As 2020 unfolds, stablecoin development is already stepping up a gear. Investors, institutions, and even governments are seeing the benefits of cryptocurrency minus the price volatility.
The stability of these digital coins makes them appealing not only to central banks, but also to global corporations ready to shake up the traditional financial industry.
The benefits of using stablecoins
The primary advantage of stablecoins over Bitcoin (and similar digital assets) is their immunity to sudden price fluctuations. By definition, a stablecoin is designed to offer stability, as it’s tied to an asset or basket of assets.
The issuer can peg the stablecoin to exchange-traded commodities (such as oil or gold), other crypto-assets, or fiat currency. The goods in question back the digital asset, making significant price fluctuations less likely – although some are inevitable.
Users can still access the benefits of cryptocurrencies without sacrificing price stability, making simple transactions much easier.
This major plus creates a bridge between cryptocurrency and the traditional financial systems to provide users with the best of both worlds.
Stablecoin development has a series of advantages that could revolutionise international payments, as well as the way people store and use money.
Stablecoins are ideal for fuelling the remittance markets
Stablecoins can greatly improve the current payment system and all related services as they make cross-border payments faster and cheaper. This benefits both providers and end-users.
Moreover, stablecoins make financial services affordable for millions of people who are otherwise denied access to these services (the unbanked).
Stablecoins facilitate peer-to-peer payments
Traditional payment systems may have improved lately, but the system still lacks efficiency and can be tedious, slow, and expensive.
Stablecoins can power platforms to reduce costs and speed up peer-to-peer payments, with benefits for trading, everyday payments, e-commerce, and end-users who need to transfer small amounts.
In other words, stablecoins eliminate borders and minimise the costs of currency exchanges.
Leaders in stablecoin development
While most people in the cryptocurrency ecosystem praise the benefits of stablecoins, there are still a few hurdles to overcome. Stablecoins face a series of legal and regulatory challenges before they can have a genuine impact.
There are over 200 stablecoins on the market at the time of writing, but not all of them were created equal.
The most popular is still Tether (USDT), which owns about 94% of the stablecoin market. Its value is tied to the US dollar, as the issuer’s reserves back every USDT with one dollar – or, at least, this is what the company claims.
Moreover, during these legal battles, Tether’s statement that its stablecoin is 100% backed by USD has been called into question.
The other famous stablecoin that grabbed all the headlines last year is still in the development phase. Facebook’s Libra has made it to the front pages worldwide ever since the first rumours about it emerged in May 2019.
The idea of a global stablecoin governed by a private corporation that has access to over two billion users has triggered unexpected reactions.
Governments and central banks in most countries around the world decided to ban Libra long before its official launch as a way to protect their own national currencies.
But with so many possibilities coming to light, stablecoin development could make a big jump to turn 2020 into the year of state or corporation-backed digital coins.
Where central banks stand on stablecoins
Many states are quite advanced when it comes to stablecoin development, insisting that central bank reserves should back stablecoins.
The Central Bank of China, for instance, has been working on a central bank digital currency (CBDC) that will enforce control over the Chinese public and potentially spark a de-dollarisation of world trade.
Russia’s Central Bank is also experimenting with stablecoins in its regulatory sandbox, according to a statement by Chairman Elvira Nabiullina.
Other countries that have been considering CBDCs as a viable solution include Sweden, France, Japan, Singapore, South Korea, and Thailand. The European Central Bank (ECB) has also been analysing the merits and dangers of CBCDs as a new form of base money.
The potential of stablecoins is luring many private and public organisations into digital currency. Whoever manages to break the ice and launch the first stablecoin to disrupt the global monetary system will likely establish itself as a dominant player.
While Facebook hopes to be the pioneer in stablecoin development by launching Libra this year, it remains to be seen whether it can overcome the governmental barriers in an unwelcome political environment.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.