CWC Newsletter #12 (January 29, 2020)

By Taylor Ryker, Analyst

What are stablecoins? And what are the potential impacts on the cryptocurrency space and larger financial and social media markets?

Stablecoins are cryptocurrencies that are usually pegged to a central government currency, such as US dollars, Chinese yuan, or EU euros. In contrast to other popular cryptocurrencies like bitcoin, stablecoins provide a "safe harbor" from big-swing price volatility. Deutsche Bank believes that bitcoin is not a reliable source of value due to its volatility. Central banks, national governments, and multinational companies are all very interested in how cryptocurrencies and stablecoins could potentially support their economies, societies, and corporations. The beginning of 2020 is witnessing a growing push to reign in the "Wild West" of cryptocurrencies' volatility in order to provide more confidence and trust for larger institutional players and everyday users.

Stablecoins issued by central banks or by private entities are largely classified as central bank digital currency (CBDC). In a study conducted by the Bank for International Settlements (BIS), 66 banks were surveyed to find out their views and actions in a CBDC. 80 percent of the 66 banks said they were engaged in some form of development and research on CBDCs. 20 percent of the world's population will have access to a government-backed digital currency.

Central banks around the world are currently studying how to regulate and implement stablecoins into their economies. The Bank of England is determined to include stablecoins under the same regulatory standards as existing payment channels in the traditional financial markets.

Lawmakers in Japan are planning to propose a national digital currency. With the fear of the superiority of a Chinese CBDC, Japan aims to maintain their position at the forefront of fintech innovation with the Bank of Japan leading the initiative.

In addition, governments around the world are coming together to discuss the need for a global standard for cryptocurrencies. The World Economic Forum is creating an international consortium to explore different governance frameworks in order to provide guidance for stablecoins. This push to create guidelines for stablecoins comes on the heels of other regulatory developments, such as the "Blockchain Bill of Rights."

Even the State of Hawai`i is looking into legislative means to allow local banks to provide custody solutions for digital assets. A current bill in the State of Hawai`i's legislature creates guidelines for banking institutions to permit their customers to more freely use digital assets with the confidence of banking security.

Private companies have also issued stablecoins. The Omni Foundation issued the popular stablecoin called Tether. Tether is backed by 1 Tether: 1 US dollar and allows traders with a cryptocurrency that is non-volatile. The Gemini Exchange, funded by the famous Winklevoss Twins, has also issued the first regulated, US-dollar backed stablecoin called the Gemini Dollar.

Oil-producing nations in the Middle East are deeply interested in discovering alternatives to the US dollar that is not bitcoin. Due to the strength of the US dollar and US sanctions in the area, Middle Eastern nations are looking for solutions for their cross-border settlements in the energy sector.

However, stablecoins have come with some controversy. Popular stablecoin Tether is accused of being the prime suspect in the massive price bubble in 2017 where the price of bitcoin reached $20,000, an all-time high. Tether with the assistance of cryptocurrency exchange Bitfinex is suspected to be the method in which the bitcoin price was wildly manipulated. In addition, stablecoins are also prime targets for criminals in order to help in their money-laundering schemes. The US Financial Crimes Enforcement Network (FinCEN) are committed to have every stablecoin comply with their anti-money laundering rules.

If central banks force their citizens to adopt their CBDC or other stablecoins, this would benefit the larger cryptocurrency space. Currently, the cryptocurrency space is still hostile and difficult to understand for the average user. Through the adoption of CBDCs, citizens will have more exposure to transacting, safe-guarding, and storing digital assets. This will provide a technical bridge for the average user to feel more confident in adopting cryptocurrencies.

Disclaimer: KJ Kingsley is not a financial advisor and holds the digital tokens or cryptocurrencies represented in the content above. This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this post constitutes a solicitation, recommendation, endorsement, or offer by myself to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. The opinions expressed in this publication are those of the author. They do not purport to reflect the opinions or views of any of the author’s employers.