Stablecoins: A pitched battle... for his wallet. New products have come onto the market that aims to displace banknotes and debit cards.

The adoption of new digital payment methods could bring significant benefits to customers and society: higher efficiency, more competition, broader financial inclusion, and more innovation. However, it could also pose risks to financial stability and integrity, the effectiveness of monetary policy and competition rules, as pointed out in a recent study by IMF staff, the first in a new series called "<a href="https://www.imf.org/en/Publications/fintech-notes/Issues/2019/07/12/The-Rise-of-Digital-Money-47097">FinTech Notes</a>."
<h4>Adoption of stablecoins</h4>
The adoption of new forms of money will depend on the interest they arouse as a deposit of value and as a means of payment. However, there are new products, such as stablecoins (stable digital currencies), which are substantially different from traditional ones, such as cash and bank deposits.

Although many stablecoins still represent a credit to the issuing institution or the assets underpinning them and many also offer surrender guarantees at face value (so that a stable coin purchased for 10 euro can be exchanged for a 10 euro banknote, similar to a bank account), there is no government support. There is a need to build private confidence by backing the issuance of these currencies with safe and liquid assets. Moreover, settlement technology is usually decentralized, based on the blockchain model.

<img class="alignright" src="https://www.criptonoticias.com/wp-content/uploads/2019/09/USDC-289x300.jpg" />

Times are changing. USD Coin recently launched in 85 countries, Libra - a product announced by Facebook- and centralized variants of the stablecoins business model are becoming widespread. So why are stablecoins becoming popular?

The advantage of stable digital currencies is their attractiveness as a means of payment. Low cost, global reach, and speed are, without exception, substantial potential benefits. Besides, stablecoins could allow blockchain-based asset payments with no intermediate steps and can be incorporated into digital applications thanks to their open architecture, as opposed to the proprietary systems that banks typically work with.

However, its greatest <a href="https://blogs.imf.org/2019/09/19/digital-currencies-the-rise-of-stablecoins/">attraction</a> lies in networks that promise transactions as easy as the use of social networks. <a href="https://www.cryptoknowmics.com/crypto/top-5-most-valued-cryptocurrencies-of-the-week-payments-multi-strings-and-bitcoin/">Payments</a> go beyond the mere act of transferring funds. Fundamentally, they are a social experience that brings people together. Stablecoins offer the possibility of better integration into our digital lives and are conceived by companies that thrive on user-centered design.

Large technology companies with substantial global user bases offer networks that are already in service and can quickly disseminate new payment services.
<h4>Risks of stable digital currencies</h4>
However, risks abound, and for this reason, the authorities must create an environment that maximizes benefits and minimizes risks. Authorities will have to innovate and collaborate across countries, but also across functions. We put forward six factors that could be taken into account.

<strong>First, banks may lose their place as intermediaries if they lose deposits to suppliers of stablecoins</strong>. However, banks are not easy prey. They will surely try to compete by offering their innovations (and higher interest rates). Besides, providers of stable currencies could recycle funds by transferring them to the banking system or decide to grant credit by opening their deposit mechanisms. In other words, banks are unlikely to disappear.

<img class="alignright" src="https://www.criptonoticias.com/wp-content/uploads/2019/09/Libra-300x194.jpg" />

<strong>Second, monopolies could arise</strong>. Technology giants could use their networks to marginalize competition and monetize information, using their exclusive access to customer transaction data. New standards of data protection, portability, control, and ownership are needed. Moreover, services must be interoperable to facilitate entry.

<strong>Third, weaker currencies could be at risk</strong>. In countries where inflation is high and institutions weak, local currencies may be disadvantaged against foreign currency stablecoins. This would constitute a new form of "dollarization" and could undermine monetary policy, financial development, and economic growth. As countries are forced to improve fiscal and monetary policies, they will have to decide whether it is in their interest to restrict stablecoins in foreign currency.

<strong>Fourth, stable currencies could promote illicit activities</strong>. Suppliers should show how they will prevent the use of their networks for activities such as money laundering and terrorist financing by demanding compliance with international standards. New technologies offer opportunities to improve monitoring, but supervisors will have to adapt to the increased fragmentation and geographic diversity of the stable digital currency value chain.

<strong>Fifth, stable currencies could lead to the loss of "seigniorage,"</strong> whereby central banks capture the profits generated by the difference between the face value of a currency and the cost of making it. Issuers could extract profits if their stablecoins do not earn interest, but the stable currency behind them generates a profit. One way to address this issue is to promote competition for coin issuers to end up paying interest.

<strong>Sixthly, there is a need to strengthen consumer protection and financial stability</strong>. Consumer funds must be safe and protected from bank runs. This requires legal clarity about the type of financial instrument that the stablecoins represent. One approach would be to regulate stable digital currencies as money market funds that guarantee a fixed nominal return, requiring providers to maintain sufficient liquidity and capital.

Stablecoins, therefore, present as many challenges as potential benefits, and authorities should consider forward-looking regulatory regimes commensurate with this challenge. The policies adopted today will shape tomorrow's world.

Digital Coins: The Rise of Stablecoins

I am an industrial engineer specializing in blockchain. Enthusiast of cryptocurrencies and writing the latest news regarding the Crypto world.

Digital Coins: The Rise of Stablecoins

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