Is the long march to Digital Currencies and Stablecoins inevitable?
Here is our pick of the 3 most important Stablecoin news stories during the week just passed:
This week, we look at the continued push by the western private sector technologists to gain ground in the new money arena and the restraining role of its State regulators, along with the Chinese State driven approach (hence the Chairman Moa reference to “long march”) who is also wanting to play a geopolitical disrupter role.
Firstly, in the rapidly expanding and innovative world of DeFi (Ethereum ecosystem and protocols) we see a new initiative known as Liquity, a new lending protocol that promises a fully redeemable stablecoin. The work is still continuing at a pace down at the base protocol layer with lots of new ideas and initiatives. Some will most certainly fail, hopefully some will succeed spectacularly, all without State money and direction.
Then the restraining side. The ECB has realised just how successful Facebook’s Libra could be and released a paper calling for proactive stablecoin regulation. ECB Stablecoin Regulatory and Stability Review “We conclude that the malfunctioning of a global stablecoin’s asset management function could pose risks to financial stability given its potential size and interlinkages with the financial system. In order to reap the potential benefits of global stablecoins, a robust regulatory framework needs to be put in place in order to address these risks before such arrangements are allowed to operate.”
Finally, China, undaunted by COVID-19 is continuing it’s push not only with the rollout of its stablecoin technology but also at a geopolitical level as it looks to leverage its position and create an alternative to the US Dollar.
- FX Street article: “United States dollar dominance on shaky waters as China’s digital Yuan takes shape”. United States dollar dominance on shaky waters as China’s digital Yuan takes shape
- Cointelegraph article: European Central Bank Calls for Proactive Stablecoin Regulation With the ability to scale quickly via its 2 billion users, Facebook’s Libra could amass USD $3 trillion in assets and become a systemic risk to the financial system, says the ECB.
- The Block article: Liquity, a new Ethereum-based lending protocol, promises a fully redeemable stablecoin The system, still under development, has a novel redemption mechanism that sets a price floor and minimizes the need for governance. It believes that the strategy it will employ to maintain parity with the U.S. dollar will make the system more capital-efficient and less risky than its predecessors.
So a final thought, is the restraining by regulators giving banks time to decide if they will be leaders or followers? This excellent clip from Darrell Duffie, professor of finance at Stanford Business School posits that Digital is inevitable and that Banks will be involved at the point the losses incurred by disrupting themselves and adopting Digital are outweighed by the cost to their core business from new and emerging competitors like Facebook. youtube link
Simply put, it is a loose, loose game for the Banks. Maybe a handy pandemic to sweep up all those loses with some State support might be a great opportunity? Something to ponder as we look for a path out of lockdown.
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