Banks to Jump on the Crypto Bandwagon with Stablecoin Entries

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Six international banks are expected to issue a stablecoin or fiat-backed digital token on IBM’s Stellar-powered money writing service, as per an announcement by IBM and Stellar on Monday.
Over 44 international banks have enrolled with IBM’s Blockchain World Wire, with several of them having already signed a letter of intent to issue their own stablecoins, according to vice president of IBM Blockchain Jesse Lund. The VP made the announcement in a keynote at Money 2020 Asia in Singapore alongside Stellar cofounder Jed McCaleb.

2018 resulted in a flood of stablecoin issuances, which seek to keep a consistent price in the face of Bitcoin and altcoin volatility. They include Circle’s USDC, Gemini’s GUSD, and Paxos’ PAX, all of which are U.S. dollar-backed. Last month, JPMorgan announced JPM Coin, which it didn’t officially call a “stablecoin” but which effectively functions as a dollar-backed intermediary currency for corporate clients and other banks.

Other banks looking to issue a stablecoin include Brazil’s Banco Bradesco, South Korea’s Bank Busan, and the Philippines’ Rizal Commercial Banking Corporation — as well as banks IBM has yet to publicly name whose stablecoins will be backed by the Euro and Indonesian Rupiah. IBM plans to expand the token economic ecosystem of settlement assets, according to Lund.

We let the market drive the expansion and selection of the network incrementally. We are really feeling excited that we are on a roll to build something new and revolutionary that’s really going to change the landscape of cross-border payments.

Most people in the crypto community are critical of fiat-backed stablecoins, due to the fact that collateral for funds are kept in custodian banks that could be seized by authorities. In fact, the stablecoins concept merely borrows from blockchain technology’s distributed ledger technology and is not really decentralised. Steve Ehrlich – chief operating officer of the Wall Street Blockchain Alliance – said:

At the end of the day, centralization is okay for the utility it provides.

The World Wire aims to replace traditional banking intermediaries and add a cross-border payment functionality that is more efficient and cheaper using Ripple technology, for example. Similarly, Stellar’s XLM token is used as a settlement instrument for fiat, wherein two companies agree to a transaction in different fiat currencies can exchange those currencies via the XLM token. The transaction is then recorded on the blockchain, making payments cheaper, faster and safer for the end user as well.

Diverging from Ripple, however, IBM isn’t the issuer of the decided-upon settlement asset. Ripple issues XRP, the token used to transact over the Ripple network. Big Blue asserts that there should be a diverse array of digital assets for cross-border payments and that network participants should be able to choose and negotiate their own assets.

“If you think that a wholesale coin or digital coupon has the ability to reduce friction for these types of wholesale transactions, it’s a natural progression to say central banks will want to do that too,” said the managing partner at Middlegame Ventures, Pascal Bouvier. “How the market structure evolves is difficult to predict … but it’s very much akin to loyalty coins that airlines use for their own purposes.” Similarly, Ehrlich said “[one-day] stablecoins will turn into their own various payment networks that almost become economies in their own regard, like loyalty programs.”

In the short term, fiat-backed coins will be ubiquitous. While some explode in market cap, others will fade as it becomes increasingly expensive to support stablecoins, which requires hiring banks to act as Fiat holders to ensure backing, not the mention the intense scrutiny and regulation requirements that some stablecoins do not even have at the moment (Tether). If issuers don’t see a return on investment for the fees associated with it, some sort of fallaway would be expected.

Stablecoins will turn into their own various payment networks that almost become economies in their own regard, like loyalty programs… You can think of all kinds of use cases these digital tokens can be used for — either from a payments perspective with all the clients of a bank or to reward some type of behavior. Again, they’re like digital representations of something that has been satisfied,

Bouvier said.

At the time of writing, World Wire supports over 47 currencies for payments across 72 countries. The technology giant plans to expand its network even further to provide global coverage within three to five years in order to allow remittances from anywhere in the world. Needless to say, IBM captures a fee of network transactions to operate and maintain it.

In truth, the world of fiat-backed stablecoins is right around the corner – are you ready for it?