Stablecoin projects in the making

This is the second part of the Stablecoins post I published two weeks ago. This time I would like to introduce to you a few more interesting and exciting projects, but with a different perspective — the other side of the coin, so to speak!

I have been incredibly lucky recently to meet Alexander Lipton, a Connection Science Fellow at the Massachusetts Institute of Technology (MIT), and Alexis Collomb, a professor of Finance at Conservatoire national des arts et métiers (CNAM), at an event dedicated to exploring and assessing the efficiency gains and risk reduction we could expect from blockchain/DLT. (That’s Alexander and me in the photo, chilling out in the break in a nearby café. Alexis was busy overseeing the event that whole day, so he missed his shot of espresso.)

Stable, Global, Digital Money

If you happen to have read my last post, then you will remember that I referenced that awesome report by George Samman on The State of Stablecoins 2019 where he comments that our current monetary system has resulted in a global level of price instability and inflation — a challenge that can be tackled by blockchain and cryptocurrencies. In order to do that, the report mentions that pricestable coins will be based on various assets, rather than on national currencies.

Well, Alexander is actually involved in a very big research project run by MIT — called Digital Tradecoin (DTC). The idea behind it is to create a coin stabilised by a basket of real assets (e.g. crops, energy, minerals) so that it can circulate in a large ecosystem and help global trade. It is meant to be a natural counterweight to Fiat currency.

And, to be suitable for large-scale transactional purposes, Digital Tradecoin (DTC) is designed to be fast, fully scalable, reliable and environmentally friendly since it will use a preapproved network of diverse and trusted Validators rather than the energy-intensive process of mining. Here is how it will work in practice: Sponsors will pool the assets, an Administrator will digitise them and issue DTCs, Users who want to buy DTCs with Fiat currency will do that through a Special Bank who will send the coins to them via a distributed ledger. By the way, the ledger will be semi-private which means that Users will be anonymous, while Sponsors will be publically visible and verified.

In order for the whole system to function efficiently, Know Your Customer (KYC) and Anti-Money Laundering (AML) solutions will be implemented along with an algorithmic mechanism that will ensure the stability of DTC. For instance, if DTC’s market value rises in comparison to the intrinsic value of the underlying assets, Sponsors will contribute more assets to the pool and sell them on the open market — which will push the price of DTC down. On the contrary, if DTC’s value starts falling (when compared to the asset pool), the bank will sell DTCs back to the administrator for cash. The administrator will, in turn, sell part of the pool assets to obtain cash — which will push the price of DTC up.

The advantages of such a system are numerous. Since the whole process is completely transparent, the details of the monetary circuit can be supervised and, also, distributed accounting becomes easy. Hence, the system risks can be modelled and predicted more reliably.

Alexander explained to me that DTC would be ideal for international commerce when backed by an alliance of small nations or, alternatively, for use in commodity markets when backed by farmers. Another important point is that the risk of default would be much lower because the alliance members would be geographically and politically diverse rather than being a single large entity. Alexander told me that it was exactly how the Bank of England had come into existence in 1694 — as an alliance of merchants. (Did you know that?)

Stablecoins to facilitate further innovation

While listening to Alexander talking about the Digital Tradecoin concept, I thought to myself it was a perfectly valid idea. But, a real ‘eureka’ moment struck me while he was describing Silamoney, a startup Alexander co-founded together with Shamir Karkal, Angela Angelovska-Wilson and Isaac Hines — who are all accomplished professionals in their own right.

As you know, blockchain and distributed ledger technology have created new financial rails for transferring value. Additionally, many fintechs that specialise in unbundled services have emerged. Naturally, all these new rails and services need to be interconnected with the existing banking system. Well, Silamoney offers the missing link with its application programming interface platform and stablecoin called Sila. Essentially, they provide APIs for ID verification, account linking, as well as ACH** processing for issuing, redeeming and transferring Sila, and transacting with regular money. That means that fintechs, or any other SMEs for that matter, are free to start building their trailblazing applications right from the inception rather than wasting time searching for and partnering with ACH processors, ID verification providers, regtech providers, banks, and capital markets custodians — a process that can take up to a year. What’s more, the platform will make their transactions faster, easier and cheaper.

So, if you are a fintech startup or an SME, and the news got you excited, head over to Silamoney’s landing page. There is a short form at the bottom where you can sign up to work with the team. The technology will enter into a beta phase very soon, upon which you will be able to get access to a development sandbox.

As a stablecoin, Sila is pegged to the US Dollar (other currencies to follow!) via a centralised, 100% reserve held in highly liquid US treasuries. In fact, Sila’s structure and function resembles that of a Narrow (aka Special or Safe) bank. It might be worth mentioning here that Narrow banking * is a concept that would restrict banks to holding liquid and safe government bonds. As far as loans are concerned, other financial intermediaries would make them. In other words, the deposit taking and payment activities would be separated from financial intermediation activities. (Please follow the link above to an overview of the full-reserve/narrow banking proposal!)

I forgot to mention that Sila currently uses Ethereum, but is blockchain agnostic. Alexander revealed to me that they were also considering Stellar and Zilliqa. You might remember from my last post that Stellar is the platform IBM chose to run their Blockchain World Wire Network on since Stellar’s protocol for digital currency to fiat currency transfers allows cross-border transactions between any pair of currencies. Equally impressive is Zilliqa, a scalable, secure public blockchain platform with a very high throughput — 2,828 transactions per second (achieved in their test net). (Disclosure: Alexander sits on Zilliqa’s corporate and advisory board!)

In practical terms, Sila’s users will be registered with KYC information, a blockchain address, and an identifying handle. Once their info has been validated, they will be able to link their bank account and request to be issued Sila. The request will debit a certain amount of US Dollars from the user’s linked bank account, and upon settlement of the funds, the user will be issued Sila at their blockchain address. The debited funds will be held in a short-term government money market fund that invests in US treasuries, thereby guaranteeing Sila’s stability versus the US Dollar — as I have already mentioned above. The process is equally simple when a user requests redemption of Sila: the requested number of tokens at their address is burned, and the money market fund interest is deposited to their linked bank account.

What’s even cooler is that Sila can function as tokenised cash, that is, users can transfer it anonymously between themselves. All one needs is an Ethereum account and a wallet. Here is an analogy: when we withdraw or deposit cash at an ATM, we need to identify ourselves. But otherwise, it is not traceable what we do with it or whom we give it to. Similarly, Sila can move freely around the Ethereum universe.

‘Programmable money is a multi-trillion dollar opportunity’

You might have seen Spencer Bogart’s tweet regarding the future opportunity programmable money represents. Spencer is a Partner at Blockchain Capital, a venture firm focused on the crypto and blockchain industry, and he thinks that programmable money is a multi-trillion dollar market — and I think he is right!

Thanks to advances in cryptography and tokenisation technologies, we can nowadays not just transfer tokens from one wallet to another but also hardwire ‘Terms and Conditions’ of that transaction into it. It is literally a piece of code attached to a cryptocurrency that enables the parties in a transaction to reduce or eliminate their dependence on a middleman since the transaction happens automatically according to the predefined rules on when and how the value will be exchanged.

Sila is programmable money. For instance, it enables landlords to charge a fixed amount at a certain time each day, week or month through smart contracts. Of course, this is just a very simple example and a much broader set of computational instructions is possible.

Programmable money opens up limitless possibilities

I discussed programmable money at length with Alexis Collomb — that’s the guy who did not get to enjoy a cup of coffee with Alexander and me. Since the topic is so interesting and important, I feel that it deserves a separate post. Also, I have to get Alexis’ photo, don’t I? (In the meantime, please check the resource I linked to! It comes from IBM’s Institute for Business Value.)

I will end the post here with a piece of advice Alexis has for banks: “I would urge banks to start experimenting since programmable money opens up limitless possibilities, at least in theory. It should enable new value-added services deployed over integrated and controlled transactions whereby we can exchange different goods and services according to pre-agreed and built-in rules, and all that in a very transparent manner”

As always, I would like to thank you for all your likes, claps and comments! Have a great day!

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* ‘Narrow’ or ‘special’ or ‘safe’ bank is a proposed type of bank that would be restricted to holding liquid and safe government bonds.

** Automated Clearing House processing.