September 15, 2020 8 min read
Opinions expressed by Entrepreneur contributors are their own.
In this digital age, consumer habits are proving that modern payment solutions make a lot of sense. And in light of social-distancing concerns, consumer preferences have trended even further towards contactless payments.
Stablecoins are Tools for Entrepreneurs
Digital payments offer a much-needed bridge between entrepreneurs and banks, suppliers, and employees. They can create new domestic opportunities, as well as elevate a business to the global playing field. For entrepreneurs, it’s crucial to maximize profitability at all times. Leveraging the power and potential of digital payments is an option too good to pass up on.
A digital transaction between the business and its customers or suppliers introduces more convenience, safety and a cheaper option overall. Addressing the cost-effective nature of payments is crucial, particularly for smaller companies and startups. They need to keep overhead costs down as much as possible while maximizing their revenue at every possible turn. Tapping into digital payments can make a world of a difference. Incorporating digital payments can lead to more customers, more revenue and more time to spend on other aspects of the business.
Stablecoins fit the digital payment narrative quite well. Every single one of these assets can be pegged to regular currency, whether it is a U.S. Dollar, Euro, Pound Sterling or other assets and commodities. A stablecoin has no fluctuating value, and it can only represent one unit of the pegged (fiat) currency. Stablecoins take fiat denominated assets and tokenize them on the blockchain. According to this research by Blockchain Capital, there are three major types of stablecoins, there are fiat-backed stablecoins where someone deposits U.S. dollars into a trust and a centralized issuer creates that stablecoin on a 1:1 basis with what is inside of the trust. And then “there are crypto backed stablecoins that use algorithmic pegs or backing with other crypto assets to create a stablecoin that’s still pegged to the U.S. dollar, but backed by crypto or algorithmically managed in some way,” Brian Kerr, co-founder and CEO at Kava, explained to me in a recent interview.
Related: 5 Types of Cryptocurrency Entrepreneurs Should Know About
Besides crypto-backed stablecoins, there are fiat-backed and governance-rights stablecoins. On the fiat-backed side, sustainable value capture is capped at a low percentage of the stablecoin market cap. Crypto-backed stablecoins diverge from centralized custody to provide a decentralized alternative while still maintaining claims on collateral. The volatility coin provides owner governance rights over system parameters or protocol changes to name a few.
While stablecoins are not a big part of digital payments yet, various companies and central banks are paying close attention to this concept. In the cryptocurrency world, stablecoins are used for very specific purposes. However, outside of trading with them on exchanges and exploring a handful of DeFi applications, like taking out loans in fiat currencies, there are few options for users in the cryptocurrency sector.
Stablecoins in Traditional Finance
Central banks, governments and even some technology giants have begun exploring the option of creating their own “stable” currencies. Facebook’s Libra, for example, can fit this role quite easily. It is backed by a reserve basket of different national currencies to help keep its value somewhat stable. However, the Libra project has received a lot of backlash, and its future remains uncertain.
The efforts by Facebook have not gone unnoticed. Central banks and governments are contemplating whether they can create a digital national currency. Efforts are underway in Russia, China and other countries.
At this time, China seems to be much closer to issuing a digital national currency than any other country. Its digital Yuan is already being tested by various banks in populated regions. Although these trials remain relatively small-scale, it sets the tone for what the future may hold. A stablecoin would fit neatly into China’s plan of going all-in on blockchain technology over the next few years.
“U.S. and China can offer a sovereign stablecoin,” says Kava’s Kerr. “They can set the interest to whatever they like by simply issuing holders more tokens, but it’s entirely inflationary. I doubt the population would accept a standard inflation of 4.5 percent. This is why USDX is attractive.”
Sovereign stablecoins are now being called the fourth type of stablecoin.
Finding the Right Markets
All of these efforts are intriguing, yet they do not guarantee success for stablecoins on a bigger scale. In some countries, they may have a better chance of being adopted quickly. Cash transactions have been on the decline in several parts of the world. A report issued by Cash Matters indicates how Finland, Singapore, the UK and South Korea are all noting strong declines in cash volume.
At the same time, there is the global growth of non-cash transactions. A reduction in cash transactions does not mean people are spending less money. Quite the opposite, in fact, as non-cash payments are expected to surpass $1 trillion by 2022, according to the same report. In theory, this creates a golden opportunity for stablecoins to thrive.
The Current Banking Problems
One option that cannot be ignored is how stablecoins can be of great benefit to the unbanked population. According to the World Bank, there are still 1.7 billion individuals on the planet with limited or no access to standard financial services and products. That is an astonishing number in an era where so many different payment options exist and compete for traction.
Using stablecoinsm either the cryptocurrency versions or the ones issued by central banks, can change this narrative entirely. All one needs is an internet connection and a phone. By tapping into this segment through a compatible stablecoin-esque offering, the financial system can be opened up to a much bigger group of users.
Another aspect to consider at all times is how banks are never “too big to fail.” The financial crisis of 2008 has taught everyone how even banks can close down, resulting in significant financial losses for their customers. Leveraging a decentralized solution with no ties to the banking system is a more favorable option. Funds will always be available for withdrawal, requiring no permission nor approval.
Of the many benefits stablecoins may bring to the table, earning interest on them is one that shouldn’t be overlooked. This concept is still relatively new, but the USDN team has shown this can be done in the following way: Holders of this stablecoin earn interest rates of up to 15 percent based on their account balance, just like a savings account works. Every USDN is backed by the Waves cryptocurrency. Crypto-backed stablecoins such as USDN and USDX are different from USDC and USDT that are not backed by digital assets.
How USDX works is “a user just needs to buy and hold USDX in a wallet and they will start seeing their balance go up each block,” Kerr explains reference to USDX’s savings rate offered to anyone who holds it. “Anyone who holds USDX gets to reap the rewards. These are just two examples of how crypto backed stablecoins operate.”
How central banks will approach this matter remains unclear. It is evident that, if these currencies are to replace (or complement) existing solutions, the concept of savings rates cannot be ignored. Creating a viable annual reward structure is difficult, unless there are enough ways for banks to effectively earn money through these currencies and pass some profits on to their customers.
Modernizing Global Payments
Stablecoins are, by definition, digital currencies with their value pegged to a real and stable asset. In this era of doing business online, it makes a lot of sense for entrepreneurs to accept modern digital payments. Looking beyond the traditional offerings can expand one’s audience and customer base exponentially. A stablecoin can be used by small businesses, traded and exchanged globally.
Incorporating this new form of money into one’s system can be done in many ways. Money transfer services can tap into more liquidity by expanding their service to migrant workers. Companies with international clients and employees can move funds across borders with ease.
U.S. Federal Reserve’s Board of Governors member Lael Brainard put it simply in a recent speech: “Stablecoins can achieve functions of traditional money without relying on confidence in the issuer to stand behind the money.” It is a very different way of doing business, and one that benefits both small and large businesses allowing entrepreneurs other means of commerce beyond fiat currencies.
Due to the transparent nature of stablecoins, as well as transactions, being irreversible, they make for great payment options to settle salaries and loans. On the other side of the spectrum, transactions via a stablecoin for subscription-based services, for example, removes the concerns regarding chargebacks and fraud. All payments are final.
Related: Stablecoins, Rather Than Cryptocurrencies, Might Be the Future of Money
Ongoing developments in the stablecoin industry will pave the way for more versatile solutions. There is no “perfect” currency yet, but what current offerings bring to the table should not be dismissed either. By actively pushing the boundaries and interweaving more features into stablecoins, such as earning interest, the modernization of global payments remains in full effect.