Do we need Stable Coins?

stablecoins-everywhere

TLDR. While most consider cryptocurrencies an investment asset class, we should not forget that the original purpose of decentralized digital currencies was to be used as currencies. Volatility has been the biggest obstacle for cryptocurrency payments. The use of cryptocurrencies as a payment method has been slow, but over time it has been gaining substantial momentum.

Making payments with Bitcoin has always been easy, but widespread acceptance by merchants has taken longer. Apart from trading Bitcoin on over 200 exchanges worldwide, on some exchanges like Coinbase you can accept Bitcoin payments for your business. Coinbase Commerce is a merchant app for businesses that make it easy to accept payments in Bitcoin and other cryptocurrencies and instantly convert them into fiat, to minimize the risks from price volatility.

A couple of days ago Grayscale, global leader in digital currency asset management, tweeted: “More than 100,000 merchants and organizations worldwide now take payment in #Bitcoin. Try using #gold to make your next purchase and see how far that gets you.” The company released this information as part of its “Drop Gold. Go Digital” campaign. The firm challenges gold advocates to name one store, that you can walk into and pay using the precious metal.

Reading a tweet like this is not surprising at all. From a merchant perspective, adopting crypto payments is a one way street. Crypto gives back to merchants a degree of control. Crypto payments resemble the behavior of cash. On the other hand, as a consumer, when you look at the payments infrastructure, using your card to buy something is simple and straightforward. But for merchants, the existing system is frustrating, complex and costly. Crypto payments reduce the middlemen involved in a transaction. Consumers pay merchants directly for goods and services.

While the Grayscale tweet is very true, it’s nothing new. It’s been presented by some media as a new milestone for Bitcoin.

The truth is that the number of retailers and merchants accepting Bitcoin crossed 100,000 globally in 2015. In 2018, over $1 billion in digital currency payments were processed by BitPay. A study by Paymentsense, a London-based card payment provider, found that 35% of the 504 surveyed SMEs think that crypto payments will be a part of the payments landscape in the future.

It’s only a matter of time before major online and bricks-and-mortar retailers start accepting Bitcoin and other crypto as payment methods. When you consider the adoption levels by merchants and the high number of millennials that hold cryptocurrencies, you can expect that the Amazon’s and Alibaba’s of the world, will eventually get into the world of cryptocurrencies. The only question is whether they will issue their own stablecoins, like Facebook did with Libra, or work with the coins that are already in the market.

Recently, Walmart filed for a patent of their own stablecoin, implementing two of the fundamental aspects of Facebook’s Libra: proving financial services for the underbanked and having a stable price through centralized fiat-backed redemption.

Stablecoins have received a lot attention. In the last half of 2018, three new stablecoins launched: USD Coin (USDC), Paxos Standard Token (PAX), and Gemini Dollar (GUSD). In 2019, large Fortune 100 companies joined. Facebook launched Libra and JP Morgan, its JPM Coin. Looking at stablecoin growth, they had an impressive 2018, and are going to capture even more market share in 2019. In December 2017, the stablecoins market had market cap of $1.2 billion and by December 2018 it had more than doubled to $2.6 billion.

Stablecoins are the catalyst for crypto payments, and will make a big difference in how fast cryptocurrencies will be accepted for payments.

The fastest payment method in the US, ACH (Automated Clearing House), takes 24 hours. On the other side of the Atlantic, a SEPA (Single Euro Payments Area) transaction can take anywhere between a few hours to over a day to settle. While there are faster payment options with service providers like Paypal or Stripe, they come with a cost, squeezing the profit margin for SMEs.

Several stablecoin issuers, including Paxos and Coinbase, are seeing a shift from using stablecoins for trading to using them for payments, and they are strengthening their efforts in this direction For example, Terra, a Korea-based stablecoin startup, has attracted over 240,000 online shoppers to try its payment app and processed over 380,000 transactions.

Coinbase has its own stablecoin, the USD coin (USDC). The overarching selling point of all of stablecoins across the industry is strikingly similar: a focus on convenience and reliability. As Coinbase claims, emphasizing financial inclusion: “Unlike regular US dollars, USD Coin doesn’t require a bank account. It doesn’t require that you live in a particular geography. And you can send USD Coin around the world at an extremely low cost in just a few minutes. This opens a lot of possibilities.”

Stable.Report, a site that monitors stablecoins, lists more than 230 projects that are either live or still in development. More than half were launched after 2017, which shows an incredible growth for this market. The top stablecoins are pegged 1:1 to the US dollar. The choice of the US dollar is because it’s the world’s reserve currency. But with a potential financial crisis, the US dollar might not be the best choice in the mid-term.

The IMF recently released “The Rise of Digital Money“, explaining how the rise of digital currencies will impact existing banking institutions. According to the IMF, cryptocurrency stablecoins will likely put some banks out of business

Stablecoins are incredibly important for the cryptocurrency industry. The increasing adoption of stablecoins will act as an important catalyst to popularize the use of cryptocurrencies as a mainstream medium of everyday transactions, as well as for other applications.

Yet, stablecoins are only a stepping stone for the evolution of the crypto market. Stablecoins do not represent the future of crypto, but they do represent the present. They reduce volatility for crypto commerce and to provide a gateway between the traditional finance, fiat money and cryptocurrency. The future really will be one of blockchain over banks.

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Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG. He writes the Blockchain Weekly Front Page each Monday and has no positions or commercial relationships with the companies or people mentioned and is not receiving compensation for this post.

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