Money volatility is unavoidable, as stocks and currencies constantly fluctuate in price and value. Cryptocurrencies are somewhat synonymous with volatility and risk, the opportunity for large gains and the potential for equally large losses. In order to combat this, stablecoin has emerged. Stablecoin reaps the benefits of cryptocurrency, whilst mitigating or minimizing volatility, the best of both worlds which attracts the gaze of risk-averse investors. Find out what are the opportunities and threats in banking using stablecoins.
Fluctuation Halting Cryptocurrency Emerging Into Daily Transactions
Cryptocurrencies have been viewed as a risky investment, considering the myriad headlines with Bitcoin or Ether drastic rises and falls in value. Ultimately this is due to their small market cap, which creates price volatility, such that throwing a stone into a pond will create more pronounced ripples than throwing a stone into the ocean.
The fluctuation has halted cryptocurrency emergence into the realm of daily transactions. Worker wages, mortgage payments, or simply buying groceries are unable to be conducted with cryptocurrency since not all people want to bear the risk of value fluctuation.
Stablecoin: A Cryptocurrency That Avoids Volatility
However, it has been combated with the emergence of stablecoin, a type of cryptocurrency that avoids volatility. Stable coins are pegged to traditional assets, such as gold or fiat currencies, avoiding fluctuations which is a powerful allure to the conservative investor. They move in value alongside the physical asset, therefore as the value of USD increases, there will be a corresponding increase in the USD stable coin.
What Is The Benefit Of Investing In The Stablecoin?
One might question the relative benefit of investing in the stable coin, as opposed to investing in the currency or the physical asset. Alongside the traditional benefits of cryptocurrencies, such as transparency, privacy, security, decentralization, and low transaction fees, stablecoin also provides efficiency. For example, there is a digital asset tracked against the real-world value of gold. The digital asset holds the same value as the corresponding weight in gold, without possessing the tangible gold nugget. Gold has traditionally been seen as a safe investment with low volatility, and the gold stablecoin moves correspondingly to the gold price.
Selling A Physical Asset vs Selling A Digital Asset
The benefit of holding the stablecoin as opposed to physically holding gold is that the digital asset could be sold almost immediately, at current pricing, using a computer or phone. Selling physical gold involves appointment booking, validation, and price valuation, which is a lengthy process. The Bank for International Settlements (BIS) issued a report in October of 2019, which stated “Stablecoins might be more capable of serving as a means of payment and store of value, and they could potentially contribute to the development of global payment arrangements that are faster, cheaper and more inclusive”.
Stablecoins Aiming At Being Ubiquitous In Society
Stablecoins aim to be ubiquitous in society and to be used in daily transactions. Economist and US Federal Reserve’s Board member, Lael Brainard, said “Stablecoins aspire to achieve the functions of traditional money without relying on confidence in an issuer—such as a central bank—to stand behind the money”. Stablecoins are backed by fiat currencies, but also have an extra layer of security. In order to combat fiat currencies crashing, the stable coin can easily be exchanged for stablecoin equivalents of another currency, or even gold, mitigating risk.
Banks Able To Use Stable Coins In Payments
Recently this year, the Office of the Comptroller of the Currency (OCC) announced that banks could use stable coins in payments. Under the report, national banks are authorized to optimize blockchain networks to store and record transactions, given the increasing demand for fast payments.
Brian Brooks, the comptroller of OCC, said “Our letter removes any legal uncertainty about the authority of banks to connect to blockchains as validator nodes and thereby transact stablecoin payments on behalf of customers who are increasingly demanding the speed, efficiency, interoperability, and low cost associated with these products”. Given the cutting-edge developments of the stablecoin industry, it facilitates the merging of banks and cryptocurrency. With OCC guidance, banks can now settle over broader payments with stable coins and even issue their own stable coins. Following the report, the investment banking company JP Morgan released the JP coin in October 2020.
Pressure On Banks To Build Compliant Platforms
Following the issuance of the act allowing banks to issue stablecoin, it fuels the pressure for banks to build compliant platforms. Max Dilendorf, from Dilendorf Law Firm PLLC, said “The interpretive letter is not a huge development, but it will be important to banks to stay up to date before their business model is wiped out”.
Risk Involved With The Adoption Of Stablecoin
As each coin has two sides, there are some risks involved with the adoption of stablecoin. These extend from lack of legal certainty, which the OOC act tended to address, but also regulatory governance, money laundering, cybersecurity and data protection, consumer protection, and tax compliance. Stablecoins are dependent on their underlying asset, therefore fiat-based stablecoins follow decline as fiat currencies crash.
As the trend towards unbanking grows, stablecoin supply is expected to increase over time. People are looking for faster, more secure, easier, and cheaper ways of sending payments across. As old bank institutions are adopting stablecoins, it is a testament to the changing new landscape, as stablecoins are becoming embedded in society. Maybe it is not far-fetched to purchase a coffee in the future with a digital stablecoin.
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