Could Accounting Tokens Be Better Than Stablecoins?

CoreLedger
CoreLedger
Published in
5 min readJul 1, 2021

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You’ve probably heard the term stablecoin before, but the name can be a bit misleading. A stablecoin can actually mean a few different things, including tokens that aren’t even “stable.” Most of the time, stablecoin is used to refer to cryptocurrencies that are pegged to a fiat currency. Tether is a popular example, having its value pegged to that of the US Dollar. Of course, when the USD inflates, as it has been recently, so too does Tether. This fluctuation in value means that these cryptos are only as stable as the fiat they are pegged to, or in other words, not very stable. Depending on the country you live in, using a “stablecoin” pegged to your country’s legal tender isn’t really an improvement over crypto. Some stablecoins are also backed by loans and grants, most of which are stabilized by algorithms rather than cash. But, stablecoin can also refer to tokens that are backed by money in a bank account or even by physical cash stored in a vault.

Stablecoins are a regulators nightmare because they act like cash, can be used anonymously and even globally, relinquishing the need to physically to do a cash transfer. And thus they can not be controlled, just like cash. For the purposes of this article, we are ignoring the ethical and philosophical questions of why and how there should be any control over the flow of value in a free society; but these questions aside, people are always searching for the somewhat utopian dream of stability and liquidity in their financial system, which makes the promise of stable-coins so attractive. We’ve advocated in the past for more stable asset backed tokens in industries like agribusiness, and those points still stand. But in this article we’d like to propose an alternative to stablecoins that works completely differently; we call them Accounting Tokens.

Cracks in the traditional financial system

Before we get into Accounting Tokens, let’s first think about some of the reasons why people would want a stable-coin in the first place (aside from the obvious stability). Using blockchain-based methods of payment like cryptocurrencies can sometimes even be more convenient and reliable than bank transfers. That’s because a SWIFT transaction can cancelled, rejected or otherwise rendered invalid. Traditional banks also tend to have poor exchange rates, excessive fees, and in some cases may limit or control transactions due to a country’s political situation. Blockchain transactions, once signed with the proper private key, cannot be rolled back, making regulation tricky, and hence making it an attractive solution in places with financial instability.

In any case, there is also a growing number of countries experiencing problems with the SWIFT system, and replacements to this decades old mainstay have long been discussed. In 2017, the Central Bank of Bangladesh lost over $81 million USD in an attack made possible by exploiting the bank’s SWIFT terminal, and other banks have reported similar attacks.

Traditional bankings problems continue outside of SWIFT vulnerabilities. One of the biggest issues is the sheer amount of unbanked people in the world. People who aren’t represented by a financial institution number somewhere between 1.6–2 Billion; but the vast majority of these people do own a phone. Using blockchain and crypto could therefore be a convenient way to do banking without having to trust and rely on some middlemen who have proven in the past to be untrustworthy. This has been a long discussed blockchain use case to bring financial inclusion to the world, but there’s one not-so-small problem.

Problems with Crypto… and Regulation

The problem, to go right back to the beginning, is that crypto is volatile and unstable. There aren’t a lot of trustworthy, well established cryptos. Bitcoin, the oldest cryptocurrency, is famous for volatility so dramatic that it is almost impossible to do business with it, at least with a business that is still anchored in the real world. That’s why stable-coins are so attractive; people are seeking a way to have realistic legal tender combined with the benefits of blockchain, and the only convenient way to do this is to create a token that has the face value of a currency like USD, EUR, CHF, GBP and so forth. Blockchain adds the possibility of doing trades in real time without the risk of a rollback. But the biggest impediment to using crypto or blockchain for real business are regulations. Regulators have a big problem with legal tender on blockchain, because of the before-mentioned issues. But, for businesses, there is an alternative.

Accounting Tokens Instead of Stablecoins

Accounting Tokens can best be compared with any standard credit and debit accounting system that businesses (and even private people) have been using since the early days of bookkeeping. Whether you make your entries on paper, in an Excel sheet, or on blockchain is irrelevant, accounting ultimately works the same way. Regulators tend to follow the rule that if something looks and smells like a financial product, and acts like a financial product, then it can be classified as a financial product. Accounting on Excel is anything but a financial product. Therefore by making sure that Accounting Tokens have the same properties as any other accounting system, Accounting Tokens cannot be qualified as a financial product.

If you want to do business with just a limited number of business partners, then you can use blockchain to do the settlement process between these business partners. Here, the token fulfills only accounting purposes, standing for the amount of money you owe the token holder. But, the upside here is that, thanks to the endless possibilities of tokenization, it doesn’t just have to be money. It can also be goods and services equaling the amount of the face value, not unlike the good old-fashioned coupon. In fact, you can think of it as exactly that.

Using blockchain for such a purpose also adds the possibility of governance. In the case of an accounting token, it might be necessary to restrict the group of possible token holders to those who have gone through a proper KYC/AML process; for example, a whitelist would make sure that nobody outside of that group can get or hold the token. Documentation can be added, which sets the rules and conditions under which the token can be used. And it can even be included into your balance sheet, because it is nothing more than an entry on a (public) table, saying how much one party owes to another one.

This is not a stablecoin in the way regulators fear, but literally a stable-coin (stable-token) that fulfills most of the same requirements that people crave. It is pegged to a currency, it can be used like cash in a realtime transaction on-chain, and it can’t be rolled back. What more do you need?

At CoreLedger, we believe that blockchain is a practical technical solution to improve and solve a wide variety of issues across industries and sectors, which is why we try to cut through the hype and focus on real world applications, not just what’s technically possible.

CoreLedger’s mission is to help businesses of all sizes quickly and affordably access the benefits of blockchain technology. From issuing a simple token, to enterprise- grade token economy solutions, we have all the tools you need to quickly and affordably integrate blockchain into your business.

Interested in our results-focused, real-world approach? Then visit our website for more information, or get in touch with us directly to discuss your project.

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CoreLedger
CoreLedger

Asset tokenization | Blockchain documentation | Token transaction