Stablecoins: a brave new world

We’re entering an age when the nature of money is changing all the time. But some shifts are much larger than others. The rise of cryptocurrencies has been rapid and transformative in recent years as new funds are traded, exchanged and factored into the global economy.

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The changing face of money has also created confusion, however, with decentralisation coming with additional challenges. In this brave and uncertain world, stablecoins offer clarity, stability and a range of productivity and financial benefits. 

“Governments are accelerating research into central bank digital currencies, which are essentially government-backed stablecoin projects.”

Stablecoins are a specific type of digital currency pegged to real-world assets or market-based formulae. As such, they're a great way to avoid extreme price volatility while enabling the benefits of transparency, privacy and efficiency.

Like cryptocurrencies, they support digital transactions, transparency and privacy. But like fiat currency, they allow businesses to transfer value instantly and cheaply without risk of excess volatility.

As businesses look to benefit and governments seek regulation, the future of money is changing before our eyes.

A short history

Private sector stablecoins first launched with Tether (USDT) back in 2014 at a 1:1 ratio with the US dollar. Other examples include Circle’s $US Coin (USDC) from 2018 which is backed by multiple fiat currencies and cryptocurrencies and is also pegged to $US.

ANZ recently created the first Australian stablecoin backed by a bank, called A$DC, which it delivered to the Victor Smorgon Group through Zerocap.

Around the world, national governments are accelerating research into central bank digital currencies (CBDCs) which are essentially government-backed stablecoin projects.

In the US, the Federal Reserve is actively exploring CBDC options, and the European Central Bank is progressing its 'digital euro' project. The world's first CBDC has already been rolled out in The Bahamas with the 'sand dollar' helping to inspire early research in Japan, China, Sweden and Nigeria.

More than $113 billion in stablecoins have been issued globally with these coins often used as a “safe haven” for investors during times of volatility.

Driving demand

With a lack of centralisation and oversight, untethered cryptocurrencies can be subject to wild price swings. This is deeply concerning for business entities and global governments and has led to a growing appetite for regulation.

US Securities and Exchange Commission Chair Gary Gensler recently suggested it was time to regulate cryptocurrency markets. The Chair of the Federal Reserve Jerome Powell has also issued a call for regulation.

Stablecoins are a product of this environment where the advantages of cryptocurrencies are easy to see and the risks impossible to ignore. They have been developed to solve known financial problems in a fast-paced and increasingly global economy.

These cryptocurrencies offer the benefits of a streamlined digital economy under the stable paradigm of central banking traditions.

The following factors are driving demand for private and government stablecoin projects:

Speed. Stablecoins make financial processes faster. International money transfer is more efficient with multiple international bank accounts swapped for a single crypto wallet.

Affordability. Money is tokenised and maintained in its original form so it can be moved between locations, reducing fees and providing greater value for businesses and customers.

Simplicity. Peer-to-peer digital transfers are made more accessible with banks or other third parties not required to facilitate transactions.

Programmability. Stablecoins are essentially made up of code enabling features that can be added to adapt to changing business and customer needs.

Privacy. Funds can be transferred between locations and entities without compromising privacy.

Productivity benefits and potential impacts on business

The rise of stablecoins has come in parallel with the expansion of cryptocurrencies over recent years. Initially used to hedge assets and manage risk, applications are likely to expand as central banks look to increase regulation.

While still in their early days of adoption, the impact of stablecoins on the business world could be immense. Much more than digital-native versions of traditional currency, they could have novel applications and promote deeper levels of financial inclusivity.

For example, stablecoins could make it much cheaper for businesses to accept payments from distinct entities. They could also improve financial access for millions of people around the world and facilitate the ability of governments to send stimulus funds and run conditional transfer programs.

Sometimes promoted as a vehicle for programmable money, stablecoins could be used to support entirely new monetary and social policy programs. For example, they could be restricted or expanded based on specific goods and services, defined locations or calculated periods of time.

For businesses, stablecoins offer a range of tangible benefits including faster transactions, lower fees, simplicity, programmability and privacy.

Key advantages

Improved trading conditions

The primary use of stablecoins is to facilitate trades on crypto exchanges. Instead of buying cryptocurrencies directly, stablecoins function as an intermediary in a similar way to traditional fiat currency. They can be used to improve trading conditions and lower trading costs on the ground. They also provide an alternative to on-ramp and off-ramp congestion and associated expenses.

Reduced payment costs

Transfer fees and other banking charges can be significant. Instead of passing these expenses on to consumers, businesses can circumvent them with stablecoins. According to the World Economic Forum, the very existence of stablecoins could help to lower costs through the expansion of competition. With more global and open-loop payment options, existing financial institutions will be forced to deliver a more competitive environment. 

Efficient global transfer

According to the World Bank, low and middle-income countries received $US540 billion in remittances in 2020. This number is expected to reach $US565 billion in 2022. Stablecoins are an anonymous global alternative but, unlike cryptocurrencies, they provide a dependable store of value. This is a huge advantage for international businesses, especially those operating in developing nations. Anyone with internet access can benefit from a stablecoin account which is ideal for underbanked businesses.

Improved risk management

More than $A113 billion in stablecoins have been issued globally with these coins often used as a 'safe haven' for investors during times of volatility. Instead of dealing with Bitcoin fluctuations, for example, businesses benefit from the support of an underlying asset. 

Escrow and settlement

Stablecoin transactions are automated and transparent which makes them ideal for escrow and settlement cases. Disputes are greatly minimised as everything is publicly auditable and easy to track. Deposited tokens are held until all payment conditions have been satisfied.

High-yield lending

The global peer-to-peer lending industry is expected to grow by 25.4 per cent between 2018 and 2028. Stablecoins have the potential to revolutionise that industry. With double-digit interest rates, efficient trading integration and massive institutional demand, stablecoin lending provides exceptional opportunities for debt investors.

Over the next few years, the growth of stablecoins will be heavily influenced by market adoption and regulation. Often scrutinised by global financial regulators and supervisors, the future of private stablecoins not backed by fiat reserves will depend greatly on their classification as assets, securities or money market funds.

The development of CBDCs is also accelerating as the existing financial system looks to benefit from the digital economy while adding layers of regulation and control.

As developments unfold and currency offerings continue to diversify, stablecoins offer real tangible benefits to businesses across the world. 

Ryan McCall is CEO and co-founder at Zerocap, an Australian crypto asset investment platform for private and institutional clients.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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