Stablecoin: the beginning or end of cryptocurrency’s potential?
By Martyna Borys & Elvina Soogun
As with any emerging technology, blockchain technology has its fans and early adopters but its critics too. The debate as to whether the blockchain offers hype or hope continues. However, its attractive, digitalised ecosystem proposition has disruptors working around the clock to bring this technology into the mainstream. According to the Gartner Hype Cycle, the blockchain is following the typical trajectory for emerging technologies thus far, and forecasters, including Gartner, believe it will grow into a mature technology within ten years.
But where are we today? Many people argue that cryptocurrency is a major setback for the blockchain technology, distracting us from the truly valuable applications it could have in areas like traditional asset management, crossborder payments, smart property or smart contracts. The price volatility plaguing digital currency continues to be a big hurdle when considering blockchain’s potential within the scope of the future of money.
The latest and hottest crypto industry topic puts pause to this debate. Stablecoin is believed to overcome the volatility, grounding the decentralisation of cryptocurrency in a stability that could make it feasible for everyday use. The question is, will stablecoin put an end to the naysayers that say the promise of the crypto utopia will never be fulfilled?
Crypto’s Achilles heel
The dream is a borderless, digital currency that’s applicable for mainstream use, and works without the need for a central authority — and voilà — the latest crypto innovation promises just that. Stablecoin is set to help increase (create really) the viability of everyday financial transactions on the blockchain.
These coins are designed to slow the rapidly fluctuating rates to make sure that users can spend coins without the fear of seeing their value increase overnight. A crucial factor if cryptocurrencies are to make it into the mainstream is ensuring that inflation stays within safe and stable margins. Doing so will mean that people can actually pay for things day-to-day or sign a job contract in Bitcoins. At the moment, these scenarios have been technically possible but practically, far from reality.
So if volatility is crypto’s Achilles heel, how can we stave it off? Stablecoin offers three different approaches. Stablecoins are either backed 1–1 with fiat currency (Tether for example), apply price collateral (Maker DAO), or retain a computer algorithm that automatically adjusts the supply of coins in line with market price (Basis). The latter is rather interesting and is a system built on a concept dating back to 1668.
A bridge between worlds?
To date, the major problem for Bitcoin and other digital coins alike was that many crypto exchanges in the UK couldn’t accept pound deposits, as banks didn’t want to co-operate. This meant that crypto users couldn’t transfer any money funded by digital currency, trading via their bank or ‘cash out’ back into pounds at times of high volatility.
But today, this is changing. We’re finally entering an era where the big boys within financial services are forced to recognise that the potential of the crypto economy (Cryptoconomy) is real and it’s fast-changing the way people manage their wealth.
Financial services, including banks, are becoming more and more open to collaborate with crypto entrants and fintech start-ups. This September, the Swiss Bankers Association (SBA) issued guidelines to banks who may want to do business with start-ups. Tether has established a banking relationship with Deltec Bank & Trust, Goldman Sachs backed Circle for a USD-backed Coin and Alprockz and Swiss Banks partnered to create ROCKZ.
Giant enterprises are also placing their chips on crypto. One example is IBM’s partnership with Stellar, and Stronghold backed by Prime Trust. These are just a few cases, but the timing is too much of a coincidence. Could the introduction of stablecoin be a strategic factor shifting the tides? Maybe. Mitigating the inherent risk in crypto investing and trading has held financial services (and retail traders) back but this could be a turning point.
Stablecoins, unlike Bitcoin, Ethereum or Litecoin are not aiming to replace traditional money, but to work alongside it. And because stablecoins are only a derivative of a central bank’s currency, maybe banks are breathing a sigh of relief.
Compromise comes at a cost
Banks, as the consumers’ trust holders, will of course, push to retain as much power and control as possible while fintechs like Revolut have fought to negotiate painless access to cryptocurrency exchanges for its users. The most common use case for stablecoins at the moment is as a liquidity tool for cryptocurrency exchanges. However, this could soon lead to more complex projects, like building smart contract dividend payments and loans.
But stablecoin remains a double-edged sword. Some people argue that stablecoins aren’t the ‘ultima thule’ of cryptocurrency but actually a step away from the sheer potential that Satoshi Nakamura had conceived. If digital coins are tied to a currency that’s controlled by central banks — then stablecoins are very much dependent thus not the decentralised dream that enthusiasts envisaged. This is because they require significant trust in a third party — something that Bitcoin was designed to eliminate.
And, after all, Bitcoin has a still long way to go. See the recent, dramatic price drop as case and point. But in the meantime, stablecoin offers a way for some users to secure the stability they seek.
Caution: new era
2018 has been a year where the number of active stablecoin projects has dramatically increased. There are already over 50 in development globally. Peter Lee, editor of Euromoney, fairly summarised: ‘If Euromoney had an actual dollar for every plan for a new stablecoin we have been told about in the past fortnight, we would be thinking of, well, maybe not retiring but certainly heading out for a very fine lunch.” While it’s true that many projects have failed, there have been a few genuinely successful use cases which have made it through the hype.
Gartner concludes that blockchain technology is officially entering the trough of disillusionment. The world we imagine is one where you can transact value and assets day to day without being subject to the whims of a central authority.
But when it comes to stablecoins, an incredible responsibility lies with its producers. Fintech innovators need to take a stance in the debate, backed by sound arguments and strong proof points. If they are to guard their users from currencies supplied by central banks, they need to show leadership and shared responsibility.
Anthony Back, the head of content and research at Intrepid Ventures summarises this well: ‘(…) stable cryptocurrencies will be the first introduction to crypto for millions or billions of people. If the first experience is a massive violation of trust and the creation of unnecessary economic hardship, this could be a major setback instead of a leap forward for the open currency movement. It could make it much harder for legitimate cryptocurrencies to take hold, and could give governments the political will to massively hamper innovation in the crypto space.”
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