Stablecoins: Would you like fry’s with that?
Here is our pick of the 3 most important Stablecoin news stories during the week.
Traditionally, money has been defined as an asset that acts as a unit of account, a store of value, and a medium of exchange. But what if we could unbundle money and be good at just one or two of the three properties but offer some additional features not covered by today’s Fiat money?
Economists have been interested in competition among currencies at least since the time of Hayek (1976)’s contribution, who suggested that a solution to the mismanagement of government-issued currencies would be competition among a variety of privately issued currencies. Hayek’s proposal for competing currencies, however, faced problems when confronted with the difficulty of establishing a system in which multiple assets could have all three defining properties of money.
The Central Bankers Bank the Bank for International Settlements (BIS) explored this topic and its implications.
In the meantime, privately issued stablecoins passed the 100 Billion mark, the largest being Tether which crossed 60 Billion, catching a few peoples attention. The primary use case remains for day traders to move in and out of Crypto positions, however, we are seeing more and more businesses using them for cross border payments. One of the issues raised by the BIS report was the potential for digital dollarization of smaller less well advanced economies.
The Riksbank (Central Bank of Sweden) plans to test its proposed central bank digital currency (CBDC) with commercial bank Handelsbanken as it moves on from having only simulated participants. The e-krona is set to move from the simulation phase to a testing environment with external participants, Reuters reported Friday.
Handelsbanken, the country’s largest bank by assets as of 2019, will work with the central bank to test how the CBDC could handle payments in the real world.
Sweden appears to be second only to China among major economies in the advancement of its CBDC plans, Reuters said. While multiple other countries are in active discussion and research, Sweden and China are the only ones to have begun testing, with the latter’s currently being rolled out to consumers on a pilot basis.
But maybe the Chinese CBDC will struggle to get out of its current trial phase. This article from Forbes questions its chances for success as it does not offer any advantages to consumers over the current electronic payment providers, Alipay and WeChat.
And on the physical cash front, Chinese investment bank CITIC Securities estimates that it would take years for the digital yuan to replace a mere 10% of physical cash in the country.
The digital yuan is also not expected to provide additional transparency and efficiencies promised by blockchain-based CBDC models, given that it does not run on a blockchain.
So in summary, unless a new form of money offers distinct advantages over existing ones, it will struggle. The BIS paper suggests that a method of achieving competitive advantage is not to compete on all three characteristics of Fiat money, but to be super good at just one or two. Which is what Tether and Circle are doing today, just focusing on being a stable store of value for those who want to be outside the Fiat system.
Alan Scott is an expert in the FX market and has been working in the domain of stablecoins for many years.
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