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Stablecoins in the 21st Century Financial System


Posted: Thursday, November 26th, 2020

Estimated Reading Time: 2 minutes

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The financial system, as we know it, is about to change. Stablecoins already represent an interesting proposition, despite many being reluctant to embrace new technologies.

However, as many of the world’s leading central banks pointed out lately, central banks digital currencies (CBDCs) are closer than we like to believe. By all means, a CBDC is not replacing any fiat currency. Instead, it takes its role further, showing a financial system that adapts to the needs of the new century.

Based on blockchain technology, stablecoins aim at being a means of payment within the network. One of the biggest advantages over, say, Bitcoin or other cryptocurrencies popular among retail users is the low volatility they have. After all, the name says it all.

Take Bitcoin, for example. Its 2020 performance so far into the year is nothing but spectacular. It rose over 300% since March lows, with few pullbacks. However, in the last 24 hours, it lost 12% of its value. Just like that.

Stablecoins

Stablecoins solve such problems. For this reason, some interesting projects are viewed as viable for the financial system and may even offer a road for central banks to take in their quest of issuing CBDCs.

Famous Stablecoins

Despite being early days, some interesting projects already exist. Tether, for instance, is a stablecoin born in 2012. It aims at facilitating investments into and out of crypto-assets and is meant for both wholesale and retail use. Embed in the Bitcoin blockchain, Tether uses the Distributed Ledger Technology (DLT) to hold assets and to lend to third party. Sounds familiar?

Another interesting project in the stablecoins universe is the one launched by J.P. Morgan a couple of years ago. The JPM Coin is tied to the U.S. dollar, and it is restricted to a small number of the investment bank’s institutional clients.

Moreover, it uses the blockchain technology to make instantaneous payments, and it is redeemed at part, in fiat currencies. Structured as a claim in the underlying U.S. dollar, it is backed up by one-hundred percent central bank money in U.S. dollars held by J.P. Morgan.

Other stablecoins exist too. Some not so famous (e.g. Gemini Dollar, TrueUSD), and some famous even before they are born (e.g. Facebook’s Libra). The road to full acceptance of one or more stablecoin into the international financial system is filled with many obstacles. For instance, one hurdle and potential threat is that wallet providers, at some point, may engage in fractional reserve banking.

However, this is how things start. First, on the drawing board. Next, testing the waters with small projects. Finally, big players (a.k.a. central banks) look into it.

Blockchain revolutionized the world in more ways than we like to admit. Stablecoins pave the road for future CBDCs.

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