Stablecoin, niche use is not bad[Column]| coindesk JAPAN | Coindesk Japan

In December 2022, the United Nations announced plans to use stablecoins to help Ukrainian citizens. Starting with the three cities of Kyiv, Lviv and Vinnytsia, the United Nations High Commissioner for Refugees (UNHCR) will begin direct transfers of USD Coin (USDC), the second largest stablecoin by market capitalization.

Stablecoins for humanitarian aid

“When it comes to humanitarian assistance, speed is key,” UNHCR representative to Ukraine Karolina Lindholm Billing said in a statement announcing the plan. It is also essential to provide various options for receiving

The plan is to download a smartphone-based wallet called Vibrant and transfer USDC sent through the Stellar blockchain to 4,500 MoneyGram remittance service outlets for euros, dollars, and cash. It can be exchanged for Ukrainian hryvnia.

Many have hailed the plan as a way to harness technology for those who truly need it. Ukraine’s Deputy Minister for Digital Transformation Oleksandr Bornyakov, who has backed several humanitarian initiatives powered by crypto, said the project “could be a lifeline for survival.” rice field.

The project follows a small-scale experiment conducted over nearly six months in collaboration with the Stella Development Foundation. The foundation says crypto assets are a way to underpin humanitarian projects that are often constrained by geographic restrictions.

Headwinds for stablecoins

But it is also true that blockchain technology, and stablecoins in particular, are currently being reconsidered after months of price stagnation and consumer distress.

The crypto industry has been somewhat lucky, as the damage that hit the industry last year hasn’t spread to the broader economy. Billions of dollars in capital were liquidated, but the impact was largely limited to those involved.

Stablecoins are essentially an attempt to connect the crypto economy with the real world. This has also contributed to growing concerns about the stability of the stablecoin asset class. Stablecoins are already used in many economic activities and have the potential to become ubiquitous wherever cash is used.

Economists recently published a paper looking at the ties between stablecoins and banking and other commercial sectors, pointing out their concerns. But many also point to the benefits that stablecoins bring to an increasingly digital world. Adoption and experimentation will likely only accelerate, raising questions about how stablecoins are regulated, governed, and integrated.

Crypto-assets often set the goal of “mass adoption” as basic infrastructure for economic activities. It seems wrong to me to set goals like this when we’re in the process of fixing our technology’s shortcomings.

Especially in the stablecoin world, perfecting a world of fully transparent, self-sovereign, and censorship-resistant transactions should be a priority. By definition, though, these are mostly peripheral efforts.

Disruption unlikely

The International Monetary Fund (IMF) recently reported that fintech (including bitcoin and other crypto assets) has limited adoption to disrupt the remittance sector, which is known to be inefficient, opaque and outdated. . Contrary to expectations, it concluded that fintech is increasingly being absorbed into the world of traditional finance rather than displacing incumbent remittance businesses such as MoneyGram.

“Not only is there no evidence of disruption, it is also unlikely that it will occur in the near future,” said economist Tito Nicias Teixeira da Silva Filho in Curb Your Enthusiasm: The Fintech Hype Meets Reality in the Remittances Market. in a paper published in December titled, Curb the Frenzy: Fintech Craze Faces Reality in the Remittances Market. But he acknowledges that fintech and cryptoassets are bringing competition to the remittance sector and helping keep costs down.

The challenge in many markets is that the majority of those who could benefit most from digitization still transact primarily in cash. Surprisingly, the IMF argues that central bank digital currencies (CBDCs) may succeed where fintechs, stablecoins and bitcoin have failed, but only in markets with low digital penetration.

Digital yuan not growing in use

This is in line with what a former People’s Bank of China official said he was disappointed with the spread of the so-called “digital yuan”. China’s CBDC has seen little increase in usage despite being used for the 2022 Olympics.

Xie Ping, a professor at Tsinghua University, said the digital yuan is seen as an alternative to cash in China, where private payment systems such as WeChat Pay, Alipay and QQ Wallet are already prevalent. indicate. Sometimes called super apps, these platforms also include messaging and social media platforms, as well as financial services functions such as lending and borrowing.

No one knows yet how stablecoins and CBDCs will cut into the competition. Papers are published almost every month claiming that stablecoins pose a significant risk to the existing banking system, but the situation continues to be overturned by another paper.

The same is pointed out for CBDC. As evidence already exists, there is room for multiple payment systems to coexist, and there will only be an increasing number of options targeting specific needs.

risks and benefits

In December last year, the US Federal Reserve Board (FRB) verified the “life cycle” of stablecoins from issuance to redemption. Researchers concluded that stablecoins have varying risks, depending on the stabilization mechanism.

Outside of algorithmic stablecoins, the Fed is particularly concerned about stablecoins issued by private companies. This is the case for the top two market cap stablecoins, Tether (USDT) and USD Coin (USDC). These stablecoins are supposed to be backed by liquid funds. This means that for every stablecoin issued, there should be corresponding funds set aside in banks.

Following the Wall Street Journal report, USDT issuer Tether has pledged to stop lending using reserve assets backing USDT. By the end of 2023, it said it would have zero secured lending in reserve assets.

Prior to this, Tether also promised to reduce the amount of “commercial paper” included in reserve assets. Many see the “commercial paper” as a risky investment in China’s housing market. Tether’s efforts to limit risk are to be applauded. Trade-offs are inevitable in any payment system.

For example, CBDC has constraints that developers should consider. The European Central Bank (ECB) seeks to achieve two conflicting goals: widespread adoption and meeting central bank policy.

Bank of Canada Releases Report on Stablecoin Use Cases for Personal Payments. He argued that stablecoins often lead to faster transaction speeds and better consumer privacy. But the lack of regulation also increases the risk of fraud and reduces the ability of regulators to fight financial crime, he said.

“The report concludes that while stablecoins no longer serve as alternatives to traditional payment methods, they serve niche use cases, appeal to a user base that sees value in benefits, and is willing to accept risks and costs. ,” economist John Kiff wrote in the report’s synopsis.

A niche isn’t necessarily a bad thing.

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: Shutterstock
｜Original: The Niche Application of Stablecoins Is Not a Bad Thing