With all the noise and hype around the recent large price movements of core cryptos like Bitcoin (BTC) and XRP, it's easy to forget the ones hard at work to minimise volatility risk in order to encourage crypto adoption among the skeptics. These are stablecoins of course. The core thesis behind them is that BTC was not used as a transactional currency because of its volatility, and therefore merchants and individuals would not rely on it as a unit of account or medium of exchange. This premise is not entirely true -- volatility is only partially explanatory of why BTC is not being used by consumers. In our view, the main barrier is not volatility but ease of use and form factor. It's just too hard to figure out how to actually pay with BTC or any other digital currency for real (i.e., non-digital) goods and services. And while there are attempts to put Bitcoin and other currencies into debit or credit cards, these are still early in market penetration.
If you look at stablecoins themselves, there are two narratives to note. (1) Any floating currency needs to be collateralized, whether or not it is printing money algorithmically or has bots arbitrating itself against exchanges. Otherwise you cannot fund redemptions (and if you can't fund redemptions, then you are just printing specious moneys). Holding the peg to your desired currency basket, whether USD, yuan or Euro, requires being able to defend the currency with capital reserves. Any private capital reserve can be broken by a larger private capital reserve -- or even by a government actor. Consider Soros and the Bank of England. As a result, these coins are fragile and ripe honeypots for attack and manipulation. In the case where the reserve becomes so large as to be unbreakable, and where the currency is meaningfully used as a medium of exchange, it becomes a threat to the world's actual reserve currency, the USD. The US sovereign is unlikely to allow private parties to issue and own a digital dollar at scale -- though they may be catalyzed to do so publicly (i.e., central bank coins). These are not farfetched ideas either, with over 20 governments such as Brazil, Canada, Israel, and The Bahamas all considering the prospect of a Central Bank issued digital currency.
The second narrative is much more narrow -- private company networks that ride the blockchain rails need the equivalent of a Cash Sweep. Imagine opening up a Schwab brokerage account. Your free cash in a portfolio -- let's say 1.5% -- would get invested into a cash sweep vehicle, which could be a money market fund, or a trust company cash account, or something similar. For a crypto financial company, you are unlikely to want to hold a financial license for traditional banking or investment services. But you still need to manage the cash somehow. So efforts like UBS settlement coin, or any of the recent stablecoin projects, could fill in the gap of moving USD around within a limited sized network in order to reduce friction between going in and out of fiat. If the network gets so big as to include the entire economy, then it again pops up on the Treasury's radar. That's not to say it's a dead end. Banks print money by issuing credit all the time, they are just massively regulated to do so.
So where does this leave us? Non-financial companies such as Facebook and Samsung have admitted to considering their own blockchains for future native stablecoins. Facebook's reason for this is to provide its 2 billion user base with a centralised medium for international remittances, payment for premium content (e.g. games), and your attention (e.g., advertisements) across its website, Messenger, Whatsapp and Instagram. Samsung, on the other hand, wants your mobile phone to be your crypto wallet. Such non-financial companies are likely to be less risk-averse than traditional financial companies, and have greater incentive to disrupt the payments industry, with the added ability to execute at a faster, scalable pace. As a result, these companies may help defining future key growth drivers for both the global payment and the digital asset industry. But this doesn't mean that this won't create a red ocean where other big banks, social media networks and consumer electronics companies issue their own stablecoins to compete, adding "about as much competitive advantage as having your own .com address" - Bernard Lunn of Daily Fintech.
Source: Autonomous NEXT Analysis