How stablecoins provide a blueprint for tomorrow’s money
By Paolo Ardoino, CTO of Tether and Bitfinex
Since the inception of money, there has been a desire to make better forms of it.
Stablecoins are at the forefront of making manifest the full potential of money. By leveraging blockchain technology, stablecoins provide an excellent vehicle for day-to-day transactions and present day financial applications. In other words, and although they are not money, stablecoins are a key part of the infrastructure for tomorrow’s money.
The ‘if it’s not broke don’t fix it’ adage has never applied to money. Since the advent of the internet, the world has transformed to constantly engage in social and economic activities creating a continuing cycle of commerce, investing, consumption, and the general distribution of information.
At any given time, there are billions of merchants, customers, companies, and consumers making decisions and transactions and interacting with one another. These transformations and interactions have resulted in much progress. However, this progress has at different times had little impact on the traditional system of money that we use, due to the creaky financial infrastructure of the banking system. But this all may be about to change.
The money of the future needs to be fast, secure, cheap, innovative, and easy to use, all while being connected to the digital infrastructure that billions of people use daily. Stablecoins assist in seamlessly delivering all these key functions.
Cryptocurrency and blockchain technology has been developing for more than a decade. During this time, it has made monumental progress in building new capabilities for the global economy.
While day-to-day transactions in the legacy economy may seem to be a simple transfer of value from one party to another, the inner workings are complex due to the number of financial intermediaries required.
Consider making a simple purchase at your local store with a credit card. This transaction involves, at a minimum, the issuing bank, the receiving bank, and the payment processor, who all take fees. Stablecoins remove this complexity by enabling value to be sent directly from the customer to the merchant without involving multiple intermediaries.
The Tether platform is built on top of several open blockchain technologies, leveraging the security and transparency that those blockchains provide.
Tether customers are subject to rigorous KYC, AML, CFT, and sanctions compliance standards, and Tether’s terms of service, and to the fee schedule and deposit and withdrawal thresholds.
Tether tokens can offer lower transaction fees than wire transfers of fiat currency and may provide higher interest rates on stored balances. Tether represents a superior medium of exchange in many use cases.
As to Tether specifically, it has also just reached a settlement of legal proceedings with the New York Attorney General’s Office (NYAG). Under the terms of the settlement, Tether admitted no wrongdoing coming out of NYAG’s investigation of Tether. Over the past two and a half years, Tether worked in full cooperation with NYAG and provided more than 2.5 million pages of documentation to answer their questions and bring this matter to a close.
Tether shares NYAG’s goal of increasing transparency. For that reason, last year, Tether voluntarily provided NYAG with information about the composition of Tether’s reserves, and Tether proposed that as part of the settlement agreement, it would disclose – both to NYAG and to the public – additional information about Tether’s reserves on a quarterly basis. Tether embraces this commitment.
NYAG concluded, in essence, that Tether and an affiliated party – Bitfinex – could have done better in publicly disclosing certain events to the public. NYAG’s findings are limited only to the nature and timing of those disclosures. After two and a half years of investigation, there was absolutely no finding that Tether ever issued tethers without backing, or to manipulate crypto prices. Interestingly, the market capitalization of tethers over the past two years – while this investigation was taking place – has grown from US$2B to in excess of US$34B at the time of writing.
Creating a channel where value may be transferred directly from one party to another not only removes friction from the money of tomorrow, but it also creates opportunities to disrupt multiple industries.
The global remittance market is expected to grow to nearly US$1 trillion by 2026. The majority of remittances are made by workers from developing economies.
Direct transfer of value allows for individuals, families, and emerging economies to maximize the value of their resources, thereby increasing wealth and economic growth.
Our financial infrastructure is also being reshaped by the rapid rise of decentralized finance (DeFi). Smart contracts are enabling complex financial products to be offered autonomously and without third-party intervention. Insurance products, loans, derivatives, yields, and trading are all now possible without agents, brokers, banks, and dealers. For these products to be offered at scale, a substantial amount of liquidity must be available.
DeFi has grown from a US$700 million market to a US$40 billion market in just one year. As the world awakens and makes the transition to these life-changing DeFi products, the demand for stablecoins will continue to grow.
The beauty of the money of the future is that it can make an impact on everyone. In many developing countries, there are millions of farmers and small businesses that earn less than a few dollars a day.
Many of these people rely on microfinance products that promote financial independence, entrepreneurship, and can assist them during times of financial distress.
Unfortunately, current microfinance products can be flawed and do more harm than good. The average interest rate on loans for microfinance products is 35% globally.
The high interest rates on microloans often cause the impoverished to get into a continuous cycle of debt. On the other hand, DeFi loans for stablecoins have interest rates as low as 0.5%. Stablecoins and DeFi have the potential to provide opportunities to those who need it the most.
Stablecoins are at the epicenter of financial transformation for the money of tomorrow. They are designed to be faster, cheaper, and more effective, while circumventing middlemen and waste.
The money of the future will funnel value back to the people. It will empower individuals to save more, earn more, and do more.
The money of tomorrow must have no boundaries. It must work for farmers, businesses, consumers, migrant workers, banks, governments, you and me.
It is a resource open to everyone.
Paolo Ardoino joined Bitfinex at the beginning of 2015 and now serves as Chief Technology Officer.
After his graduation from Genoa’s Computer Science University in 2008, he started working as a researcher for a military project focused on high-availability, self-recovering networks, and cryptography. Interested in finance, Paolo began developing financial related applications in 2010 and founded Fincluster as CTO in late 2013. Backed by two financing investment rounds, Fincluster delivered an advanced, modern and accessible web platform serving different clients with customization capabilities.
Paolo eventually joined Bitfinex as Senior Software Developer in 2014, tasked with trading engine development, platform scalability, and high-availability. Later in 2016, Paolo transitioned to the role of CTO. As CTO of Bitfinex, Paolo’s role is to manage the development team, evaluate new technologies, design and develop the Bitfinex backend platform. In addition to this, Paolo also serves as Lead Backend Developer at Bitfinex.