Cryptocurrencies as Money: Evolution of Stablecoins and What's Next

Stablecoins are cryptocurrencies that are backed by other assets to achieve a stable value, which creates untold opportunity for the way humans interact with money as they have the benefits of cryptocurrency (borderless, secure, low cost) while protecting the users from volatile price action. They often represent real money (GBP, USD etc) and for this reason are more easily understood by a global audience.

I'll briefly outline the more common types of stablecoins before I do more of a deep dive on the emerging trends we are starting to see discussed by global powers, like CBDCs (Central Bank Digital Currency) or public payments infrastructure built by corporations, like Facebook's Libra.

The stablecoins that currently represent the most volume are typically backed by real world assets off chain (the assets are not related to a blockchain) - like the US Dollar or the Pound, notably TUSD or TGBP (Issued by Trust Token). Trust Token is an example of a regulated stablecoin issuer with 1:1 assets in a bank for each stablecoin in circulation.

There are also stablecoins that are backed by assets on chain (the assets are on a blockchain) Most notably MakerDAO which is collateralized by cryptocurrency.

The most complex of the stablecoin family is the algorithmic backed stablecoin, which achieve price equilibrium through complex algorithms - such as Basis who ambitiously raised $133m but later had to shut down the project due to regulatory hurdles in the US.

If executed correctly, algorithmic may prove the most shielded from real world influence, as its price would be protected by computer code rather than external financial influences like fiat currency stability.

Bitcoin offered us a new way of looking at money - it offers borderless infrastructure unlike traditional banking, remains highly secure, and has an extremely low barrier to entry - literally anyone with an internet connection is able to create a wallet and send and receive bitcoin around the planet, usually for a very low fee.

Let that sink in if you haven't already, because I feel like a lot of people still haven't quite grasped that fundamentally. The impact of this starts to become clearer when we look at growing peer to peer volume. Noteable figures here are from Chile and Argentina, which are seeing aggressive growth.

More famously is the Venezuela example, where people buy Bitcoin to exchange for USD - which I'll explore more later.

While bitcoin gave people an opportunity to be their own bank, the bank isn't much good when the value of its assets is highly volatile - this is why stablecoins are likely to be at the heart of new infrastructures and interfaces that are being created around the world, and it is definitely worth watching out for applications that let you send, spend and store cryptocurrency seamlessly, as we are still at a bit of a blockade when it comes to doing so.

Currency as a Hedge

In Venezuela the US Dollar is now more desirable than the bolivare, it's considered a hedge and seen as "sound money" where the bolivare isn't. This concept is known as Dollarization or Currency Substitution and often occurs during economic downturn and aggressive currency devaluations.

Perhaps the most famous example of this is Zimbabwe. A famous run of pictures features citizens with entire wheelbarrows full of cash as the result of currency devaluation.

Stablecoins offer the potential for currency hedging and diversification on a micro scale when the correct tools are introduced. Blockchain & DLT give us the ability to create a bank account with our mobile and simultaneously hold multiple currencies at once.

This is no small feat, and will likely create direct competition with central banks or change the way people interact with money. For example, a citizen in Chile would be able to simultaneously hold US dollars, Swiss Francs, and Euros, all in his mobile phone.. or better yet, a new stablecoin that is backed by a basket of all three.

This paves the way for the emergence of micro economies or community lead economies where people begin using other currencies that they feel are more stable or secure than their own, or the currency of their home country. In the modern world, where travel and migration are so common, this also allows the more open flow of money - very bad news for money transfer services like Western Union, who charge up to a staggering 7%.

Digital Money services are already flourishing in the Phillipines.

The catch here? Banking authorities and regulators won't like this at all. Once that stablecoin has been issued, it can be freely traded and it could be difficult to trace who is using it.

Especially if people create ways to spend them in small communities. The difficult part will of course initially be exchanging the stablecoins for real paper money, though regulated entities like Trust allow the immediate exchange of stablecoins to fiat money.

Despite these stablecoins having a real money counterpart 1:1 in a bank, once they are issued onto a public blockchain they can usually be moved freely and they exist outside of the banking system until they need to be exchanged for paper money - but what if they don't get exchanged at all?

There is a very real possibility that people create ways to spend them amongst themselves once the interfaces have been built. This is bad news for big banks and surveillance states, largely why Bitcoin is already considered a threat to monetary policy in places like Venezuela.

Central Bank Digital Currencies, or "CBDCs"

It's no surprise that decentralised technology will be utilised by centralised banks eventually. Financial inclusion and technological efficiency are two benefits, but ultimately they offer the bank more control and surveillance over the users. State issued digital currency is coming and sooner than you might think.

Earlier this year the Peoples Bank of China announced plans to roll out a digital yuan, and they're making good headway. More recently was the suggestion of a US Digital Dollar as part of a Coronavirus Relief Bill, which was later removed from the bill.

The Central Bank of England are also exploring CBDCs at length, and have issued a public discussion paper which you can even respond to.

But what is a CBDC? - simply put a Central Bank Digital Currency is digital money that is issued by the bank (digital fiat). With the rapid decline of cash in society and more private banks, this could potentially give edge to central banks to offer more lucrative tools to users. CBDCs will coexist with paper money, rather than replace it.

It's important to note that BoE state that a CBDC "would not necessarily be a cryptocurrency" but would essentially offer the same benefits as Stablecoins: programmability, decentralisation and security, but they could also be thought of as digital bank notes.

Libra & Corporate Stablecoins

Most of the world are now aware of Facebook's plan to create Libra, a new Financial Infrastructure that would leverage Facebooks currently operational network of software that is thought to be home to over 2.5 billion people.

Libra is largely criticised on the global stage as it represents a real threat to Central Banks and existing banking infrastructure - Facebook also have a horrible reputation for user safety and protection given their history with our data.

Despite all that, if executed correctly It would allow the seamless movement of money between all Facebook software (Instagram, WhatsApp, Messenger) and offer Facebook even more power and influence than they already have.

This is really where Marc Andreessen's famous term "software is eating the world" comes to life. Facebook would suddenly not only connect 2.5 billion people, but also offer them global, borderless banking infrastructure.

Whether you like Facebook or not, that is an exceptional thing to think about. Particularly with how many Facebook users do not have access to a bank, but can access a mobile phone.

What this leads me to believe is that we are entering a more aggressive political period of innovation for 'cryptocurrency as money' with different sides representing different types of stablecoins.

Cryptoanarchists: Want more privacy, security and stability over their money - and to not rely on central authorities for safety (Public/Private Stablecoins).

Regulators/Governments: Want to maintain control of the status-quo by innovating to stay ahead of the curve (CBDCs).

Corporations: Want to create new financial systems like Libra using their existing influence and leverage. (Libra/Corporate Issued Stablecoins)

Before I continue, I confess I am oversimplifying things with the above groups - these groups aren't all black and white, and they do work together - Libra is undoubtedly home to some of the best regulators and smartest cryptographers in the world, just as there are some of the worlds best cryptographers behind government CBDCs. In fact, I would bet some of the folks working on CBDCs would even consider themselves cryptoanarchists and want to create better money for everyone.

Of all of the types stablecoins I have looked at, in my opinion the most successful will be public chain stablecoins that are backed by multiple assets or baskets of currency, and of course regulated and allow the exchange to fiat currency.

I suspect any Central Banks or Governments who are aggressive in experimentation and procure the right talent will also be onto something, although historically it has been hard to get the top software technologists into the public sector.

I also foresee it being very difficult for Corporations trying to innovate in this field, who will of course have to run the gauntlet with regulators and lawmakers - but it'll be worth it if they are successful. There is also the possibility that they collaborate and build technology in parallel with governments.

Cryptoanarchists, Corporations and Governments all want to ensure they have a seat at the table as they build the new financial infrastructures of the world, and none of them are going down without a fight.