Quant’s Founder and CEO, Gilbert Verdian, argues that only a certain kind of stablecoin is fit for enterprise use.
Blockchain has enabled all kinds of new digital money. At one end of the spectrum, we have cryptocurrencies: speculative and highly volatile. At the other, governments around the world are investigating central bank digital currencies – backed, just like fiat money, by a central bank guarantee. Somewhere between the two are stablecoins. They’re algorithmically pegged to a reserve asset like the U.S. dollar or collateralised 1:1 with the reserve currency and supposed to avoid the volatility inherent in cryptocurrencies.
But if this month’s spectacular crash of Terra UST and its sister cryptocurrency Luna can teach us anything, it’s that not all stablecoins are created equal. Algorithmic stablecoins, for example, have inherent vulnerabilities compared to backed coins and CBDCs. If their algorithmic peg weakens because of a depreciation in the linked currency’s value, then it can have a dramatic downward effect, making their use case as a bridge currency between cryptocurrency and fiat uncertain at best.
Perhaps as a result, the regulatory framework for stablecoin has been called into question, most recently by the SEC’s Janet Yellen. Global regulators are examining how to best ensure the stability of our financial systems, protect consumers, and create a vibrant and innovative environment for businesses and commerce to thrive. Indeed, it is a delicate balance to be struck.
Enter the commercial stablecoin
There are certain characteristics of a stablecoin that make it more suitable for B2B use by financial institutions and their enterprise customers. At Quant, we call these ‘commercial stablecoins’.
These privately issued digital currencies, backed by fiat or commodities, will become an essential counterpoint to CBDCs. Issued by regulated private companies, financial institutions and banks, many are already live. One consumer-facing example, Circle’s USDC, is now the fifth-largest digital currency with a market value of USD 52 billion. Others include the USDF Consortium, an initiative by 10 FDIC-insured U.S. banks to create a bank-minted stablecoin on a public blockchain. Another example is the DCJPY token, a yen-based digital currency pegged to bank deposits, developed by a group of 70 Japanese companies and banks to speed large-scale fund transfers and inter-company settlements.
There is also momentum growing amongst enterprises. Volvo, for example, is using its ‘trading tokens’ to function as e-money to facilitate payment for logistics and business services between participants in its ecosystem.
Commercial stablecoin for private enterprises is most likely to gain traction and volume for the flow of business-to-business payments and in trade financing. However, another use case could be for intra-company payments on private-permissioned ledgers at multinational enterprises. Internal corporate entities could adopt a stablecoin backed by fiat deposits for intra-company loans, FX and for netting to lower the costs of booking transactions between subsidiaries.
Fostering the commercial stablecoin
Much like in the early days of the internet, there is an interoperability limitation hindering the global use of commercial stablecoins. Today, they can only transact on the network they were initially issued on. Worse, they can only be redeemed for fiat with the bank (or consortium member) that minted them. And, of course, blockchains and DLTs are limited in interconnectivity, making it difficult to move or transact stablecoins from one network to another.
How then does the commercial stablecoin live up to its potential? The answer is three-fold: make it easy to issue, make it useable on any blockchain and make it simple to redeem into fiat and vice-versa. Once these factors are put into place, and we are nearly there, we will see more enterprises embrace these innovative digital assets.
We envision a future with a diverse ecosystem where cryptocurrencies, commercial stablecoin and CBDCs, each with a unique purpose to store and exchange value, become ubiquitous.