Stablecoins: Payment’s Final Destination or a Gateway Currency?
Volatility has been a large obstacle to cryptocurrencies becoming more widely used for payments. Stablecoins are an attempt to overcome this challenge by holding a steady price (usually relative to fiat).
However, using stablecoins requires putting your trust in whoever is supposed to remain the peg behind the coin. This has been a key problem for the leading stablecoin by market cap and volume (Coinmarketcap), Tether’s USDT. While USDT has recovered to near parity with the US Dollar since falling to ~$0.85 on October 15, 2018 on several key exchanges like Kraken (Coinmarketcap), mystery still shrouds the stablecoin in the absence of a full audit.* Without a full audit, adoption remains inhibited as investors speculate on whether Tether is practicing reserve banking (fiat deposits a % of total issued) or whether they are just a method for partner exchanges like Bitfinex to manipulate markets and avoid regulation surrounding fiat exchange.
Doubts surrounding USDT have provided opportunities for other stablecoins to grow, but hype in the crypto space once again far exceeds adoption as stablecoins still only account for approximately 1.5% of value of cryptocurrencies in circulation (Economist, Coinmarketcap). There are now over 20 different stablecoins. Most stablecoins are backed by real world assets such as fiat or gold. Some are collateralized by a basket of other cryptocurrencies. Others have no collateral at all but are controlled by an algorithm that increases or decreases the supply to keep their prices stable. Nevertheless, Tether’s continued multi-billion daily volume points to demand, whether it be as a short-term store of value for traders or as a method to facilitate payments. Just like the ICO hype before them, most of these coins will fail, but the underlying story remains intact.
The efficiency of blockchain technology in processing payments is too appealing to ignore.
For example, sending a compatible stablecoin over the Stellar-blockchain can be processed within seconds for a nominal cost (Stellar.org). In contrast, if I wanted to send money as a business using PayPal to a foreign country, it can require up to a 4.4% fee plus 2.5% conversion fee and 4–7 days to process. A traditional wire transfer wouldn’t be much better with a fee of USD 35 and a 2.6% conversion fee.
The question then is not whether the trend of fiat tokenization will continue, but whether it is the final destination for payments or merely a gateway currency to native cryptocurrency (ex. Bitcoin) transfers? It’s important to remember that money is not just a medium of exchange, but also a store of value. Many of the most appealing characteristics of native cryptocurrencies are missing from stablecoins such as no reliance on a single intermediary or a limited supply. Bitcoin programmatically limits total eventual supply to 21 million. While bitcoin’s purchasing power fluctuates in the short-term, fiat and tokenized stablecoins will most certainly lose their purchasing power in the long-term due to inflation.
Until a critical mass of goods and services are priced in native cryptocurrencies, stablecoins provide the necessary short-term stability to facilitate payments. However, adoption of tokenized fiat may just be the necessary intermediate step for mainstream adoption of native cryptocurrencies like Bitcoin. As a merchant, why accept a currency that will depreciate with absolute certainty in the long-term if others accept a native cryptocurrency with programmatically limited supply? Yet a third alternative is regulation limiting acceptance of native cryptocurrencies while unstable currency regimes (Zimbabwe, Argentina, Venezuela, etc.) result in adoption of native cryptocurrencies by any means, thus resulting in a world with tokenized US Dollars, Japanese Yen, and Euros alongside native cryptocurrencies such as Bitcoin.
The long-term fate of native cryptocurrencies facilitating payments and the transfer of value rest on moving from objects of speculation on exchanges to adoption amongst merchants producing goods and services. In the meantime, stablecoins facilitate a superior alternative for transferring value.
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*In June 2018 an inspection report was issued by Freeh, Sporkin & Sullivan, LLP that reviewed the bank account balances and found everything satisfactory (Tether.to), but this does not constitute a full audit.