Stablecoins need more than the dollar to thrive
Stablecoins have the potential to become a truly meaningful application of blockchain technology but continue to be held back by a lack of consideration of their fit within the existing financial ecosystem.
These cryptocurrencies, which are pegged to real-world assets like the euro or U.S. dollar, have great appeal to traditional organizations. They possess the benefits of cryptocurrencies without the volatility of Ethereum or bitcoin. In light of Facebook’s Libra project, this has caught the attention of regulators like the Financial Stability Board who recently urged G20 finance ministers and central bank governors to carefully consider how the issuance of a global stablecoin might impact the economy.
We need to be realistic about how stablecoins are structured if the industry is to truly realize the benefits they offer. Here are a few issues industry proponents should keep in mind.
In many ways, 2019 has been the year of the stablecoin and we can expect to see more developments on this front. After all, stablecoins offer a cheaper way to make international transfers than banking options, which come with expensive fees and commissions.
They also process transactions faster than the usual two to three days that the Swift network takes and are not limited to working hours or time zones.
Stablecoins help to solve problems around transparency and security in a way that fiat currencies have yet to. Approximately $2 trillion is laundered each year through the international banking system. A stablecoin would keep transactions auditable and trackable without infringing on an individual’s financial privacy.
A stablecoin will only be meaningful if the underlying asset has relevance to the market’s needs. Yet, the U.S. dollar, which the majority of high-profile stablecoins are pegged to, has proven to be a limited solution.
Since its issuance, concerns have risen around the structure of the most popular U.S. dollar-backed stablecoin — Tether. Until now, there has not been satisfactory clarification around who is auditing the USD reserves, which back the token (USDT). There are also clear conflicts of interest around cryptocurrency exchange Bitfinex’s ownership of USDT.
Tether’s failure to resolve these issues has led to loss of its monopoly on the market. Several projects such as USDC, TUSD and PAX have emerged as competitors for this market share but still face similar hurdles.
However, a euro-backed stablecoin can provide much more value for a crypto-enabled financial system. To understand why, it’s important to first consider the role that Europe and the euro play in the global financial system.
Let’s look at the macroeconomics — the U.S. has triple deficits across its public budget, saving-investments and current accounts occurring at the same time. According to OECD data from Q2 2018, the U.S. has had a negative current account balance equal to -2.40% of its GDP and a fiscal deficit of almost $1 trillion.
In comparison, markets which use the euro have experienced the opposite with a positive current account balance which amounted to 1.18% of the region’s GDP. In the long term this positions the euro to be a currency that is more ideal than the USD. The amount of trade happening within the European Union is also of considerable size. According to the World Trade Organization, the EU accounted for 34% of world trade in 2017.
If cryptocurrency is going to meaningfully disrupt international payments and trade finance, then it must integrate with the international trade process in a relatively frictionless way. In the near to medium term, this will only happen if companies have access to a cryptocurrency, like a euro-backed stablecoin, that is denominated in the same currency as the prices of the goods they’re buying.