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Listen Now: Are Stablecoins the Answer?

 

We are experiencing more interest in the use of cryptocurrency than ever before; however, they bring risk particularly due to their volatility. Are stablecoins the answer to this? In this webinar,  Chris Ostrowski and Nolwazi Hlophe help us explore what stablecoins are, how they can impact digital currency and financial inclusion. The webinar also considers what stablecoins would mean for central banks, monetary policy, financial service providers and for the end-users.

How are bitcoin and other cryptocurrencies different from stablecoins? For one thing, bitcoin and other cryptocurrencies have not been successful as a stable store of value. They have however, been useful as an investment vehicle, or as an alternative for a sovereign currency. Because cryptocurrencies have not been successful as a store of value, there has been a need to link them to fiat currencies i.e., the dollar. One reason to do so is the ability to use crypto currencies as a transactional tool.

This ability to convert cryptocurrencies into something more stable is where the concept of stablecoins comes from. In defining stablecoins, it is important to know that stablecoins are a privately issued but they do maintain a more stable value than other cryptocurrencies. Stablecoins are different from Central Bank Digital Currencies (CBDCs) in that they are not issued by the central bank.

The role of the Central Bank in digital currencies, including stablecoins, cannot be understated. Research has found that 82% of central banks are concerned with how the public can be protected from cyber threats that may come because of new players in the market.

Central banks have two main policy objectives regarding digital currencies:

  • Safety
  • Efficiency

The technologies involved in digital currencies, for example Blockchain and other Distributed Ledger Technologies, could potentially bridge the trust gap between the central banks and issuers of digital currencies. The use of such technologies means stablecoins could become part of the answer. Stablecoins can use the benefits of the distributed ledger, freeing central banks from some of the concerns regarding the distributed ledger.

As with all digital currencies, stablecoins are not without risks, including lack of transparency, as well as the lack of oversight and governance from central banks. However, there are reasons as to why stablecoins exist, including the following:

  • Acting as a bridge between cryptocurrencies and bank deposits.
  • In the wholesale space – it is equivalent to the settlement coins used for interbank settlement.
  • Opportunity in cross-border payments and in emerging markets where domestic currencies are highly volatile.

So, are stablecoins the answer? Stablecoins are certainly part of the solution! The current system has its own risks, and stablecoins offer some solutions, including de- risking global payments. We can safely say that stablecoins are here to stay!

*To keep up with what is happening in stablecoins visit the OMFIF website

Nqobile Khumalo
Nqobile is DFI's Assistant COP Manager and helps manage our communities and their activities. As part of her role Nqobile shares useful resources and insights from a wide variety of sources and authors with our community.