Stablecoin and Ready Reckoner = accelerating growth

A ready reckoner is a printed book containing pre-calculated values, often multiples of given amounts, available in the UK before decimalisation in 1971 – when 12 pennies became 10. Stablecoin is a new digital form of money and represents the paper money at par, for example, one Wyoming’s new Stablecoin, Frontier is equal to one US Dollar.

The end user 

For the end user, business or consumer, it acts as has the same value as existing currency. The deliver though by digital wallet and compatible with mobile phone’ collection of readily available payment options such as, Applepay, Googlepay, Visa and Mastercard. The digital wallet, a necessary, can operate on the mobile phone and can connect bank accounts apps.

Licensed Service Providers (LSP)

LSP are licenced by the regulatory authority in that country and are licensed by approved “Commissioner”. For example, Wyoming is the first US state to issue a stablecoin using the new Federl Regulations.  The Hong Kong Monetary Authority’s (HKMA) new stablecoin regulations has attracted 77 enquires from banks, technology companies and investment firms about becoming LSP. HKMA provides the option to issue stablecoins in other countries for example China Renminbi once legally permitted.

The Reserve

An accumulated amount that equals coins outstand plus any extra margins deemed prudent. These reserves are held in high quality liquid short term government debt. For Frontier it is US T-Bills and a regulatory set mix of averaged weight maturities. Held by a Custodian and managed by an Investment manager with board representation independent of the LSP.

Ready Reckoner 

The concepts used are parameters affecting the cost of the reserve. The table below includes market interest rate and overtime the retention rate of the coins in the reserve. This can be split into two: coins that return (redeemed) and those that stay in circulation. The Federal Reserve Board of Governors estimated foreigners hold $950 billion US Banknotes. This is great economics for the US as no interest is paid. Residents of countries with less reliable institutions and more political and economic instability tend to hold international currency as a safe  haven. The top five such currencies are: USD, euro, Yen, GBP and Chinese Renminbi. 

Stablecoins, like currency, when allowed to roam, becomes an inexpensive asset for that country economy. The digital wallet allows it’s user to pay or exchange or swap fiat and crypto assets at any time with immediate and final settlement. 

Given a stablecoin will be used like a dollar bill then the reserve could recognise ‘non-redemption’ as positive. LSP could be rewarded, over time, for creating a minimum of redemptions. An example being with a reward for coins in permanent circulation.

The good news is the bond market is familiar with this type of activity. These methods can include reversing a sinking fund bond – turning into a raising reserve.  A sinking fund bond, well accepted in the US, sets aside revenues over time to repay debt. For Stablecoin, the need to repay from the reserve occurs when a redemption is needed. In the meantime, all stablecoin in circulation can redeemed from the reserve less the alliance for the ‘circulation’. 

This ‘interest free money’ appropriation in the “Reserve” can enthuse the issuance of stablecoins worldwide. For example, if only 30% of the stablecoin remains in circulation then at a 4% T-Bill rate, then LSP cost becomes 13% against the initial 4% T-Bill rate. If the most optimistic views of stablecoins come true, then 90% of all Stablecoins could remain in permanent circulation. 

In the days of Bearer Bonds with coupons attached, over time, fewer coupons would arrive for payment. The issuer of the bond continued to pay 100% of the coupon amount due. This money was left with the paying agent and no interest earnt for the Bond Issuer. 

Digital Stablecoin Infrastructures

With regulation it is pleasing to see a digital infrastructure of professional custodians, exchanges, investment managers and clearers forming. It’s great to see Crypto currency companies moving to stablecoin announcing the use of an established bank custodian. Hopefully we have seen the last of the line ‘well we took advice’ and failures such as Terra Luna Stablecoin which left 280,000 out of pocket.

Summary

The money in banknotes circulating the world, for example US’s £950 billion, costs nothing. LSEs must have like for like reserves. Stablecoins issued into digital wallets where the user is in control, redemption seems remote. The owner of a stablecoin can sell or exchange it for fiat - both domestic and FX - or crypto assets immediately with final settlement. 

A new digital and safer infrastructure is following the regulators. As such putting the future for Custodians, Investment Managers and Clearers looks promising.

Spare a thought for the traditional banking business technology. Thankfully no need to panic as 50% of all banking systems use COBOL, a 60-year-old computer code, 95% of ATM (of dear physical cash and 80% of in-person banking activities. What’s that Corporal Jones, Stablecoins using digital wallets?

 https://www.youtube.com/watch?v=rjxseHuUSYI