IBM’s Blockchain is Live and Bank Stablecoins Are Coming
Six international banks are planning to issue their own stablecoins, or digital tokens backed by fiat currency, on IBM’s Stellar-powered money wiring service, IBM and Stellar announced Monday.
More than 44 international banks that support payments are on the service, IBM Blockchain World Wire, and several of them have signed letters of intent to issue their own stablecoins, according to Jesse Lund, Vice President of IBM Blockchain, who made the announcement in a keynote at Money 2020 Asia in Singapore alongside Stellar cofounder Jed McCaleb.
The crypto industry’s 2018 bear market resulted in a flood of stablecoin issuances, which seek to keep a constant price in the face of the high volatility of bitcoin and other crypto assets. They include Circle’s USDC, Gemini’s GUSD, and Paxos’ PAX, all of which are U.S. dollar-backed. Last month, JPMorgan Chase announced JPM Coin, which it didn’t call a “stablecoin” but effectively functions as a dollar-backed bridge currency for the corporate clients and other banks with which it transacts.
The banks looking to create their own stablecoins include Brazil’s Banco Bradesco, South Korea’s Bank Busan, and the Philippines’ Rizal Commercial Banking Corporation — as well as banks IBM has yet to name whose stablecoins would be backed by the Euro and Indonesian Rupiah. IBM plans to continue expanding the ecosystem of settlement assets, Lund said in an interview with Cheddar Monday.
“We let the market drive the expansion and selection of the network incrementally,” Lund said. “We are really feeling excited that we are on a roll to build something new and revolutionary that’s really going to change the landscape of cross-border payments.”
Many in the cryptocurrency community are critical of fiat-backed stablecoins (as opposed to crypto-backed or algorithmic stablecoins) because the collateral for funds are kept in custodian banks that in theory could be seized by the government at any point; the concept merely borrows from blockchain technology’s distributed ledger capabilities and isn’t truly decentralized. But most people don’t really care about that.
“At the end of the day, centralization is okay for the utility it provides,” said Steve Ehrlich, chief operating officer of the Wall Street Blockchain Alliance.
World Wire aims to replace traditional banking intermediaries that add complexity to cross-border payments and make transactions more expensive, like Ripple. By using Stellar’s XLM token as a settlement instrument for fiat currencies, two companies that agree to a transaction in different fiat currencies can exchange those respective currencies into the XLM token. The transaction would then take place using XLM, or lumens, and be recorded on the blockchain. (World Wire also supports a U.S. dollar-backed stablecoin through a collaboration with Stronghold.) Ultimately, this makes payments faster, cheaper, and safer for the end users as well.
Unlike Ripple, IBM isn’t the issuer of the decided-upon settlement asset. (Ripple issues XRP, the token used to transact over the Ripple network.). Big Blue believes there should be a variety of digital assets to enable cross-border payments and that the network participants should be able to choose and negotiate their asset choice.
And unlike other markets whose central banks use real time gross settlement software with the money center banks of its jurisdictions, wholesale payments in the U.S. are driven more by product, like ACH, than the Federal Reserve.
“If you think that a wholesale coin or digital coupon has the ability to reduce the friction for these types of wholesale transactions, it’s a natural progression to say central banks will want to do that too,” said Pascal Bouvier, managing partner at Middlegame Ventures. “How the market structure evolves is difficult to predict … but it’s very much akin to loyalty coins that airlines use for their own purposes.”
Similarly, Ehrlich said one day “stablecoins will turn into their own various payment networks that almost become economies in their own regard, like loyalty programs.”
In the near term, fiat-backed coins will be the most prevalent. As some explode in market cap, others will recede as it becomes more difficult and costly to support a stablecoin, which requires hiring banks to hold the dollars to back each coin plus intense dedication to regulation and compliance requirements. If issuers don’t see the revenues for the fees associated with it, some sort of fallaway would be expected.
“Stablecoins will turn into their own various payment networks that almost become economies in their own regard, like loyalty programs”
“You can think of all kinds of use cases these digital tokens can be used for — either from a payments perspective with all the clients of a bank or to reward some type of behavior. Again, they’re like digital representations of something that has been satisfied,” Bouvier said.
World Wire currently supports more than 47 currencies for payments across 72 countries. The tech giant plans to further expand the network to provide global coverage in three to five years that will allow people anywhere to send and receive remittances from anywhere else in the world. IBM captures a small fee of network transactions to operate and maintain it.