2019 Will be a Big Year for Stablecoins – Redux
Philippe Bekhazi, is the CEO of cryptocurrency-trading firm XBTO Group.
When I penned an article for Coindesk in December of last year, I made some (at the time) bold predictions about why 2019 would be a trailblazing year for stablecoins. In hindsight, my calls were not lofty enough as the velocity of change and development in this dynamic industry continues to astound even crypto ‘veterans’ such as myself.
Consider that within just 6 months, the crypto winter has transformed into a bull market, and as we head into summer Bitcoin is trading north of $12,000, a rise of approximately 216% year-to-date, making it the best performing asset class of 2019.
However, my call on the breakout year for stablecoins was not and is not predicated on the price movement of cryptocurrencies. It is due to the growing need for a stable, collateralized asset token sitting on a secure blockchain, used to hedge against crypto volatility and act as a more optimal mechanism to move value around in stable terms.
Perhaps the biggest development in this sphere this year is Facebook’s Libra project, a significant undertaking and consortium that aims to create a stablecoin payment mechanism to be used across some of the world’s largest retailers and technology vendors.
While it is early days and this gargantuan project faces challenges and regulatory scrutiny, its sheer scale and buy-in from household brands marks a milestone and validates our thesis that demand for stablecoins as an efficient means of global, cross-border payments and e-commerce will only grow. While it is hard to handicap exactly where and when Facebook’s Libra project nets out, the fact that it is bringing Congress and Central Banks to the table shows the pull that digital currencies have in a new world order.
From a deeper dive operational perspective, here are some practical questions that need to be addressed about Libra’s efficacy and implementation:
- Taxes, taxes, and taxes. Libra is not a currency under most legal definitions, which means it will be taxed most likely in the same way as Bitcoin, at least in the USA. That creates enormous amounts of friction and reporting to be compliant. Will Facebook create an automated way of doing this, or will the IRS create clearer rules and guidelines in this regard? This is a big unknown that could create a major stumbling block if not addressed.
- How stable is stablecoin in a world where fiat currencies are, by definition, backed by nothing more than confidence? The economic levers are shifting and soon we will not know what to do with interest rates as most large economies converge to zero. And stable versus what? If we are to consider that the USD will represent a large part of the basket and that the Euro and JPY largely represent the rest, the stability of the basket logically will be less in dollar terms than the dollar itself. This means that the dollar ecosystem will be giving up stability for the ability to arguably transact more easily. If we compare the Libra currency to Bitcoin as a reference point, we will find that the basket is just as volatile vs bitcoin as most of its underlying constituents. What is the real value of the Libra currency under these parameters and would it not be simpler to use a dollar stablecoin since the dollar hegemony remains the status quo? The bottom line is that end-users will not meaningfully benefit from this basket on a day to day basis. At the end of the day, creating a new currency also requires corporate users who can price their goods in, and pay taxes in Libra. If the commodity producers and exporters continue to use the dollar to price goods, Libra creates more friction than it solves.
- Creating and redeeming the basket needs to be an efficient process that will invariably incur a cost likely to be borne by the retail user. The nodes will have the privilege to charge whatever they deem reasonable to convert local currency into Libras. Only sophisticated users will know that the basket has an actual NAV or fair price and this may create large conflicts of interest if smart and sufficient checks and balances are not put in place.
- Data Security and KYC/AML concerns. A currency should provide a certain layer of privacy and censorship-resistance to retain its full fungibility. Can we expect the Libra coin to have “privacy” and act a quasi-bearer instrument? We can only hope, but the stringent laws regulating money laundering will create KYC/AML issues galore that will force the consortium to comply and retain onerous records. This could give vendors another valid excuse to have unfettered access to everything one does on a daily basis. While some may not care, the Orwellian future gets crystalized further every day.
Casting Libra aside, our call moving into 2019 was that we would see an emergence of new stablecoins and blockchains and with that more endpoints and a growing and more diverse network. Our belief in this growing ecosystem has led us to create a mechanism to serve as a liquidity nexus giving stablecoin issuers, holders and exchanges certainty over access and liquidity. This is designed to result in less slippage when users are moving between the more than 400 stablecoins in existence today or as a half-way house before converting fiat back intro crypto, or vice versa.
Through this vision, Stablehouse was created (and is currently being beta tested for launch) to establish a clearinghouse that allows for the immediate quasi-fungibility between stablecoins to necessitate a frictionless mode of interchange among these coins This clearinghouse could be similar to a check-clearing process between banks but at a far more efficient pace. The rapid pace of new offerings and FOMO of other FAANG stocks to mirror the Facebook model is rubber stamping and cementing our vision.
Another rapid-fire and critical development not to be overlooked is on the technological front, with new blockchain platforms emerging. Blockchains are complicated beasts, not only in their technological inner workings but in their economic models used to secure the blockchain and incentivize decentralization. At the end of the rainbow, a blockchain is useless if it is subject to any kind of attack that would compromise, in any way, the data that it stores. The immutability of the ledger is paramount and the censorship-resistance of that construct is critical too.
While it is clearly a futile exercise to make hard predictions in such a real-time industry, what is crystal clear is that 2019 will be seen as a banner year in the development, utility, and acceptance of stablecoins — with a ripple effect seen across the crypto, banking and payment sectors that are becoming more intertwined by the day.
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