Stablecoins Begin To Look Beyond The Dollar (#GotBitcoin?)
Stablecoins are prevalent at all levels of crypto transactions these days, from the largest spot markets on exchanges like Binance to the trading pair of choice by many Hong Kong and mainland China OTC desks. The reason for the demand is simple: stablecoins provide a bridge between the fiat and crypto worlds. Stablecoins Begin To Look Beyond The Dollar (#GotBitcoin?)
However, not all stablecoins are the same. From currency peg to counterparty risk, there are two competing models duking it out at the moment: trusted and trustless stablecoins, with each referring to different levels of counterparty collateral risk.
We prefer trustless stablecoins as that model eliminates the counterparty risk of needing to trust a company, auditor, bank and humans in general.
The top 5 stablecoins in the market are all pegged to the US dollar and while USD is a reserve currency, that market is quite saturated already. In contrast, the opportunity in the other 180 fiat national currencies used by the majority of the world has barely been realised. That’s where the next frontier for stablecoins is.
In operating Bitspark in many emerging markets we have heard first hand from individuals, NGOs and companies how bank collapses are somewhat common and trust in government and banking is rock bottom. Access to digital cash that’s publicly visible and under the ownership of the individual would eliminate these problems and this is what Bitspark has been pioneering with PHP, IDR, VND pegged stablecoins for our remote money exchange agents.
Unique Trading Opportunities
There are interesting trading opportunities here too. Exotic currencies around the world almost always depreciate against the US dollar with recent examples found in Venezuela, Argentina, Turkey, Zimbabwe and Iran.
A good trade here would be to short those currencies via placing a dollar stablecoin as collateral to back the issuance of these currencies and then selling them for dollars. Bitcoin traders, merchants, and individuals need to use these currencies everyday anyway, so there is a market of buyers to which issuers can sell to.
Over time as the issued currency depreciates, the collateral value backing it becomes more valuable relative to the issued currency, enabling the issuer to withdraw or exchange excess collateral. Having already sold their issued coins on Day 1, they have effectively shorted the exotic currency without having to deal with any questionable local custodian – that’s almost impossible to do within traditional financial services
At Bitspark, we are creating trustless stablecoins for every currency in the world having recently launched an exciting product with Stable.PHP, a stablecoin pegged to the Philippine Peso backed by BitUSD (the first and oldest stablecoin in existence) using the Bitshares protocol.
I will be discussing more about some of the trading opportunities in taking short positions on Stable.PHP at this year’s Invest.Asia conference in Singapore. For example, when your collateral is BitUSD and you are issuing an exotic currency like Stable.PHP, you can take a leveraged position long or short.
Our set of exotic stablecoins will only be expanding through the year enabling more people to access a digital financial system in their local currency.
G7 Says ‘Global Stablecoins’ Pose Threat To Financial Stability
The G7 group of nations has reportedly drafted a report which says that “global stablecoins” pose a threat to the global financial system.
According to the BBC on Oct. 13, a draft report from the G7 outlined the various risks associated with digital currencies. It also said that, even if member firms of the governing Libra Association addressed regulatory concerns, it may not get approval from the necessary regulators, stating:
“The G7 believe that no stablecoin project should begin operation until the legal, regulatory and oversight challenges and risks are adequately addressed. […] Addressing such risks is not necessarily a guarantee of regulatory approval for a stablecoin arrangement.”
The G7 also states that global stablecoins with the potential to scale rapidly could stifle competition and threaten financial stability if users lose confidence in the coin.
The report will purportedly be presented to finance ministers at an annual meeting of the International Monetary Fund this week.
Further Problems For Libra?
The BBC states that, while the report does not single out Facebook’s proposed Libra stablecoin project, it could spell further trouble for the already beleaguered proposed payments system.
Global regulators are increasingly leaning on the project, with the Bank of England recently establishing provisions with which it must comply before it can be issued in the United Kingdom.
Facebook CEO Mark Zuckerberg will testify before the United States House of Representatives Financial Services Committee about Libra later this month. The head of the committee, Democratic Representative Maxine Waters, has been a noted critic of the project. Earlier this year, the committee drafted the “Keep Big Tech out of Finance Act.”
Libra has seen several major partner firms of its governing consortium leave the project recently. On Oct. 4, major payments network PayPal withdrew from the organization and was soon followed by Visa, Mastercard, Stripe and eBay.
Furthermore, Finco Services of Delaware initiated a lawsuit against Facebook, alleging trademark infringement, unfair competition, and “false designation of origin” regarding the use of the Libra logo. The plaintiff is also suing its former designer, who did the logo work for Facebook, for reusing the design.
Bitcoin Has Failed But Global Stablecoins A Threat, Say BIS And G7
Bitcoin and other early cryptocurrencies have failed as an “attractive means of payment or store of value,” says a new report from the G7 and Bank of International Settlements (BIS).
However, the October report, argues that widely adopted asset-pegged cryptocurrencies, or stablecoins, such as Libra are a growing threat to monetary policy, financial stability and competition.
Widely adopted stablecoins, dubbed “global stablecoins” in the report, have the potential to reach an international audience and have “significant adverse effects” on the current economic system, it argues.
Meanwhile, “[first generation cryptocurrencies like bitcoin] have suffered from highly volatile prices, limits to scalability, complicated user interfaces and issues in governance and regulation, among other challenges. Thus, cryptoassets have served more as a highly speculative asset class for certain investors and those engaged in illicit activities rather than as a means to make payments.”
Stablecoin taxonomy – defined as a money equivalent, contractual or property claim, or right against an issuer for an asset – will remain a preeminent legal question for the time being, the report continues. The effects of stablecoins on incumbent money systems such as wire transfers have yet to be fully understood as well.
While stablecoins may offer faster, cheaper and more inclusive payments, they can “only be realized if significant risks are addressed.”
In a footnote, the G7 report says the Swiss Financial Market Supervisory Authority’s (FINMA) handling of the Libra Association, which falls under the regulator’s purview in Geneva, agrees with the G7’s stablecoin recommendations.
FINMA recently said Libra highlights the need for international coordination and “appropriate prudential requirements” for all services offered over that of a payment system.
The report on stablecoins was prepared at the request of the G7 in July, soon after the launch of Libra back in June. While obviously directed in part at the project, the report only mentioned Libra in one footnote.
Responding to the G7, the Libra Association sent out a memo Friday saying the stablecoin is “not intended to change the role and influence of central bankers,” adding:
“Wallets and other financial services operating on the Libra Network (including exchanges and other on and off ramps) will have to comply with regulations, such as local capital controls, which can be tailored to prevent large scale flights from local currency to Libra coins in emerging markets.”
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