The introduction of stablecoins and the future of financial inclusion


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Institutional interest in crypto is growing, confirmed by a Goldman Sachs survey that found that 40% of the company’s high net worth clients have already been exposed to cryptocurrencies. Stablecoins – which offer a safer, more stable option in the crypto space – have seen hypergrowth, reaching a market cap of $ 119 billion. The volatility of crypto has drawn more conservative investors to asset-backed stablecoins.

Stablecoins are a form of private money. As Christina Segal-Knowles, Executive Director, Financial Markets Infrastructure at the Bank of England points out, modern money is a combination of public and private funds, up to 95% of which in developed economies is private. She adds:

“If new forms of digital money can be made secure, they could potentially contribute to faster, cheaper, more efficient payments with greater functionality. They could make payments more resilient. And they could even have long-term benefits for financial stability. “

Real stablecoins, which are non-interest bearing coins that are said to have a fixed value against a reference currency or asset, will play an important role in the future of global finance. They offer affordable, secure, real-time payments. This makes it cheaper to accept payments and makes it easier for governments to run conditional cash transfer programs, while lowering the cost of remittances and connecting non-banks to the financial system.

Related: What form of digital assets will the future of payments be?

We grew up on the gold standard; It makes sense to create new financial instruments backed by gold and other real assets that protect value and allow people to borrow against their assets. The global monetary system as we know it isn’t that old – it’s only been 75 years since Bretton Woods.

But it was only 50 years ago that President Richard Nixon announced that the US dollar would no longer be backed by gold as it has been since Bretton Woods. Now that system is threatened, not just by governments printing money like there’s no tomorrow and inflation, but also by stablecoins.

Related: Stablecoins pose new dilemmas for regulators as mass adoption emerges

In particular, Facebook’s announcement of the Libra project in 2019 made regulators realize its potential to go global and access billions of users through its social networking platform. China is exploring cross-border payments in its development of the digital yuan, which could extend to the more than 50 lower-middle-income countries that are part of the Belt and Road Initiative. The majority of the world’s population lives in these countries. The advent of the digital yuan could potentially crash the US dollar as the backbone of the global financial system.

Stablecoins and Emerging Markets

On the other hand, there is the potentially positive value of stablecoins in emerging markets and for populations at risk. Think of people watching their hard-earned savings dwindle in value or citizens of countries like Venezuela and Lebanon watching their currencies crash. Remember how the global COVID-19 pandemic highlighted the urgent need for low-cost, direct digital transfers.

In a recent article, Katherine Foster and other researchers highlighted that stablecoins have the potential to enable secure and convenient transactions with no volatility at a lower cost than mobile money held in a variety of non-bank wallets. This positive value is desperately needed as global remittances, a key flow of development finance, declined during the pandemic due to job losses for migrant workers. Remittances saw their steepest decline in recent history, falling nearly 20% from $ 554 billion in 2019 to around $ 445 billion in 2020.

The humanitarian community also sees the potential and has pushed the boundaries of blockchain technology to improve the effectiveness and efficiency of its interventions. Ric Shreves, Director of Emerging Technology at Mercy Corps, sees stablecoins as a convincing use case: “Imagine if we had a low-cost coin with low volatility that would be acceptable worldwide. How could that affect our work? It could affect our work on anything from back office operations to moving money to difficult places to direct sales to our program participants. There are a number of really compelling use cases for this technology. “

Related: Digitize charity: we can do good better

Developing countries are already relying on crypto. The top 10 countries with cryptocurrency users worldwide include Kenya, Nigeria, South Africa, Venezuela, Colombia, and Vietnam. The latest crypto report from Finder, a website that compares financial products, also reports that emerging markets like Vietnam, India and Indonesia are leading the race to adopt cryptocurrencies. The trend of consumers from emerging markets in Latin America, Africa, and East Asia switching to cryptocurrencies can preserve savings they might otherwise lose due to economic turmoil.

Stablecoins and the new financial order

Building a new decentralized financial system with stablecoins will fundamentally change the way people save and use their wealth and money. Here are some of the reasons why:

  • Stablecoins have the potential to overcome significant shortcomings and frictions with existing cross-border payments, which is crucial for transfers and reducing transfer costs.
  • Stablecoins can boost well-being as money-distributing countries recover from the disastrous effects of the global pandemic, like the stimulus packages currently being distributed to millions of unemployed during the COVID-19 outbreak.
  • Stablecoins can have a positive impact on financial inclusion – using electronic money for payments and savings will enable people to build a digital story that is essential to accessing credit.
  • Stablecoins can expand cross-border trading opportunities for small and micro businesses.
  • Commercially issued stablecoins could provide an alternative for non-banks and provide them with more stability by giving them access to a store of value so that they can save without breaking high barriers to entry for banking services.

Related: The Stablecoin Path: A Journey to Stability, Trust and Decentralization

“Unfortunately, we will have more humanitarian crises as a result of COVID-19,” said Sofie Blakstad, founder and CEO of hiveonline. “And we will also have less money. So now is the time to really use technology to prove how we can achieve these goals more cheaply. “

Stablecoins and challenges

There are hurdles to achieving this. Despite their name, stablecoins do not guarantee stability. There is no uniform, standardized taxonomy for stablecoins. The US Federal Reserve has called for a comprehensive regulatory framework for stablecoins. In addition, any solution would have to take into account consumer protection, financial stability and the prevention of financial crime. In addition, there will be regulatory challenges in different economies, jurisdictions, legal systems and different levels of economic development. These challenges would require a harmonization of the legal and regulatory framework for data use and data exchange, competition policy, consumer protection and digital identity.

Q. Christopher Calabia, a former senior vice president and banking supervisor at the Federal Reserve Bank of New York, asked five critical questions about the potential of stablecoins for the poor in his article, “Could the Poor Bank on Stablecoins?” These important questions were: Will stablecoin processing speeds be fast enough for the poor? Will the technology available to the poor support stablecoins? What do stablecoins cost the poor? How will stablecoin issuers comply with e-money regulations? How will financial systems with limited foreign exchange reserves adapt to stablecoins?

We need the innovators to understand the financial needs of the poor and develop valuable tools for them. At the same time, regulators need to rethink who and how can provide services. Today we are in an exciting and experimental era that is about reinventing money, how we use it, and how people make it.

With the right regulation, a stablecoin could be made safe for widespread use and deliver on its promise by providing more funds to those most in need. In order for stablecoins to be useful to the poor, they must be widely adopted by consumers, traders, businesses and governments. With intent, single-mindedness, and a nuanced understanding of the needs of the poor, the blockchain community has the technology and the spirit to do it.

This article does not provide investment advice or recommendations. Every step of investing and trading involves risk, and readers should do their own research when making a decision.

The views, thoughts, and opinions expressed herein are those of the author alone and do not necessarily reflect the views and opinions of Cointelegraph.

Jane Thomason is a thought leader in blockchain for social impact. She has a Ph.D. from the University of Queensland. She has held several roles at the British Blockchain & Frontier Technology Association, Kerala Blockchain Association, Africa Blockchain Center of Excellence, UCL Center for Blockchain Technology, Frontiers in Blockchain and Fintech Diversity Radar. She has written several books and articles on blockchain. She was named in the Top 100 Women in Crypto, Top 10 Digital Frontier Women, Top 100 Fintech Influencers for SDGs and Top 50 Global Thought Leaders and Influencers on Blockchain.