Stablecoins allow anyone, anywhere access to tokenised fiat currencies. The next step in monetary technology is to merge the two functions of money (medium of exchange and storage of value) to provide access to assets previously only accessible to institutional investors.
Elsewhere in this issue we will explore some of the use cases for stablecoins, which can be viewed as combining the best qualities of traditional money – such as stability – with the technological benefits of digital currency.
One of the core elements of any new stablecoin solution is launch services, which enable the creation, issuance and management of the currency by supporting smart contract development, regulatory compliance and integration with existing blockchain networks.
Security is one of the most important aspects of this service offering according to Jade Mckinley, a developer at blockchain development company Turnkeytown, with enhanced security measures including robust encryption protocols and secure smart contract development protecting against hacking and fraud.
Another crucial aspect is the integration of regulatory compliance tools to meet the evolving requirements of global financial authorities, ensuring that stablecoins adhere to the necessary legal standards.
By using Stablecoin launch services,
issuers can create Stablecoins
with specific characteristics
Launch services
Mckinley notes that stablecoin launch services are likely to focus on scalability, enabling the issuance of large volumes of stablecoins. Improved interoperability with other blockchain networks and financial systems is also anticipated, enhancing the usability and accessibility of stablecoins across various platforms.
By using stablecoin launch services, issuers can create stablecoins with specific characteristics such as transparency, stability and regulatory compliance.
Anna Yuan, founder of Perena and previously stablecoin lead at Solana Foundation, acknowledges that a number of challenges to stablecoin implementation persist, including unclear regulations and hostility from banks.
On the question of how stablecoin launch services can facilitate the creation, management and utilisation of stablecoins and serve as a gateway for individuals and businesses – especially those in underserved regions – to participate in the digital economy, she describes the likes of Brale, Bridge and Paxos as key infrastructure that could help existing financial institutions tap into their user base and leverage blockchain to enable efficient money movement.
“However, those infrastructure players can’t really help underserved regions at this time due to the regulatory framework,” explains Yuan. “All three are MTL or NYDFS frameworks, which doesn’t really help with a bank in Somalia, for example, wanting to launch its own stablecoin to prove to its client base that it is not mishandling funds.”
Yuan says this type of infrastructure is key to converting legacy monetary and payments stacks built on century-old technology to a better stack using blockchain as the ledger and stablecoins as the payments token.
“The only way for stablecoins to be truly asstable as digital fiat is if they are backstopped by the central banks”
Anna Yuan
“To dive one step deeper, many central banks don’t have the best technology so it is hard to trust that they are keeping tabs on every bank and their respective accounts accurately,” she adds. “Having even permissioned blockchains would be a better solution to trusting a single ledger at a small country’s central bank, which could be subject to corruption.”
Price stability
Liquidity generally is the bedrock of price stability. Other factors that contribute to enhanced stability include reserve transparency, custodian trustworthiness and regulatory certainty.
One of the key talking points around stablecoins is their ability to promote financial inclusion and democratise access to digital financial instruments.
A bulletin issued by the Bank for International Settlements in March noted that retail access to financial services and products from regulated institutions has improved globally, with 76% of the world’s adult population having an account in 2021 – up from 51% in 2011.
However, most of this has been down to the expansion of cell phones and access to mobile money rather than to bank accounts, which for many people across the world remain as elusive as ever. For example, use of digital payments is lower than account ownership, especially in emerging market economies.
One of the key talking points around stablecoins is their ability to promote financial inclusion and democratise access to digital financial instruments
Zodia Markets recognises the potential operational efficiency associated with stablecoins – empowering institutions to streamline cross-border transactions, enable instant settlements and reduce costs through embracing the transformative potential of blockchain technology.
“Access to correspondent banking at the wholesale level has deteriorated over recent years, meaning access to cross border payments in many countries has become difficult or impossible. This has a knock-on effect at the retail level,” explains Nick Philpott, co-founder and head of partnerships at Zodia Markets. “Where it is available it can offer limited capabilities and/or be very expensive.”
Holding a stablecoin in an offshore jurisdiction is much easier and far more readily available, including at the retail level. Any smartphone can have a wallet capability, which can provide many people with a level of access to international finance and stable assets that they have never had before.
Improved control
“All of this can be done with superior risk and compliance controls compared with fiat currencies,” says Philpott, who joined the Stablecoin Standard advisory board last year to add his company’s collective experience to the shared goal of establishing standards of best practice across the stablecoin ecosystem. “As such, for many people stablecoins represent a means of access to basic finance, let alone digital finance.”
According to Philpott, lack of access to adequate banking on the part of issuers and distributors is the biggest obstacle to stablecoin implementation.
“The ability of stablecoin issuers and cryptoasset firms more broadly to get access to basic banking was starkly displayed when Silicon Valley, Signature and Silvergate Bank failed, which in turn impacted Circle and its USDC coin,” he says. “There are other challenges, but they all pale in comparison to the lack of access to banking.”
“Some of the work that Stablecoin Standard and its members have done in terms of podcasts, publications, events and providing responses to regulatory consultations has been very useful”
Nick Philpott
Philpott says Zodia Markets is fortunate insofar as it is majority owned by an international bank, Standard Chartered, which has allowed it to combine cryptoassets with wholesale FX pricing. “However, there are very few stablecoin issuers that are as fortunate,” he adds. “The only notable ones on permissionless chains are SocGen Forge’s EURCV and BTG Pactual’s BTG DOL.”
To overcome these challenges, he recommends education of banks to extend their risk appetite to include banking stablecoin issuers.
“Some of the work that Stablecoin Standard and its members have done in terms of podcasts, publications, events and providing responses to regulatory consultations has been very useful,” says Philpott. “We just need more.”
Yuan reckons the best thing a regulator could do is to recognise stablecoins as cash/digital dollars and make it part of something like FDIC. “The only way for stablecoins to be truly as stable as digital fiat is if they are backstopped by the central banks,” she adds.
Encouraging engagement
When asked what steps the industry could take to encourage more engagement with stablecoins by the international financial community, Yuan suggests that contrary to popular opinion, Tether focuses a lot of its efforts on real world adoption and payments use cases.
“I think this is the best way to demonstrate to the international financial community that our value proposition is not just DeFi trading,” she adds. “Circle also spends a lot of resources on promoting non-trading use cases.”
One of the key questions for proponents of stablecoins is the extent to which the stability of stablecoins is a critical factor in driving adoption and trust among users – and what could be done to further improve the stability of these cryptocurrencies. However, Philpott suggests that the stability of the issuers is a more important consideration.
“What most people fail to recognise is that one of the qualities of money is acting as a medium of exchange, which implies a medium and an exchange,” he says. “With fiat currencies, the medium is at par so it does not fluctuate – it is as stable as anything can be. However, the implicit and explicit costs of the exchange for a cross-border payment are significant, often measured in percentages.”
With stablecoins, the secondary market may imply there is some ‘instability’, which is really just a normal feature of a secondary market. Thus the medium may appear to fluctuate by a few basis points.
“Given that the implicit and explicit costs of the exchange of stablecoins are small – measured in basis points – the total cost of using stablecoins is significantly better,” he adds. “It matters much less that there is a secondary market that gives an impression of fluctuations in value.”
As for what the industry should be doing to increase engagement from the international financial community, Philpott believes the focus should be on corporate treasurers.
