Stablecoins Are Legion, And More Are Coming. Are We Creating A New Crisis?
Tether launched a new stablecoin this January. One token will be equivalent to one troy ounce of gold. Based on a report by Blockdata, Tether has raised over $1 Billion in Initial Exchange Offering (IEO) funds, through August 2019, for operations. But does the market need another gold-backed stablecoin?
One estimate states that there are, at least, 134 total stablescoins on the market. Only 30% of the total coins announced are traded. Although the total number of coin-projects (stablecoins being created but not yet traded) and exchange-traded stablecoins is unknown, 2020 could see the most significant increase.
Swiss based ETP enters the Crypto trading market | Data Driven Investor
Although there is hardly ever a dull moment in the financial market specially after the introduction of…
At the World Economic Forum, held in Davos, central bank digital currency (CBDC), or digital fiat, was discussed as a payment innovation, which could lower transaction costs and create a broader market. The new market could include underserved entrants like farmers, migrant workers, and other types of micropayments typically paid in cash.
The panel agreed that innovation should be encouraged — but must be enforced by regulatory rules. The group said stablecoin competition and proliferation is a risk. The feeling among the speakers supported study and innovation but cautioned against unknown consequences. CBDCs could be a better choice for consumers, offering similar benefits to stablecoins, while being controlled by a central bank.
But central banks and financial authorities are not interested in issuing digital currencies in developed markets anytime soon. Emerging Markets could issue their own digital currency in the next few years. The reality of troubled economies issuing CBDCs is supported by Deutsche Bank Research. Could this create an unbalanced market?
Central banks, like the Federal Reserve Bank of the U.S., strive to maintain low inflation and use monetary controls to maintain stability. Regulatory authorities and banking utilities, like the Bank For International Settlements, implement rules, banking requirements and provide services; they ensure financial institutions comply with jurisdictional law. Both groups are essential for a healthy economy. But, historically, they are reactionary to surprise events.
For example, Black Tuesday (October 29, 1929) was the start of the Great Depression. The Glass-Steagal Act of 1932 was legislation to protect consumers and structure the banking industry as a reaction.
Another example, the Financial Crisis (Great Recession) of 2007–2008, was caused by unsustainable investment in mortgage-backed securities and collateralized debt obligations, which led to the creation of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010.
Both examples had many causes; the ones mentioned are generalizations. However, they suggest that public policy is kicked into action when there is a disaster.
More stablecoins will be announced in 2020. Before any economy, developed or emerging, strong or week, issues a digital token there could be hundreds of competing coins. If stablecoin use grows and becomes more popular, like in peer-to-peer applications (e.g., Venmo or PayPal), then the potential for an unexpected consequence to cash liquidity could become an issue at some future event.
Stablecoins are likely to be used for payments before any CBDC is a reality. Central banks might be more proactive to regulate this space if digital coins are at odds with CBDCs.
Originally published at https://www.forbes.com.