Stablecoins, despite their increasing market value in the previous two years, are unlikely to represent the future of payments, according to a blog post from the Federal Reserve Bank of New York.
In this blog, let’s find out if stablecoins are the future of payment?
What are stablecoins?
Stablecoins are a type of digital asset whose value is linked to the value of other money, commodity, or financial instrument. Stablecoins are designed to provide an alternative to the excessive volatility of the most popular cryptocurrencies, such as Bitcoin (BTC), which has rendered such assets unsuitable for widespread usage in transactions.
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What do economists say?
Stablecoins provide lower-cost, safer, real-time, and more competitive payments than what consumers and companies are used-to today, according to experts. As a result, they might make it easier for governments to administer conditional cash transfer programs and make it cheaper for companies to receive payments (including sending stimulus money). In addition, they have the potential to bring unbanked or underbanked people into the financial system.
However, stablecoins are at risk of being everything but stable without strong legal and economic foundations. As a result, they might implode like a faulty currency board, “break the buck” like money market funds did in 2008, or spiral into oblivion.
Let’s jump to what liquidity issues stablecoins face to understand the concept of stablecoins better.
Liquidity issues with stablecoins
Stablecoins are pegged to a safe asset, such as the US dollar, to stay stable. Stablecoins, according to experts, bind assets needlessly.
According to the researchers, locking up secure and liquid assets in a stablecoin structure prevents them from being used for other objectives, such as assisting banks in meeting regulatory liquidity requirements. As a result, the adoption of stablecoins may result in a scarcity of secure and liquid assets.
Tether, the company behind USDT, the most valuable stablecoin by market capitalization, is one of the country’s top commercial paper holders. USDT has a market capitalization of $72 billion, according to Tether.
Stablecoins that do not bind liquidity, such as ones based on algorithms, are considered hazardous and less fungible.
Stablecoins may have the same challenges as private bank notes, which are not deemed fungible and need anyone handling them to determine whether to accept any given note at face value.
Growth potential of stablecoins
- Inclusive of payment and finance systems
Stablecoins have the ability to drive payment system expansion and innovation, allowing for quicker and cheaper transactions. In addition, stablecoins may eliminate payment barriers and put pressure on existing payment systems to provide better services; since they can be used to transmit funds near-instantaneously peer-to-peer across digital wallets for potentially minimal costs.
Stablecoins may also contribute to a more accessible financial system by facilitating the emergence of DeFi, which is expected to necessitate stablecoins as a required component.
- Tokenized financial markets
Stablecoins may also play an essential role in tokenizing financial markets. For example, transforming securities into digital tokens on DLTs and trading and servicing them using stablecoins would be required. In addition, a tokenized market would allow real-time settlement at meager costs for delivery-versus-payment (DvP) transactions, such as security purchases. This might improve liquidity, transaction speeds, and transparency while also lowering counterparty risk, trading costs, and other market entry hurdles.
Certain asset types, such as real estate, may gain the most from this, as it allows for fractional ownership of tokenized assets and more transparent price discovery.
- Next-generation innovations
Finally, stablecoins have the potential to aid in the development of next-generation technologies. Web 3, a projected shift away from centralized web platforms and data centers toward decentralized networks, is one example of such an innovation.
In addition, the emergence of effective, integrated online payment systems will enable Internet services and social media platforms to shift their revenue from adverts to microtransactions under this paradigm.
What does it all mean?
The robust use cases that are now driving the adoption of existing public and institutional stablecoins are supported by the defining qualities of stablecoins, their cryptographic security, and programmability. On the other hand, these characteristics have the potential to spur innovation beyond existing use cases, which are primarily limited to cryptocurrency exchanges, specific peer-to-peer payments, and institutional liquidity management by massive institutions.
In the future, stablecoin technologies might see multiple applications and promote innovation in several sectors, including more inclusive payment and financial systems, tokenized financial markets, and the facilitation of microtransactions for technical developments like Web 3.
Stablecoins have had tremendous popularity over the last year as digital assets become more widely accepted and the applications of programmable digital currencies become clearer. However, this fast rise has sparked fears that it would have severe consequences for banks and the existing financial system.
Finally, if they are believed to be appropriately collateralized, dollar-pegged stablecoins can serve as a safe haven relative to other crypto-assets during times of market turbulence.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn’t represent any investment advice or WazirX’s official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.