tether saw a dip in its value in 2017, following a similar Bitcoin surge. Regulators and partners need to be convinced that this isn’t going to happen again before stablecoins can effectively fulfil the promise they have to offer.

 

What’s Next?

It is clear stablecoin has some way to go before achieving wider acceptance. Providers will need to convince the world that their coins are stable, secure and, perhaps most importantly, not out to destroy the financial system as we know it.

However, the high level of adoption in Asia and the growing number of projects in the West indicate that the industry is optimistic. Libra’s media attention seems at first like a damning indictment of stablecoin’s future, though it has enabled Russian-based messaging app Telegram to swim in Facebook’s wake with the launch of its Gram stablecoin. Gram shares the same global ambitions as Libra but, through developing it largely in secret, Gram has tip-toed its way to a November 2019 launch without much of the media attention and criticism faced by Libra. Only time will tell whether Gram can navigate these challenges post-launch.

The comparative success of Gram surely will not please U.S. patriots, but it certainly looks good for the future of stablecoin.

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Chris Holmes

Chris Holmes

Senior Vice President

KAE Consulting

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London

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