Stablecoins: a brave new world

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.

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.

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.