ALTCOIN, BLOCKCHAIN

International Monetary Fund Releases Statement on Cryptocurrency, Stablecoins

The International Monetary Fund (IMF) released a statement regarding potential use cases and risks associated with cryptocurrency, including stablecoins


By Tobias Adrian and Tommaso Mancini-Griffoli

A battle is raging for your wallet. New entrants want to occupy the space once used by paper bills or your debit card.

// STAY UP TO DATE – FOLLOW BLOCKCHAIN DAILY ON TWITTER: @BLCKCHAINDAILY

The adoption of new, digital payment methods could bring significant benefits to customers and society: improved efficiency, greater competition, broader financial inclusion, and more innovation. But it could invite risks to financial stability and integrity, monetary policy effectiveness, and competition standards, as outlined in a recent IMF staff paper, the first of a new series of Fintech Notes.

“Adoption of new forms of money will depend on their attractiveness as a store of value and means of payment.”

Stablecoin adoption

Adoption of new forms of money will depend on their attractiveness as a store of value and a means of payment. New entrants like stablecoins, however, are significantly different from the popular incumbents: cash or bank deposits.

RELATED: Christine Lagarde: Central Banks Should Explore Issuing Digital Currency

While many stablecoins continue to be claims on the issuing institution or its underlying assets, and many also offer redemption guarantees at face value (a coin bought for 10 euros can be exchanged back for a 10-euro note, like a bank account), government-backing is absent. Trust must be generated privately by backing coin issuance with safe and liquid assets. And the settlement technology is usually decentralized, based on the blockchain model.

Times are changing. USD Coin recently launched in 85 countries, Facebook announced Libra, and centralized variants of the stablecoin business model are becoming widespread. So why are stablecoins taking off?

The strength of stablecoins is their attractiveness as a means of payment. Low costs, global reach, and speed are all huge potential benefits. Moreover, stablecoins could allow seamless payments of blockchain-based assets, and can be embedded into digital applications thanks to their open architecture, as opposed to the proprietary legacy systems of banks.

But the strongest attraction comes from the networks that promise to make transacting as easy as using social media. Payments are more than the mere act of transferring money. They are a fundamentally social experience linking people. Stablecoins offer the potential for better integration into our digital lives and are designed by firms that thrive on user-centric design. Large technology firms with enormous global user bases offer a ready-made network over which new payment services can quickly spread.

Risks of stablecoins

Risks abound, however—so policymakers must create an environment that maximizes benefits and minimizes risks. Policymakers will need to innovate and collaborate across countries, but also across functions. Here are six observations for them to consider.

First, banks may lose their place as intermediaries if they lose deposits to stablecoin providers. But banks are not sitting ducks. They will surely try to compete by offering their own innovations (and higher interest rates). Also, stablecoin providers could recycle their funds into the banking system, or decide to engage in lending by extending deposits themselves. In short, banks are unlikely to disappear.

Second, new monopolies could arise. Tech giants could use their networks to shut out competitors and monetize information, using proprietary access to data on customer transactions. New standards are needed for data protection, portability, control, and ownership. And services need to be interoperable to facilitate entry.

Third, weaker currencies could face threats. In countries with high inflation and weak institutions, local currencies might be shunned in favor of stablecoins in foreign currency. This would be a new form of “dollarization” and might undermine monetary policy, financial development, and economic growth. As countries are forced to improve their monetary and fiscal policies, they will have to decide whether to restrict foreign-currency stablecoins.

Fourth, stablecoins could promote illicit activities. Providers must show how they will prevent the use of their networks for activities like money laundering and terrorist financing by enforcing international standards. New technologies offer opportunities to improve monitoring, however supervisors will need to adapt to the more fragmented and geographically diverse value chain of stablecoins.

Fifth, stablecoins could provoke the loss of “seigniorage,” where central banks capture profits from the difference between a currency’s face value and its manufacturing cost. Issuers could siphon off profits if their stablecoins do not carry interest but if the hard currency backing them earns a return. One way to address this issue is to promote competition so issuers of coins would eventually pay interest.

Sixth, policymakers must reinforce consumer protection and financial stability. Customer funds must be safe and protected from bank runs. This calls for legal clarity on what kind of financial instruments stablecoins represent. One approach would be to regulate stablecoins like money market funds that guarantee fixed nominal returns, requiring providers to maintain sufficient liquidity and capital.

Stablecoins thus present as many conundrums as they do potential benefits—and policymakers would be wise to envision far-sighted regulatory regimes that will meet the challenge. The policies adopted today will mold the world of tomorrow. We explore one such avenue in our next blog.

// CLICK HERE FOR MORE BLOCKCHAIN NEWS

Donate BTC: 13xyfdE1ERCu6ZaZ6Ejj7x6B7au8GJXont (Click for QR)
ERC 20: 0x3930890DC36E40e17c280aF5A80cEAC30732cFB9 (Click for QR)

BLOCKCHAIN

Circle Launches U.S. Dollar Backed Stablecoin

Today Circle and the CENTRE open source consortium introduced a service to tokenize US dollars and use those dollars utilizing blockchain technology, USD//Coin (USDC).

// STAY UP TO DATE – FOLLOW BLOCKCHAIN DAILY ON TWITTER: @BLCKCHAINDAILY

Individuals and institutions can enroll in this service to deposit US dollars from bank accounts, convert those dollars into tokens usable everywhere the internet reaches (subject to the token’s compliance controls), and redeem USDC tokens and cash out to bank accounts.

“When we founded Circle five years ago, we and many in the crypto community envisioned fiat money and financial contracts executing on top of distributed public network infrastructure, building on open standards that would allow us all to share value as instantly and easily as we can access content in web browsers and exchange messages in email and messaging apps,” the company stated on a recent blog post.

In addition to immediate usage on Circle Poloniex and Circle Trade, more than 20 companies are also announcing or launching support for USDC today.

Other wallets, exchanges, and software applications can add support for the USDC token through the open ERC-20 standard.

Price-stable tokens are foundational requirements for enabling powerful new global financial contracts, products, and services on the internet.

USDC is the first of several fiat tokens CENTRE expects to deliver, and Circle is the first of several forthcoming CENTRE members to launch USDC issuance.

Just as HTTPS, SMTP and SIP enabled free borderless information sharing and communications, crypto assets and blockchain technology will enable us to exchange value and transact with one another in a similar way: instantly, globally, securely and at low cost.

A fundamental building block of this vision is the tokenization of fiat currency itself, through what are now referred to as fiat stablecoins.

A safe, transparent and trustworthy layer for fiat to operate over open blockchains and within smart contracts is a necessary precondition to the broader and more revolutionary potential of a crypto-powered global economy. USDC aims to meet this need.

This market infrastructure succeeds only if it is a base layer that everyone can all use and build upon, and which no one issuer can centrally control.

Because of the critical need for openness and interoperability, Circle helped to create CENTRE, an emerging consortium that is defining standards and policies for fiat stablecoins as well as enforcing a governance scheme for issuers of CENTRE-enabled technology.

USDC is the first release of technology developed by CENTRE, and more information about CENTRE’s USDC contract is available on the CENTRE blog.

USDC is built on openness and accountability, enshrined in the governance and technology standards effort of CENTRE.

Commercial issuers of USDC are required by CENTRE to:

• Be licensed to handle electronic money, such as banking, money transmission or trust charters
• Have audited AML and Compliance programs that meet FATF standards
• Back all tokens on a fully reserved basis and provide monthly published proof of reserves attested to by certified public auditors
• Support fungible exchange and redemption of USDC tokens from other authorized issuer members
• Meet other reporting and review requirements established by CENTRE

Leveraging $20m in funding raised last year, CENTRE is launching its broader membership framework which includes other established financial technology firms as additional issuers.

Over the coming weeks, CENTRE will share more about these other members beyond Circle.

CENTRE believes that an open internet of value exchange can transform and integrate the world more deeply, eventually eliminating artificial economic borders and enabling a more efficient and inclusive global marketplace that connects every person on the planet.

The future of the global economy is open, shared, inclusive, far more evenly distributed, and powerful not only for a few chosen gatekeepers, but for all who will connect.

This vision relies upon an open standards model for fiat money on the internet, which is emerging now with broad industry support behind USDC.