by Chris Trew, CEO and founder, Stratis
One of the original promises of blockchain technology was the cost-effective transfer of value across the world. While this is possible with crypto tokens, the inherent volatility means tokens aren’t suitable for every situation.
Enter stablecoins – blockchain-secured tokens that track a fiat currency’s value.
Stablecoins have been in the news recently for all the wrong reasons. The collapse of algorithmic stablecoin Terra Luna has been one of the worst financial events in memory. While there might be long-term potential for algorithmic stablecoins Luna’s collapse highlighted the potential harm that an immature system can inflict on holders.
Stablecoins must be backed by low-risk, highly liquid assets. USDT remains the most widely used USD stablecoin today, with its origins in the crypto industry. Tether has come under fire over the years for a lack of transparency on its reserves. Last year the CTFC fined Tether $41 for overstating its cash reserves. Rather than holding cash on a 1:1 equivalent basis, the CTFC found that between 2016 and 2018 Tether’s cash reserves in fact equated to just 27% of issued USDT tokens.
The world already has successful USD stablecoins like USDC. Known as a fully reserved stablecoin, USDC is 100% backed by cash and short-dated US treasuries so that each digital dollar is redeemable 1:1 for US dollars. US treasuries are the most liquid market in the world, ensuring they can easily be traded for cash in the event large numbers of holders decided to redeem their USDC. But why not just use dollars?
Stablecoin use cases
Blockchain allows money to become inherently digital, with the security, speed and flexibility that brings. There are many use cases for Stablecoins, but here is a brief selection:
Faster settlement of trades: with stablecoins trades can be settled almost instantly, rather than waiting for T+5 (trade plus five days) settlement times, which are common in today’s investment banking world.
Cheaper international transfers: moving fiat money across the world remains expensive, with several intermediaries each taking a cut from a cross-currency transaction. Many legacy payment systems also levy significant fees. Stablecoin transactions can be effectively ‘feeless’. Even a company transferring money from one regional office to another incurs significant fees.
Better payments for the digital economy: including payments within apps is much easier, faster and cheaper using stablecoins. These features means an economic layer can be included in more applications like games, social media or apps that require micro-payments.
Why do we need a regulated GBP stablecoin?
Despite innovation in USD stablecoins the world still doesn’t have regulated, natively digital, Sterling token. For assets denominated in Sterling this is a challenge. For example, in the future, companies may wish to make dividend payments digitally, in Sterling, which would be in line with the regulatory drive to treat investors fairly. But no regulated and trusted solution exists for natively digital Sterling.
At Stratis we are one of the organisations working to change this. Our proposal for a GBP stablecoin is currently in the application process to then be submitted to the Financial Conduct Authority.
Our vision for Great British Pound Token (GBPT) uses the Open Banking standard so that both companies and individuals are able to deposit fiat via a simple webpage in order to mint GBPT. The token can then be sent cross-border easily using a digital wallet and redeemed to a different fiat currency if desired. GBPT will be 100% backed on a 1:1 basis with fiat and low-risk, highly liquid, assets.
When we first developed the Stratis Platform we didn’t necessarily envisage stablecoins as a primary use case but because we have built the platform from the ground up, we’ve been in a great position to adapt as new uses cases emerge. That’s the beauty of blockchain technology, it’s immutability allows for the tokenisation of virtually any asset. A trusted and truly native digital proxy for fiat might not be the most exciting application, but it’s easy to see how stablecoins will bring us important benefits in the near-term. The UK needs a piece of the action.