Expert Insight

The rise of stablecoins. Will banks ever learn?

Marten Nelson, CMO of Open Banking platform provider Token.io, looks at why big tech companies are the biggest competition for banks and how the latter can avoid disintermediation and stay relevant in the new payments revolution as digital currency becomes king

This week, Facebook announced Libra, a stablecoin to be used for payment in WhatsApp and Facebook Messenger. This is pegged to a basket of fiat currencies to minimise fluctuation of its value.

TechCrunch wrote: “Facebook has finally revealed the details of its cryptocurrency, Libra, which will let you buy things or send money to people with nearly zero fees.”

Further, “Facebook wants to make Libra the evolution of PayPal. It’s hoping Libra will become simpler to set up, more ubiquitous as a payment method, more efficient with fewer fees, more accessible to the unbanked, more flexible thanks to developers and more long lasting through decentralisation.”

The big five, Facebook, Amazon, Apple, Microsoft and Google (FAAMG), are continuing to chip away at the banks. Over the last couple of years, I’ve been telling the latter they must stop worrying about the competition from peer banks. The real threat is from the large tech companies.

Customers want an instant, low-cost international payments service. Who do you go to (or, perhaps, who did you go to) when you need to make a payment? That’s right – your bank. Does your bank provide such a service? No. As a result, there is a gap between supply and demand. When incumbents don’t fill the gap, someone else does. Always. This is what leads to disruption. In most cases it’s not the technology itself that disrupts, but new business models.

This time is no different. Several stablecoin initiatives have recently been launched (or are in the works) that fill the gap for an instant, low-cost international payment without the involvement of banks.

Banks must realise who their real competitors are and form new alliances to address these new threats. Instant, low-cost international payments is a perfect catalyst for this. Banks should adopt a federated stablecoin that enables instant, low-cost international payments to compete with Libra and other initiatives.

This stablecoin must be bank-grade, meaning it is secure, safe, fungible between multiple issuers and with clear sight of source of funds to support robust AML and sanctions screening.

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