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Stablecoins: from the controversial Tether to their applications in Finance.

Starting from the first token minted by Tether, let’s take a look at stablecoins evolution and how they may be used by Financial Services in a nearby future.

Author: Felice Chiro

Few years after the launch of Bitcoin, attempts were already being made at hybridizing the stability of fiat money with the security and immediacy of cryptocurrencies, creating what has become known as stablecoins. As for Bitcoin, the first-ever stablecoin has also been the one destined to become the most successful and popular: its name is Tether, its symbol ₮. Created in 2014 as Realcoin and rebranded later that year, the first USDT tokens were issued using the Omni Layer Protocol, an additional layer on top of the Bitcoin blockchain, with the peculiar promise to maintain a stable exchange rate of one US dollar to one USDT. The key to maintaining this peg was the claim that the issuer company kept reserves of as many dollars as Tethers in circulation: anyone could deposit the desired sum in exchange for an equal amount of Tether. Conversely, anyone could theoretically redeem the dollar value of their Tethers.

As soon as it became available for trading in 2015, the stablecoin quickly shone thanks to unique features:

· It filled the void caused by the difficulty of the process of transferring real cash into digital cash.

· It made the conversion between unsteadily valued cryptocurrencies way easier.

· Being linked to the relatively stable value of the US dollar, while not being the US dollar, it gave liquidity and a hedge against the volatility typical of cryptocurrencies, becoming the favorite investors’ choice for backing up the value of their crypto investments.

· It became available both to the platforms which had enough resources to use regular dollars and the ones that did not, extending its acceptance to most of the crypto exchanges.

This soon resulted in its mainstream adoption as the medium used in cryptocurrency trading and as a safe-haven asset in times of great volatility, feats which would have never been reached by fiat alone. Such predominance translates to a current market cap that hovers over 4 billion dollars and a trading volume to this day of roughly 38 billion dollars, while the stablecoins' network expands in diverse directions: there are now tokens for euros (EURT) and offshore Chinese yuan (CNHT), and the issuance process is now also conducted in the form of ERC20 tokens on the Ethereum blockchain and on the Omni Layer of Litecoin.

But Tether’s hypertrophic success didn’t monopolize the stablecoin scene if anything it prompted its further developments: a new breed of diverse and enhanced fiat-backed coins came to light (namely TrueUSD, Gemini, Paxos…) and the idea of hardwiring cryptocurrencies to physical reserves tickled the curiosity of major financial and monetary institutions. Financial intermediaries could issue their stablecoins, which could provide them with an automated system to handle settlements independently from opening hours and all across the globe, with much greater speed, smaller costs and without having to rely on payment circuits or other intermediaries. This is the case of J.P. Morgan’s project for a “JPM Coin”, pegged 1:1 to the dollar, with the function to streamline internal money transfer. Another relevant application for stablecoins is the development of a safe and easily transferrable international tender for payments of whatever kind. Facebook seized this opportunity with both hands, standing on its popularity to layout the project for an outright global stablecoin, Libra, which if successful could leverage the platform’s enormous network to become a standard medium of exchange across the world.

However, generally speaking, setting up a proprietary stablecoin (“permissioned” is the technical term) is no easy task: you would need to assemble a team of experts to give credibility to the project and market it to attract investors, possibly build the code and the infrastructure from scratch and face expenses for legal compliance, which is becoming more and more stringent with time. On the other side of the coin, accessible resources indeed exist to make this easier: a notable example is Hyperledger Fabric, an open-source enterprise blockchain developed by the collaborative efforts of a consortium led by Linux and with members of the caliber of Intel, Accenture, Cisco, and American Express. Some of the member companies even provide their readymade Hyperledger Fabric infrastructure as a service (e.g. IBM), which saves the cost for setting it up autonomously, leaving only the other aforementioned costs in the equation.

Central banks also took interest in stablecoins, even though with mixed feelings: instances exist both for their heavy regulation or direct ban and for giving stablecoin issuers access to central bank reserves, which would strengthen the reliability of the coins and enhance regulatory clarity, also allowing for a more direct transmission of monetary policy.

In conclusion, it has to be said that while this article deals with is the opportunities and overall benefits of Tether and the pioneering role it had in the world of stablecoins, the stablecoin itself is not free from problems and controversies, which are common among cryptocurrencies and the research of whom is left to the reader. Aside from this, it is clear how the implementations of stablecoins and the advantages related to them are extremely vast, and how their integration and normalization in the World’s monetary system are pretty much inevitable.


©2018 by BBCA.

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