The innovative part of stablecoins is not the currency, but the technology and distribution.
Written by Mario Laul, Head of Research, Placeholder
Compiled by: Luffy, Foresight News
The core function of a blockchain network is to securely process and maintain time-stamped records of information. In principle, blockchain can record any type of data, but most typically information related to financial balances and transactions. The simplest and most common financial transactions are payments, and while blockchains currently serve a variety of use cases, processing the transfer of units of value (such as paying for goods or services) remains a fundamental use case for all major networks. But while successful blockchains have become dominant payment networks in some niche markets, their success in daily large-scale payments has often come from stablecoins pegged to fiat currencies.
Currencies and payment networks can be public or private. "Public" refers to governments, central banks and other public sector agencies, while "private" refers to privately owned and operated entities, such as most commercial banks, credit card companies and other financial services providers. In practice, the line between the two is not as clear as in the quadrants of the diagram below, because government-issued public currencies circulate in private networks, while much of the private financial sector is heavily regulated by public agencies. However, the public-private distinction is a good starting point for thinking about how emerging currencies and payment systems relate to existing systems.
This table is explained and exemplified below in two cases: (1) across all monetary units of account, and (2) within a government-defined unit of account, usually pegged to the national currency.
In the first case, a currency can only be said to be truly âprivateâ if it is issued by a private sector entity, uses a different unit of account than that defined by the government, and is traded independently of government-controlled settlement networks. Free-floating cryptocurrencies such as Bitcoin and Ethereum are such private currencies, although they have rather limited use cases as units of account and payment media, such as for blockchain transaction fees, NFTs, and other blockchain-related goods and services. trade. Since national currencies have very strong network effects, private currencies other than cryptocurrencies have also very few use cases in daily payments.
In the second case, the currency associated with the national currency can also take a more "public" or "private" form. This can be illustrated by a classic currency hierarchy, where acceptance and liquidity decrease from top to bottom: the (public) currencies with the best acceptance and liquidity are at the top of the hierarchy, and the worst (private) currencies is located at the bottom. While there may be regional and historical differences, the chart below roughly reflects the situation in most modern economies, where the power to issue money is limited to the central bank. The monetary unit associated with the currency is used by commercial banks, non-bank financial intermediaries, and the private sector to denominate credits and securities, which are treated to varying degrees as cash equivalents.
While the most widely adopted private currencies, including free-floating cryptocurrencies, may develop their own independent currency hierarchies, national currencies and their hierarchies dominate payment use cases around the world. This is relevant to blockchains, as their success as large-scale payment networks seems to be less and less tied to private cryptocurrencies, but to a special group of cryptocurrencies in the same monetary hierarchy as government currencies. Known as stablecoins, these cryptocurrencies are designed to track the market value of other assets. As of this writing, the most widely pegged asset for stablecoins is the U.S. dollar, the worldâs most liquid fiat currency. Therefore, most stablecoins actually belong to the monetary hierarchy under the U.S. Federal Reserve System.
Payment networks serve different retail and institutional customer segments and use different settlement media (e.g., private IOUs, commercial bank deposits, central bank reserves), and they exist at all levels of the dollar hierarchy. For example, large-value transactions between banks are processed through Fedwire and the Clearing House Interbank Payments System (CHIPS), while smaller transactions, such as paying utility bills or transferring business bank deposits between family and friends, are handled by the Automated Clearing House (ACH). deal with. The most popular point-of-sale payment method is a debit/credit card, usually issued by a bank and can be linked to a mobile payment app. Currently, the largest networks processing such payments are operated by publicly traded companies such as American Express, Mastercard and Visa. Finally, payment gateways like PayPal, Square, and Stripe provide merchants with easy access to the web, helping to abstract away the complexity of the channels that connect different parts of the system.
At each level of the monetary hierarchy, control over a payment network includes the power to decide what is an acceptable means of payment. This is why an accounting agreement is so important. In most cases, as you go down the hierarchy, it becomes easier to "issue currency" but it also becomes harder and harder to get others to accept it. On the one hand, physical cash and commercial bank deposits are almost universally accepted as means of payment, but the ability to issue these currencies is strictly regulated; on the other hand, essentially anyone is free to issue private debt, but such IOUs can only be issued on a very small scale. Function as currency within scope, such as using gift cards or loyalty points issued by a specific business. Simply put, not all forms of monetary payments are created equal.
How does a U.S. dollar stablecoin settled on a blockchain network fit into this system? From a monetary unit perspective, USD stablecoins can be said to be located in the C quadrant of the chart above. Although stablecoins are issued by the private sector, they are not truly private currencies like Bitcoin and Ethereum due to their peg to the U.S. dollar. This is especially true for stablecoins backed by U.S. dollar deposits or cash equivalents (or even physical commodities) hosted by regulated U.S. financial institutions, which places these stablecoins slightly higher in the hierarchy compared to stablecoins backed by offshore assets. , of course both ultimately fall into the same broad category, below insured bank deposits. Stablecoins backed entirely by free-floating cryptocurrencies are a special case because they have low correlation with the existing financial system. However, when explicitly designed to be pegged to the value of the U.S. dollar, these stablecoins can still be classified as Quadrant C.
From the perspective of the government-defined unit of account (the U.S. dollar), anything other than physical currency and reserve currency held by central banks is a liability of private sector entities and therefore can be classified as "private" money. From this perspective, it can be said that all such liabilities (including stablecoins) are located in Quadrant D, given that they are also circulated in payment networks operated by the private sector. While there are important qualitative differences between stablecoins depending on the location of the issuer and its key banking partners, the increasingly popular narrative that âon-chain is the new offshoreâ highlights the differences between stablecoins and offshore USD ( (i.e., "Eurodollars"), these deposits are not directly regulated by U.S. regulators. But even if the assets backing stablecoins are hosted by U.S.-regulated financial institutions, from the holderâs perspective, they still represent dollar liabilities that lack government-guaranteed commercial bank deposit insurance. While the counterparty and financial risks associated with specific stablecoins may vary, this ultimately puts them in the same category as all other privately issued forms of U.S. dollar-denominated debt that lack guarantees but are still considered currencies.
However, stablecoins have one unique feature: they are issued on a decentralized, programmable blockchain. This means anyone with an internet-connected device can sign up for a self-hosted digital wallet without authorization, receive peer-to-peer transfers globally at extremely low cost, and access blockchain-based financial services. In other words, the innovative part of stablecoins is not the currency, but the technology and distribution. By being inherently digital, global, and programmable, stablecoins have the potential to become a more powerful and convenient form of digital cash than any currency currently available. What are the main barriers to realizing this potential? You can refer to the following three possible adoption scenarios of stablecoins in daily payments:
niche/marginal
Stablecoin adoption is highest in certain niche markets (crypto-native and traditional markets) and in special circumstances (such as currency crises or regions with highly underdeveloped or dysfunctional financial services infrastructure), but globally Still marginalized in everyday payments. In most developed economies, existing payment methods such as debit/credit cards, non-cryptocurrency mobile wallets, and even physical cash are so convenient and reliable that there is little need for alternative payment methods. Without strong enough consumer demand, stablecoin payments may have difficulty entering the wider economy. Especially when stablecoins encounter adverse regulatory treatment in major jurisdictions, their use as a substitute for or supplement to traditional bank deposits will be hindered.
Mainstreaming / Integration
As stablecoins are closely integrated with existing payment infrastructure, blockchain-based financial services and traditional financial services will gradually merge. The regulatory clarity supporting cryptocurrencies has attracted established financial institutions, especially banks, to issue or otherwise support stablecoins, thereby increasing trust in the underlying blockchain. As the lines between stablecoins and traditional bank accounts blur, a unified regulatory framework will eventually emerge that solidifies blockchain as a fundamental component of the global financial infrastructure with embedded, increasingly automated compliance regimes. Major stablecoin issuers will become important financial institutions, but risk profiles will differ depending on their structure and regulatory status. As a result, in the event of a major financial crisis, some of these institutions are likely to struggle, presenting governments and central banks with similar challenges to those that emerged following the 2007-2008 global financial crisis, further cementing their role as lenders and lenders of last resort. The role of the market maker. At the same time, the transparency and programmability of blockchain will increase the stability and resiliency of the financial sector, paving the way for future currency reforms in countries and ultimately the formation of central bank digital currencies (CBDCs) managed by governments or through public-private partnerships. ).
Substitution / Subversion
Stablecoins and blockchain-based financial services will develop in parallel with the existing financial system. Over time, blockchain is no longer tightly integrated with traditional financial institutions and payment infrastructure, but is increasingly viewed as a systemic alternative that directly competes with and ultimately replaces traditional systems. While existing institutions will adapt by launching their own blockchains, many of them will compete with more native cryptocurrency rivals. Given the unique capabilities and risk profile of blockchain-based financial services, most jurisdictions will prefer to develop entirely new regulatory frameworks rather than attempt to incorporate them into existing regulations. While stablecoins pegged to national currencies will become the primary form of currency for most on-chain payments, eventually there will be cryptocurrencies that are not pegged to existing currencies but are capable of maintaining sufficiently stable exchange rates against a basket of consumer goods. In the long term, the most disruptive outcome is the widespread adoption of these cryptocurrencies in daily commerce and even international trade, thereby establishing a completely new monetary system, which will also require a new global monetary governance body.
Historically, most cryptocurrencies have exhibited considerable price volatility, making them unsuitable for use as a monetary unit of account and universal means of payment. Stablecoins solve this problem and are arguably one of the most successful use cases of blockchain to date. While network- and app-specific tokens have important utility for operators, developers, and administrators, their adoption barrier for everyday payments is significantly higher than stable pegs to off-chain currencies that consumers are already familiar with. currency. Therefore, no matter which of the above scenarios occurs, the growth of blockchain as a payment network is closely related to the success of stablecoins.
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