The past, present and future of stablecoins
Nikola Plecas, Visa Crypto Lead, Europe, provides insight on the current state of stablecoins, what the future may hold, and how Visa Europe sees its role in the future of these digital currencies.
Visa Navigate (VN): Starting off with the basics, what is a stablecoin?
Nikola Plecas (NP): So, taking a step back, first we should establish that we think of the crypto market in three segments: cryptocurrencies which represent new assets, like bitcoin; stablecoins, which are generally backed by existing fiat currencies and central bank digital currencies (CBDC), which are issued directly by central banks. Stablecoins and CBDCs are both forms of digital currency, which you can think of as digital versions of cash controlled by a private key.
When a digital currency is backed by a fiat currency (i.e., its value is tied to something like the US dollar or the euro) it can take two forms. It can either be privately issued commonly referred to as a stablecoin or it can be issued by a Central Bank and that makes it a Central Bank Digital Currency (CBDC). An example of a stablecoin is USDC (USD Coin), which is issued by a private company and is fiat backed 1:1 to the US dollar.
It’s important to note that for the purposes of this post, when referring to stablecoins, we’re only talking about fiat-backed, not algorithmic stablecoins (which are not fiat-backed and rely on market incentives governed by algorithms).
VN: can you elaborate a bit more on the differences between stablecoins and CBDCs?
NP: Because stablecoins are issued by private entities, the reserves used to back the currency, whether it’s a dollar, pound or euro--are held at a private commercial bank . Whereas in the case of a CBDC, those funds are directly issued and maintained by a central bank..
So far we’ve seen, most privately issued stablecoins run on public permissionless blockchains. That means anyone can access them and use them to build products, and they can be used to purchase anything as long as there is a counterparty who accepts it as payment. Meanwhile, we’ve seen CBDCs – which are mostly still in pilot phase - will likely run on permissioned networks that are governed by central banks with likely different levels of permission and access to different market participants.
Both represent payment innovation and could eventually be used for everyday purchases and transfers of value between consumers and merchants at a large scale.
We’re also seeing the line between stablecoins and CBDC blurring – there are emerging regulated stablecoins issued by banks or financial institutions that are backed by wholesale CBDCs.
VN: What are the main use cases for stablecoins?
NP: Today, stablecoin use cases are primarily centred around crypto trading and the B2B operations of crypto native companies We’re seeing companies within the crypto space paying their employees or their suppliers in stablecoins and they're actively managing their treasuries in stablecoins. So, at the moment it may seem a little niche, but we will likely new ways to see use stablecoins in the future. Some of the use cases being talked about in the near-term are micropayments, streaming payments, payrolls and cross-border disbursements. With >$6T worth of on-chain transactions in 2021 alone the potential is there.
An interesting and emerging use case is cross-border remittances. In many countries around the world, payments infrastructure is lacking, but access to smartphones is high . In this setting , a stablecoin represents a channel that could potentially be cheaper and more effective than existing remittance payment methods.
VN: What needs to happen to enable the development of stablecoins and the greater use of them in the mainstream economy?
NP: There’s still a long way to go before stablecoins are ready for widespread, mainstream use, but I think that three main things need to happen first. The first requirement is for consumers and merchants to have faith in the standards of governance behind stablecoins, so that they know that they can redeem their token at par and receive fiat currency like a dollar or a pound back at any given point in time. Secondly, you need to have the right regulation in place for stablecoins, which will provide certainty for businesses to start using them to build products. Without regulatory certainty it is difficult to envisage how these innovations can take place. Thirdly, building a new network requires technology – in terms of scalability and security – as well as a compelling story for consumers so they have incentive to switch and there needs to be access to a large merchant network. This is all still some time away .
There is also a high degree of complexity from poor UX and interoperability around using these instruments. At the moment, you would need to be crypto native to understand how to use them. Merchants are playing the waiting game, as it’s hard to predict which blockchain network will dominate this space as new networks continue to come online. I think, therefore, it is very hard for any of these solutions to gain traction. Right now, the incentive for consumers to switch is small.
VN: So what are the potential future benefits of adopting and using stablecoins?
NP: Theoretically, in terms of the direct improvements over fiat currencies today, the key advantage is speed. You are effectively transferring money over the internet, which can take seconds or minutes, and the experience is often more seamless than using a traditional banking system and converting back to fiat currency.
The first use cases of stablecoins were focused on transferring value across blockchain networks to support crypto economy use cases (primarily trading and B2B payments between crypto companies) . As the UX and UI for these services improve, in the future this could be used for any type of cross-border disbursements and could therefore be interesting to businesses that either need liquidity immediately, or would benefit from faster access to funds, and can enhance the existing money transfer capabilities of financial institutions.
Secondly, there is a big opportunity for using any type of digital currency as programmable money. This is probably the most exciting area which could benefit from being explored in more depth. . What I mean by programmable money is using smart contracts to write code to make it do different things automatically. As a business, if you are receiving funds, you can programme for a specific amount of a stablecoin to be used to settle your existing obligations or to pay employees. This automates a lot of the processes that businesses have to do manually today, potentially saving money and time.
VN: There have been a number of issues and reputational damage around stablecoins already – do you see that having a big impact and what could be done about it?
NP: Not all stablecoin schemes are created equally, and it’s clear we still have a long way to go before they are ready for mainstream use. Visa wants to ensure that there are appropriate safeguards and standards for how these underlying reserves are managed for these stablecoin schemes, so that consumers and businesses have full faith in the tokens and redeem at par. Visa works closely with regulators and these schemes to understand what the appropriate regulations and standards are to ensure trust and safety for consumer assets. We are monitoring for further developments in the U.S. and for other countries’ viewpoints and regulation on stablecoins. Visa believes that increasing regulation on stablecoins can address some of these issues and concerns. Increased transparency of where the funds are and how the reserves are managed with frequent attestations and lower duration of overall reserves is something that can provide additional credence and belief from consumers and businesses that they can redeem tokens at par.
VN: How far into the future do we have to look before stablecoins become an everyday feature of our lives?
NP: I strongly believe that as businesses and consumers interact more and more with crypto, some of the things under development will become products and services, and second nature to people, in the same way that reading an email or buying goods online became second nature to us in the late 1990s and early 2000s.
Personally, I think that in the near future we will see blockchains as another settlement layer and payment rail with stablecoins running on it. I think we’ll also see a number of new use cases will emerge covering things that we probably haven’t even thought of yet. The reason for that is that you have thousands of developers using these stablecoins as building blocks for new products and capabilities on open source permissionless networks where you can build whatever you want. With venture capital funds coming in and very intelligent people working on these problems, we expect that some of the complexities will be removed.
VN: What is Visa’s current role in the development of stablecoin and the direction it is going? Where do you see the potential for Visa to play in the future?
NP: Today, Visa is focusing on removing friction from the user experience when they try to purchase digital currency, whether this is cryptocurrency, stablecoin, CBDC, or a non-fungible token (NFT). This is at the core of what we do as a network – enabling consumers to buy goods and services. Visa will continue to play the role of a network enabler and payment provider for all kinds of existing and new payment flows, Visa also have a role to play in the future as a tech and infrastructure provider to become an integral part of these future payment network.
In the future, we want to continue working in this space and become a bridge between these new and exciting technologies and traditional financial services clients. Last year, Visa announced that we built a settlement capability that allows us to settle digital currencies, starting with stablecoins and USDC, and we want to extend this to other stablecoins and major currencies, as well as CBDCs, in future. Payments are not a zero-sum game. We see ourselves as the leader in this space, and as it develops, we want to be working with the most exciting developers and projects that are emerging.
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