Institutional interest in crypto is progressing, confirmed by a Goldman Sachs survey, which found that 40% of the company’s high-net-worth clients were already exposed to cryptocurrencies. Stablecoins — which offer a more secure and steady option in the crypto space — have experienced hyper-growth, reaching a $119 billion market cap. The volatility of crypto has attracted more conservative investors to asset-backed stablecoins.
Stablecoins are a form of private money. As Christina Segal-Knowles, executive director for financial markets infrastructure at the Bank of England, points out, modern money is a combination of public and private funds, up to 95% of which in developed economies is private. She adds:
“If new forms of digital money can be made safe, they could potentially contribute to faster, cheaper and more efficient payments with greater functionality. They could increase the resilience of payments. And they could even have long-term benefits for financial stability.”
True stablecoins, which are non-interest-bearing coins designed to have a firm value against a reference currency or asset, have an important role in the future of global finance. They offer low-cost, safe, real-time payments. Doing so makes it cheaper to accept payments and easier for governments to run conditional cash transfer programs while lowering the cost of remittances and connecting the unbanked to the financial system.
We grew up with the gold standard; creating new financial instruments backed by gold and other real-world assets that protect value and allow people to borrow against their assets makes sense. The global monetary system as we know it is not that old — it’s only been 75 years since Bretton Woods.
Only 50 years ago, however, President Richard Nixon announced that the U.S. dollar would no longer be backed by gold as it had been since Bretton Woods. Now that system is under threat, not only from governments printing money as if there is no tomorrow and the resurgence of inflation but also from stablecoins.
In particular, Facebook’s announcement of the Libra project in 2019 made regulators sit up with its potential to become global and access billions of users through its social network platform. China is exploring cross-border payments in its digital yuan development, which could extend to the more than 50 lower middle income countries part of the Belt and Road Initiative. These countries are home to the majority of the world’s population. The rollout of the digital yuan could potentially unseat the U.S. dollar as the backbone of the global financial system.
Stablecoins and emerging economies
On the other hand, the potential positive value of stablecoins is in emerging economies and for populations under threat. Think of people watching the value of their hard-earned savings erode or citizens of countries like Venezuela and Lebanon watching their currencies nosedive. Think of how the global COVID-19 pandemic has exposed the urgent need for low-cost, direct digital transfers.
In a recent paper, Katherine Foster and other researchers highlighted that stablecoins carry the potential to facilitate secure and convenient transactions without volatility at a lower cost than mobile money held in a wide variety of non-bank wallets. That positive value is badly needed as global remittances, a critical development finance flow, have fallen during the pandemic due to job losses for migrant workers. Remittances saw their most serious decline in recent history, falling by almost 20% from $554 billion in 2019 to around $445 billion in 2020.
The humanitarian community also sees the potential and has pushed the boundaries on blockchain technology to improve the effectiveness and efficiency of its interventions. Ric Shreves, director of emerging technology at Mercy Corps, seesstablecoins as a compelling use case: “Imagine if we had a low volatility low-cost coin that was acceptable globally. How could that impact our work? It could impact our work from everything, from back-office operations, us moving money into difficult places, to actually doing direct distributions, to our program participants, there’s a number of really compelling use cases for that technology.”
Developing countries are already embracing crypto. The 10 top countries with cryptocurrency users globally include Kenya, Nigeria, South Africa, Venezuela, Colombia and Vietnam. The latest crypto report from Finder, a financial product comparison website, also reports that emerging economies like Vietnam, India and Indonesia are leading in the crypto adoption race. The trend of consumers from emerging markets in Latin America, Africa and East Asia turning to crypto may preserve savings they may otherwise lose to economic turbulence.
Stablecoins and the new financial order
Building a new decentralized financial system with stablecoins will fundamentally change how people save and use their assets and money. Here are some of the reasons why:
Stablecoins have the potential to overcome significant shortcomings and friction in existing cross-border payments, which is vital for remittances and reducing the cost of remittances.
Stablecoins can promote welfare as countries recover from the catastrophic consequences of the global pandemic with money distributions, like the stimulus packages currently being distributed to the millions of unemployed during the COVID-19 outbreak.
Stablecoins can positively impact financial inclusion — using electronic money for payments and savings will allow people to build digital histories, which are essential for access to credit.
Stablecoins can extend cross-border trading opportunities for small and micro businesses.
Commercially issued stablecoins could present an alternative for the unbanked and provide greater stability by giving them access to a store of value, enabling them to save without overcoming high barriers to entry for banking services.
“We’re going to have more humanitarian crises, sadly, as a result of COVID-19,” said Sofie Blakstad, founder and CEO of hiveonline. “And we’re also going to have less money. So now is the moment to really use tech to prove how we can deliver these goals more cheaply.”
Stablecoins and challenges
There are hurdles to achieve this. Despite their name, stablecoins do not guarantee stability. There is a lack of uniform standardized taxonomy for stablecoins. The United States Federal Reserve has called for a comprehensive regulatory framework for stablecoins. Moreover, any solution would need to address consumer protection, financial stability and financial crime prevention. Furthermore, there will be regulatory challenges across diverse economies, jurisdictions, legal systems and different levels of economic development. These challenges would require harmonizing legal and regulatory frameworks governing data use and sharing, competition policy, consumer protection and digital identity.
F. Christopher Calabia, a former senior vice president and banking supervisor at the Federal Reserve Bank of New York, raised five critical questions on the potential of stablecoins for the poor in his paper “Could the Poor Bank on Stablecoins?” These important questions were: Will stablecoin processing speeds be fast enough for the poor? Will technology available to the poor support stablecoins? What will stablecoins cost the poor? How will stablecoin issuers comply with e-money regulations? How will financial systems with limited foreign exchange reserves adapt to stablecoins?
We need the innovators to understand the financial needs of the poor and develop valuable tools for them. At the same time, we need the regulators to reconsider who may provide services and how. Today, we are in an exciting and experimental era of “reinventing money,” how we use it and how people earn it.
With the proper regulation, a stablecoin could be made safe for wide-scale use and fulfill its promise by enabling more funds to reach those in greatest need. For stablecoins to be useful to the poor, they will need widespread adoption by consumers, merchants, businesses and governments. With intentionality, purpose and a nuanced understanding of the needs of the poor, the blockchain community has the technology and the spirit to do this.