By John Liu, Chief Product Officer, Fusion Foundation
Facebook and JPM Coin Suggest Mainstream Potential for Stablecoins
Global projects like Facebook Libra and JPM Coin have captivated the world with the potential that stablecoins (cryptocurrencies pegged to assets with perceived relative stability like the USD, the Swiss Franc—even gold or silver) might move to the mainstream sooner than some have envisioned.
Planned for launch as early as 2020, Libra will be backed by a reserve of real-world assets, including bank deposits and short-term government securities, making it more stable than other cryptocurrencies, while giving it an instant platform. Although its fate remains uncertainconsideringFacebook’s regulatory and privacy probes, Libra was positioned from the start asa direct challenge to existing central banking systems: “a more efficient, low-cost and secure alternative payment tool for people who can’t afford to transfer money using traditional methods,” according to the company.
Also this year, J.P. Morgan announced it had become the first U.S. bank to create and successfully test a stablecoin, saying its JPM Coin has the potential to transform global banking payment transfer for its institutional clients, an alternative to less efficient legacy bank payment systems such as SWIFT.
Lesser Known Challenges that Stablecoins Can Solve
While Libra and JPM Coin have captured the world’s attention for its mass market potential, the real sizzle for stablecoin is a ground game of real-world local use cases that are getting surprisingly little attention. Beyond the news headlines, what lesser known regional challenges are stablecoins uniquely positioned to address?
In partnership with the private sector, a groundswell of regions around the globe are turning to stablecoin to solve a range of problems, including digital payments, financial inclusion and infrastructure development. Whether consuming or providing services, municipalities comprise a vast ecosystem of contractors, consultants and agencies that need to interact and transact in order to maintain a region’s social infrastructure. However, the way these counterparties interact and transact – even in highly developed regions with ample resources like New York City – the provision of local services is often mired in complexity, fraud and inefficiency.
An even stronger case can be made for stablecoins in jurisdictions facing a range of acute challenges, such as access to banking services, transaction pricing opacity, fraud and settlement delays. Sidestepping some of the grand global use cases like Libra that trigger contentious geopolitical issues like monetary policy and national currency sovereignty, some jurisdictions are making early inroads using stablecoins given these factors to leapfrog local legacy infrastructure and exchange value digitally.
Current Use Cases: Targeting Regional Problems in Practical Terms
Blockchain initiatives dedicated to social impact around the world remain earlystage. But according to a recent study by Stanford University, “Blockchain for Social Impact, Moving Beyond the Hype,” more than half of social-good blockchain initiatives are expected to impact beneficiaries by the end of 2018. According to the report, blockchain’s most popular primary benefits are reducing risk and fraud (38%) and increasing efficiency (24%) – twin areas of critical need in fragile developing regions.
Regions have begun experimenting with stablecoins to solve for financial inclusion, access to capital markets, transaction transparency, cost-reduction and process efficiency that have the potential to help fragile developing cities be smarter and small- to mid-sized enterprises in these regions to participate in the digital economy.
In the next 20 to 30 years, stablecoin could be put to the greatest test in developing regions like Lagos, Sub-Sharan Africa, Cairo or Mumbai where populations are surging and yet the ability to provide services – even to participate in Requests for Proposals – is hampered by a lack of automation and access. Crisis conditions loom in such megacities in the absence of sustainable technology-enabled solutions to help cope with the diametrically opposed forces of growth and outdated infrastructure.
Use Case #1: for the Republic of the Marshall Island’s (RMI), current financial systems – everything from fragile paper notes, cumbersome ATMs and centralized banking – were an extremely poor fit due to the nation’s remote location and banking challenges of island life. For instance, many Marshallese transacting with families overseas face exorbitant remittance fees of 10% or more.
Last year, RMI announced it would be issuing the world’s first stablecoin that is legal tender. With the RMI SOV, Marshallese will be able to connect to the global finance network, boosting better business opportunity through vastly improved and more cost-efficient global banking connectivity and local financial service via a highly secure and auditable new national currency.
Use Case #2: the Philippines is already seeing an early push in blockchain and stablecoin innovation. Earlier this year, a leading Philippine bank launched its own fiat-pegged stablecoin dubbed PHX, which is pegged to the Philippine Peso (PHP). vPHX is part of a larger regional blockchain initiative launched last year by five rural banks in the Philippines called Project i2i aimed at improving island-to-island, institution-to-institution, and individual-to-individual banking, especially in rural communities.
Use Case #3: Fusion partner i4SD has managed hundreds of infrastructure projects with partners such as the United Nations Development Programme, the World Bank as well as these and other various national governments. i4SD is working on blockchain initiatives with a sense of urgency in relatively fragile developing countries around the world with local entrepreneurs and public organizations to ease access to electricity, water and connectivity.
Use Case #4: Even regions of the world that have ample financial resources and much older infrastructures than the US, such as the United Arab Emirates are going all in to build blockchain-based smart-cities that rely on stablecoins to leapfrog traditional centralized banking systems.
Tech Transformation on the Horizon
These use cases are harbingers of how stablecoins can be used to support an even broader range of financial functions, including cross-border lending and hedging FX exposures. But for stablecoins to realize their full potential, innovative blockchain technology needs to solve interoperability challenges that beset both local initiatives as well as well-funded global projects.
Today, Bitcoin, Ethereum and other crypto networksoperate independently, so transactions cannotbe conducted seamlessly and digitized assets cannot be exchanged easily between them. Instead, doing so requires two or more transactions in separate wallets on separate networks.
To obviate this cumbersome status quo, one of the most enticing areas of innovation is a new technology called Distributed Control Rights Management (DCRM). Blockchains and other distributed ledgers built with DCRM make it possible to transact across assets, cryptocurrencies and chains seamlessly, cheaply and securely. Such technological advances will help stablecoin as it matures by removing barriers of adoption and adding a more fluid and efficient layer for business transactions and value exchange.
Conclusion: Technology as the Great Equalizer
As local as well as large global stablecoin initiatives continue to innovate, regions around the world that will no longer be bound by the limitations of legacy infrastructure. Indeed, the digital technology will be a game-changing equalizer for smaller innovative countries like the UAE. Given guidance and support, such regions can take a fair share of the digital economy unconstrained by physical limitations.
Local pilots are attractingincreased involvement of global authorities, as highlighted in the World Economic Forum’s white paper, “Central Banks and Distributed Ledger Technology: How are Central Banks Exploring Blockchain Today?” Pilots backed by such agencies are particularly promising because, as gatekeepers of traditional finance, these agencies can serve as agents of change by encouragingthe innovation and regulatory safeguards that are needed for stablecoin’s large-scale adoption.
As they continue to evolve, stablecoins can provide myriad benefits for regions around the world, particularly where traditional banking systems have fallen short. Expect to see continued stablecoin innovation that supports faster, more transparent and cost-efficient cross-border value exchange, especially in areas that have higher rates of fraud and difficulty accessing the digital economy.