Since there has been a lot of activity and innovation in Stablecoins in the past year, and since everybody has been talking about JPM Coin and its potential effect on the financial system, I have decided to add my perspective to the conversation. (The link above will take you to an interview with Umar Farooq, Head of Digital Treasury Services and Blockchain at JP Morgan! It’s short and sweet!)
JPM Coin is definitely worthy of all the hype it got last week — after all, it is the first bank-backed cryptocurrency pegged to the Dollar and, therefore, a stable-value asset. It will be issued on Quorum, JP Morgan’s Ethereum-based blockchain, but will be interoperable across all standard blockchain networks in the future. That means that, initially, JPM Coin will move solely inside JP Morgan’s ecosystem, but will have the ability for cross-chain communication. (That translates into much wider reach!)
The Coin’s major benefit is its ability to instantly settle payments. (That’s a big deal! The idea is similar to Ripple’s XRP digital coin for global payments.) I can hardly wait to see how it will all develop taking into account that there are many, many possible applications for the Coin!
According to Mr. Farooq, JPM Coin’s first real-world application will be in international payments for JP Morgan’s large corporate clients, the second one for securities transactions, and the third one has been planned for huge corporations that use JP Morgan’s treasury services business to replace the US Dollars they hold in subsidiaries across the world. (The plans further down the road are even more exciting and ambitious!)
In practice, the whole process will work as follows: JP Morgan’s clients will be issued the coins after depositing US dollars at the bank; upon using the tokens for a payment or security purchase on the blockchain, JP Morgan will destroy the coins and give the clients back a commensurate number of US dollars. (Beautifully simple!)
Other competitors in fast, secure and cheap cross-border payments are emerging
There are many other projects that will enter the production stage this year. IBM’s Payment Network called Blockchain World Wire is one of the high-profile ones that have already been demoed. It is running on Stellar, an open-source, decentralised protocol for digital currency to fiat currency transfers.
Lumen (XLM) is the native currency of Stellar’s network and, as such, it will be used by default to facilitate transfers. Having said that, transacting parties within Blockchain World Wire network will also be able to choose a stablecoin, a central bank digital currency or any other digital asset as the bridge asset between any two Fiat currencies. (Wow!) Apart from facilitating the trade between financial institutions, the bridge asset will also supply all settlement instructions, thereby enabling simultaneous clearing and settlement. (That means that there is no need for a middleman!)
Blockchain World Wire’s ability to use a whole range of digital assets for transactions represents the main difference between Ripple’s xRapid product and IBM’s platform. Moreover, IBM plans to expand the current range of digital assets that act as settlement instruments, and also to spread its network around the world. (Wow again!)
Glimpse into the near future
My aim is not to overwhelm you by listing all other similar ideas already in the testing phase, but rather to update you on the main trends and developments that might shape the future. And, J-Coin, a stablecoin pegged to Yen to be issued by Japanese Mizuho Financial Group, is definitely one of them!
The Group partnered with sixty more financial institutions so, right from the start, they will host fifty-six million user accounts altogether. The coin will be managed by a mobile app called J-Coin Pay, which will directly link those bank accounts with digital wallets. All transfers between bank accounts and J-Coin wallets will be totally free.
The Group will also be onboarding big, medium-size and small retailers in urban and rural areas in order to sign up many more users. Also, the fact that J-Coin Pay will use QR codes at checkout for retail payments and therefore charge merchants lower transaction fees than credit card services will certainly enhance its adoption.
Furthermore, J-Coin wallet will enable a more flexible range of payments and remittance services than traditional bank account: for instance, friends will be able to split bills and family members to transfer pocket money.
The future plans include salary payments and expense accounting using J-Coin; as well as partnership with Alipay and UnionPay, two very large Chinese mobile payment platforms, a move that will make transactions easy for Chinese visitors to Japan. Additionally, the group intends to expand the platform to provide a wide range of financial services, and to implement new technologies to make use of the data it will collect from the new payment service. The latter will undoubtedly open new business opportunities!
Please follow the link to Mizuho’s official communication for more details regarding the platform! The info is eye opening! J-Coin Pay will bring Japan a step closer to a cashless society. All in all, it seems that stablecoins, i.e. cryptocurrencies will gain much wider adoption much earlier than we expected!
Different types of Stablecoins
Even if you do not hold or use any cryptocurrencies, I am sure that you know how volatile the market is. Their daily value swings can be quite substantial. In order to mitigate that price volatility, the value of a stablecoin can be fixed. There are a few ways to do that, and the first one is to peg it to a Fiat currency, for instance US Dollar, as in the example of JPM Coin. That means that a one-to-one ratio of actual US Dollars are kept in an account at JP Morgan to back up the tokens that the bank then issues.
Another way to achieve a peg is to collateralise a stablecoin with a basket of cryptocurrencies rather than Fiat cash. However, since cryptocurrencies are pretty volatile themselves, that stablecoin has to be over collateralised by 1.5–2 times. The most popular stablecoin of that sort is MakerDAO DAI.
The third approach does not involve collateralisation, but maintains a stablecoin’s price by math, i.e. a hedging algorithm that manipulates the supply of that stablecoin (aka Algorithmic Seigniorage token) by increasing it when the price goes up and decreasing it when the price goes down. Of course, there is much more to it than that! The model is pretty interesting! I will, therefore, refer you to Phil Glazer’s brilliant Overview of Stablecoins for more details as well as all the Pros and Cons of each system. I would just like to mention that last April Basis raised US$133 million to create such a stablecoin, but cancelled the project in December due to regulatory issues. (The Basis team were not able to avoid securities status for bond and share tokens they would have been issuing along with Basis coin to keep the whole system operating.)
The State of Stablecoins 2019: Hype vs. Reality in the Race for Stable, Global, Digital Money
That’s the title of an awesome report by George Samman, a blockchain and cryptocurrency advisor. I have already emailed the pdf to many of my colleagues who I knew would want to dig deeper into the topic. Please feel free to email/message me if you would like it as well, or fill in the form on Reserve’s website to download a copy!
In case you are not fond of reading longish reports, here’s my selection of the main points:
- Stablecoins will play a key role in mainstream adoption of crypto technologies. (We all agree, don’t we?)
- Stablecoins and tokenised securities are the future of crypto innovation. (That’s also easy to understand since stablecoins will provide a stable store of value, a unit of account, and a means of exchange; we will be able to get paid in stablecoins, pay for coffee, shop for groceries, save, etc. Likewise, tokenised assets and securities will create a whole new economy.)
- Stablecoins potentially promise to be a multi-trillion dollar marketplace.
- Major enterprises and banks (like Facebook and JP Morgan) will facilitate the adoption of stablecoins. (We have already talked about the future use of JPM Coin. A few days ago I read a report about Facebook working on a stablecoin for WhatsApp users. Let me remind you that the last recorded number of WhatsApp users in 2018 was 1.5 billion in 180 countries. Other popular messaging apps in the world are doing the same, e.g. Telegram, Signal, Kakao in South Korea and Line in Japan.)
- A government may simply attempt to issue a relatively stable central cryptocurrency. (That’s a possibility! We have seen that stablecoins increase efficiency.)
- Developing countries with hyperinflation, such as Venezuela and Angola, will be the first to adopt stablecoins, while others will follow. (Do you agree? Or will it be a country like South Korea with its high level of tech adoption, favourable regulations and exchange infrastructure? How about Japan?)
- The US Dollar will be the most tokenised liquid asset in the cryptocurrency space in the next 12–24 months.
- If a massively adopted stablecoin is pegged to Dollars, it could increase the total supply of Fiat money and thus contribute to inflation and further instability. According to the report, price-stable coins will rather be based on various assets, rather than on national currencies. (This is something I will write about in my next post!)
- In the next phase of development cryptocurrency will be programmable. There will be much more information available than the transferring of tokens from one wallet to another. It will include metadata about the contents of a transaction and will include a shared accounting layer. (I will also cover programmable money in my next post. I have learned about some really cool projects and I simply have to let you know about them!)
- Our current monetary system has resulted in a global level of price instability and inflation, and blockchain and cryptocurrency can tackle this challenge. (Yeap, my next post will discuss that as well!)
- Monetary maximalism, the idea that only one currency will emerge as the winner, is highly unlikely to occur. (Totally agree!)
I would still recommend that you read the report. I thoroughly enjoyed it!
Please post your comments and opinions below, or resources that you would like to share!