The Capital
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The Capital

Crypto Central Banks (Pt 5)

By WOOTRADE on The Capital

Stablecoin Organizations as a Central Bank

It is clear now that US dollar-backed stablecoins are an indispensable part of the crypto ecosystem. They are not only a medium of exchange but also a store of value. The decentralized system composed of the stablecoin issuers, its governance protocol, and the arbitrage participants that maintain the stability of stablecoins acts in the same manner as a central bank protecting the stability of the native currency. In the Blockchain.com 2019 Stablecoin Report, it is stated that stablecoins can provide a critical infrastructure layer for the digital assets ecosystem. Based on the conclusions made in the Richar Lyon study, the argument can be made that the dollar-backed stablecoins are already acting as a critical infrastructure layer for the digital assets ecosystem.

The dollar-backed stablecoins acting as the critical infrastructure layer for the crypto-financial ecosystem, in fact, draws many parallels to the Hong Kong Dollar and its role as the infrastructure layer for the Hong Kong financial ecosystem. The Hong Kong Dollar and its peg with the US dollar was implemented in 1983 because the Hong Kong government wanted to re-establish confidence among the residents and investors as well as showing the world that Hong Kong was maintaining itself as a region free of influence from the CCP in mainland. The peg system is credited for saving Hong Kong from financial ruin on multiple occasions and its stability has provided the foundation for allowing HK to develop into an international financial center.

The Hong Kong Dollar and the international financial system that it supports can serve as an example of what is possible for the cryptonetwork ecosystem if stablecoins are able to maintain its status as a store of value and safe haven asset. With the stablecoins in place, cryptonetworks will be able to continue to operate smoothly regardless of the fund inflows and outflows that will take place. The issuance organizations and the traders responsible for maintaining the peg are ultimately responsible for maintaining the confidence of investors in what has become a critical infrastructure layer in cryptoassets.

The Large Exchanges and its Central Banking Roles

Similar to how the central bank structure has changed accordingly to realities of the present market, crypto exchanges have also changed according to the present market. In the early days of crypto, there were just a few exchanges that simply acted as a platform that facilitated the buying and selling of Bitcoin. Today, there are more than 500 active exchanges that collectively form the decentralized financial supercenter of crypto offering a huge number of products and services. In the traditional financial world, exchanges perform one role, which is to carry out trades through an order-matching engine. Cryptocurrency exchanges, on the other hand, manage the entire trading business vertical, which includes customer acquisition, fund custody, trade matching and settlement.

source: cryptocompare.com

The exchange business is extremely competitive with the 10 largest exchanges still only collectively accounting for roughly 20% of all daily spot trading volume. New exchanges continue to launch in many different countries while the existing exchanges continue to aggressively expand their product and service offerings. The world’s largest exchange by daily trading volume, Binance, has stated that its goal is to build the infrastructure for the crypto ecosystem. Binance’s closest spot market exchange competitors (Coinbase, Huobi, Liquid, Kraken, KuCoin, Bitstamp, OKex, Bithumb, Bitfinex, and Bitflyer) and all are following similar business models.

Their current businesses include spot trading exchange (entire vertical), futures (entire vertical), margin trading, fiat on-ramp services, wallet storage, mining services, venture capital, token listing, lending, utility token issuance, and issuance of fiat-backed stablecoins. Crypto does not have any formal regulatory agency or central banking system, but it doesn’t mean that there is no need for stability in the markets. The task of regulator and stability administration is delegated to the exchanges themselves. While they have adopted some necessary mechanisms to improve the safety of the market participants a huge concern regarding trust remains. After all, can you fully trust the referee if the referee is also simultaneously the opposing team’s player, the coach, the team owner, and stadium owner?

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