There has been a significant increase in the value of stablecoins in 2020. The total size of the stablecoin market has risen in the last year to now be worth over $26billion with the largest by far being Tether -USDT- which has grown from $4.29 billion to $19.6 billion. Incredibly, Tether is being investigated by the New York State Attorney since Tether has been unable to clarify whether it is, indeed, backed 100% by US$ - yet it keeps growing….
The top ten biggest stable coins
Facebook’s Libra project was launched June 2018 and originally in its white paper it proposed to create a digital currency that would be backed by basket bank deposits and government bonds denominated in US Dollars, Euros, Yen, and British Pounds. Libra has now announced that it is to rename itself Diem, although it will be keeping the same logo. Although Facebook would still appear to be very much involved, Dahlia Malkhi, the new CTO of Diem is, and has been, Lead Researcher at a subsidiary of Facebook. Novi which is Facebook’s representation on the Libra, sorry on the Diem governance board. According to a report by the Financial Times, Libra is to launch a US dollar-pegged stablecoin, meaning it will launch a digital currency/coin with each one backed by a US dollar. The project, however, still requires approval from the Swiss Financial Market Supervisory Authority FINMA.
Therefore, a stablecoin with a governance board backed by the likes of Andreessen Horowitz from Silicon Valley, Facebook, TEMASK (Singapore sovereign wealth fund), Shopify (Canadian version of Amazon), Uber, Women in Banking, to name just a few, is sure to prove popular? The reputational damage to the different organisations on the governance board of Libra ought to ensure risks will not be undertaken so that every Libra $ stablecoin will, indeed, be backed by a $ in a bank account somewhere? Consequentially, would Libra not be a safer option than Tether?
The main challenge Facebook’s Libra has been confronted with is a barrage of negativity from different jurisdictions since these countries fear that, with Facebook’s 2.4 billion and WhatsApp 2 billion active monthly users, it means Libra could become very popular, very quickly. If Libra were to become the payment mechanism of choice, it is feared it may undermine various governments’ control over their supply money, and potentially their economies. How justified these fears are is questionable. Libra, if backed 100% by assets such as cash or government bonds, would not be able to create unsecured coins. Ergo, Libra’s ability to influence monetary policy through artificially expanding or contracting its supply would not be possible - a course of action that many of the governments expressing concerns over Libra regularly do with their own currencies.
Different governments express concerns over Libra
Source: Belfin club
One of the criticisms of digital currencies relying on Blockchain technology is that they are unable to handle large volumes of transactions. However, Libra, instead of relying on a decentralised peer-to-peer network, will rely initially on the Libra Association and those with permission to modify its Blockchain. Nonetheless, a concern is - will this more centralised structure make Libra more vulnerable to cyber-attacks? It is understood that Libra is therefore looking to transition to a more decentralised style of Blockchain so as to minimise the dependency on the Libra Association. Thus far, there are no further details as to when, or how, this change will be implemented.
Meanwhile, Goldman Sachs is predicting that the digital currency already launched by the Chinese will attract over 1 billion users within 10 years. The Chinese government hopes its new digital currency will help the nation’s traditional banks (which have been facing stiff competition from FinTech rivals) potentially increase their market again in the long-term. The Chinese government is clearly generating a tightening of restrictions on the FinTech sector, as can be seen by the suspension of Ant Group’s (Ant) IPO. Ant, with its one billion users, runs Alipay (one of the most popular payment systems in China) and is now facing a monopolies investigation by the Chinese government along with WeChatPay, which is owned by Tencent. Reuters reported these two payment platforms were responsible for over 90% of mobile banking transactions in the third quarter of 2019. Therefore, it would seem that if the Chinese digital currency is to be a success, Alipay and WeChatPay are potentially more of a threat to its adoption than cash!
It is almost certain that we will see other jurisdictions creating their own digital currencies. Indeed, the CEO of PayPal claims that the “use of digital currencies is set to go mainstream as more merchants take a ‘digital first’ approach to payments.” However, despite the success of stablecoins to date, governments are likely to start imposing more restrictions on new digital currencies (e.g Libra) as they fear their popularity could be so great as to make it difficult for the institutions to have a successful digital currency themselves. Notably, some jurisdictions, such as the US, are claiming that digital currencies could increase ‘shadow’ banking risks and are therefore looking to introduce legislation which would potentially make running the software of stablecoins illegal. Whilst Libra is rumoured to be positioning to issue a digital currency in January 2021, we will have to wait to see if it will be given the go-ahead! David Marcus and Mark Zuckerberg have, in the past, said: “Libra wouldn’t launch anywhere in the world without US and EU approval”. Nevertheless, will they unreservedly proceed if they get approval to do so from the Swiss regulators?