Stablecoins Are Evolving To Play A Critical Role In The Future Of Money

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Last week saw the U.K. government announce its intention to explore the potential of crypto assets, blockchain and especially stablecoins in transforming digital finance. 

The U.K. is aiming to become a “global cryptoasset technology hub” and to that end it plans to recognize some stablecoins as a valid form of payment. Those stablecoins will be brought under the U.K’s regulatory net and forced to comply with the government’s existing payment rules. 

As the name suggests, stablecoins are cryptocurrencies that are designed to have a stable value. That’s quite at odds with traditional digital assets such as Bitcoin and Ethereum, which are known for their extreme volatility. The constantly-changing value of traditional cryptocurrencies means many consider them to be impractical for most kinds of commerce. Stablecoins on the other hand, have their value pegged to that of a traditional fiat currency such as the U.S. dollar or U.K. pound, making them more suitable for mass adoption. 

The U.K. Finance Ministry said the plan is to bring stablecoins under its regulatory net in order to pave their way for use as a recognized form of payment. Select stablecoins will be regulated through the payments regulatory perimeter to create conditions for issuers and service providers to operate and invest in the country. 

The ministry said that by recognizing the potential of stablecoins and regulating it, it will be able to ensure they can be used by consumers reliably and safely. 

“We want to see the businesses of tomorrow – and the jobs they create – here in the U.K., and by regulating effectively we can give them the confidence they need to think and invest long-term,” said U.K. Chancellor Rishi Sunak. 

The Need For Regulated Stablecoins 

Regulators generally only give this much attention to new concepts when they’re already on the brink of disrupting the existing financial system. The U.K.’s move therefore adds weight to the growing body of evidence that suggests stablecoins – unlike Bitcoin and Ethereum – will play a vital role in the future financial system. While the exact nature of that role is yet to be defined, some argue they could eventually become the backbone of a future digital payments ecosystem. 

With the U.K. becoming the first major Western government to move forward on this idea, it suggests that big changes are coming to the financial sector. Such changes could bring a host of benefits for businesses and consumers alike, but they aren’t without risks. 

Proponents of stablecoins argue they can bring about benefits such as safer, lower-cost transactions in real-time, creating a more competitive payments ecosystem than what businesses and consumers presently enjoy. For instance, businesses would be able to accept digital payments more cheaply, while governments would be able to run conditional cash transfer programs, such as issuing stimulus checks, more easily. Stablecoins could also help to connect unbanked individuals and make it easier for them to access financial services. 

Those benefits will only be realized if a robust legal and economic framework exists to support stablecoins. Without regulation, fears persist that stablecoins could potentially become “unstable” and see their value collapse much like the Zimbabwean dollar did just a few years ago. 

Irrespective of the merits and faults of stablecoins, their rise has been well documented. Stablecoins have become a staple of the crypto ecosystem, used to underpin multiple DeFi services and as a haven for crypto investors during moments of exceptional market volatility. The question on everyone’s lips now is what to do about stablecoins, and the responses have been varied. Some argue there’s nothing wrong with the financial system as it is, though others counter that it’s hard to defend a system that has led to such wildly skewed income distribution – take the U.S., for example, where 15% of adults in the bottom 40% are unbanked and low-income workers, mostly non-Whites. 

Those with more open minds cautiously welcome new technologies, but say additional research should be done into the idea of Central Bank Digital Coins, or CBDCs, which are essentially central bank-sponsored stablecoins that would replace or live side-by-side with traditional fiat currency. 

Making major changes to how financial systems work isn’t easy, but governments don’t have to try and do it alone. Indeed, going it alone is probably a bad idea. Until now, the public sector has generally struggled with the deployment of digital financial services. The one exception is China, which had already processed more than 90 billion yuan ($14 billion) in transactions by the end of last year, since deploying its digital renminbi. 

Working with the private sector therefore has advantages, though any solution that’s adopted would need to address concerns around financial stability, crime prevention and consumer protection. 

The Role Of Stablecoins

A regulated stablecoin could be the key to transforming money. They have the potential to become the next evolution in a financial system that, for centuries, has relied upon a combination of public and private money. 

The modern financial system is based on a combination of public money and private funds. Public money includes things such as cash issued by central banks and digital claims against those institutions. On the other hand, private money is mostly made up of deposit claims with commercial banks. The public sector is responsible for the stability of money, while the private sector accounts for most of its liquidity, amounting to up to 95% of all money in circulation in most developed economies. 

Stablecoins would be a kind of private money. One of their key advantages is their ability to reduce the cost of digital verification. Through this, blockchain can potentially expand the role of both the public and private sectors in the provision of new money. The role of the public sector will be to facilitate this by connecting businesses with consumers, while the private sector will attempt to meet consumer’s needs with a variety of choices and services. 

To succeed in this transformation, governments like the U.K. will need to find the correct balance between the public and private sectors. If the public sector is over-emphasized, countries risk falling short in terms of speed to market, and in innovation and competition. Here, the history of the Internet plays an instructive role. Nations that harnessed the commercial aspect of the web generally came out on top. On the other hand, countries that placed too much emphasis on the private sector will lack robust regulatory frameworks and run the risk of unstable stablecoins and no consumer protection. 

To that end, governments would do well to work with private sector partners that have already created a robust stablecoin ecosystem. 

That means partners like Ardana, which is building a decentralized finance platform on the Cardano blockchain. Cardano is an ideal platform, as it’s one of the most established blockchains where transactions are processed via an energy-friendly proof of stake mechanism. It enables the fast, sustainable transactions that developed economies will require. 

Ardana’s main contribution to Cardano is the dUSD stablecoin, which is currently the only decentralized, collateralized and soft-pegged stablecoin on its blockchain. 

The main purpose of dUSD is to enable Cardano ecosystem users to borrow without high charges. With Ardana, users can mint, spend, send and receive dUSD across the Cardano blockchain. Each dUSD is generated by user-deposited collateralized assets such as Cardano’s native ADA token. So instead of converting ADA directly into a stablecoin, users can deposit ADA into an Ardana vault and receive a proportion of its value as a newly-minted dUSD loan. That gives the borrower instant liquidity. Later, users can return their dUSD to unlock their ADS tokens, paying only a small fee for the loan. 

Users can also receive dUSD by purchasing it from an exchange, or by accepting it for the payment of goods and services they deliver. dUSD is therefore able to function as both a digital asset and a traditional currency, and can be used as a unit of record, a store of value or a medium of exchange in transactions.  

With Ardana, governments already have access to stablecoin asset and ecosystem that’s built atop of a strong foundation with good market fundamentals. It’s also fully transparent with every transaction recorded onto the public Cardano blockchain. 

For governments, there’s a lot of value to be had by allowing for experimentation with different approaches. There may be merit to both the idea of CBDCs, perhaps for government issued loans and bonds, and for stablecoins in terms of consumer and business payments. So just as with today’s existing financial system, it may well be that the public and private sectors strongly compliment one another. What’s needed is technology-neutral regulation to improve transparency and standards, in order to encourage more competition among safe stablecoin solutions. 

For better or worse, China has already made a clear statement about where it sees the future of money and payments going, primarily led by the public sector. But history shows that a balanced approach has more chances of success. 

As nations like the U.K. look to catch up, the most important task going forward will be to develop a thesis of exactly what the future of money will look like, and which partners in the private sector can make it happen.