Stablecoins

"Are these the future of money?"

The Bangko Sentral ng Pilipinas estimates that 77 percent of Filipinos do not have bank accounts while the International Monetary Fund says that globally there are 1.7-billion people who are unbanked or underserved with respect to financial services.

Even for us who have bank accounts, “stablecoin” is an unfamiliar concept. The first thing that comes to mind is that it’s another alteration of cryptocurrencies or digital currency like Bitcoin.

As the name suggests, stablecoin is a sub-type of cryptocurrency but is pegged to a “stable” commodity or asset such as fiat currency (US Dollar) or gold. So, a stablecoin that you buy for 10 US dollars can be exchanged to the equivalent 1-to-1 value.

Building on the advantages of blockchain technology, the creation of the stablecoin digital currencies aims to solve the inefficiencies of the current financial system that continue to deprive billions of people globally of basic financial services and hedge against the volatility of cryptocurrencies.

The fast pace of innovations that are disrupting financial services such as new payment methods, remittances, interfaces and even credit on cloud-based platforms are rocking the foundations of government regulators struggling to get a handle of the risks to established financial institutions. Acting on what has become a global fintech concern, the International Monetary Fund created the G7 Working Group on Stablecoins to explore its effects on the world’s economies. The results of the recently released report of this working group led by European Central Bank board member Benoir Coure proposes a viable framework for these new technologies and policy recommendations.

The report states that by linking stablecoin value to a pool of assets (such as fiat currency) might be more capable of serving as a means of payment and store of value, and they could potentially contribute to the development of global payment arrangements that are faster, cheaper and more inclusive than present arrangements but, being an emerging technology are still largely untested.

Furthermore, the report said that the potential benefits can only be realized if significant risks are addressed and that stablecoins, pose legal, regulatory and oversight challenges and risks related to: Legal certainty; Sound governance, including the investment rules of the stability mechanism; Money laundering, terrorist financing and other forms of illicit finance; Safety, efficiency and integrity of payment systems; Cyber security and operational resilience; Market integrity; Data privacy, protection and portability; Consumer/investor protection; and Tax compliance.

It added that on a global scale, stablecoin could pose challenges and risks to: Monetary policy, Financial stability, The International Monetary System, and Fair Competition.

The G7 Working Group recommends the collaboration of relevant stakeholders to develop road maps for supporting and scaling up ongoing efforts to improve the efficiency and inclusiveness of payment and financial services such as cross-border payments, financial inclusion and support programs for less developed countries, strong regulatory cooperation, and harmonized standards between relevant local and international authorities.

“The Working Group recommends that finance ministries, central banks, international organizations, standard setters and other public authorities maintain the high level of international coordination and collaboration needed for cross-border policies and regulatory regimes that apply to stablecoins. Public authorities should also be mindful to forestall harmful regulatory arbitrage and to ensure a level playing field that encourages competition. Close international coordination will help to reap the benefits of recent technological advances more quickly and efficiently and address the formidable challenges identified above,” the report said.

Important issues on emerging fintech solutions were raised by the G7 report that can be addressed if standards set by regulators of global financial systems are met. New solutions, whether developed by technology companies, governments, banks or other entities must forge a path of co-existence with the current financial structure under a well-designed regulatory system.

I have often twitted government for its laggard attitude to the fast pace of technology innovations that ironically offer practical and immediate solutions to corruption and inefficient delivery of public services. The G7 report gives a viable process guide to both government regulatory authorities and stakeholders to ensure that adoption of new technologies are secure and complementing to existing financial systems. The leading stablecoin projects including the hotly discussed Libra are aligning toward this direction.

Financial division affects the poorest of society who do not access to the most basic financial services. This lack of financial opportunity negates efforts to fight poverty which adds to the already heavy lifting of government resources.

Is stablecoin going to be the future currency? The benefits are too big to ignore for our regulators. Banks and even the BSP with its goal of financial inclusion are now more open to these new fintech solutions. As mobile technologies are already in the hands of every Filipino, the risk of predatory apps victimizing click happy users should spur more urgency in getting our regulations ready for the potential global shift to stablecoin.