No, actually?

Having stability is the main strive of both governments and individuals who make plans for the future. However, the world is always in motion with markets rising and falling, geopolitical situations changing, demographics moving and entire economies being upheaved by such events combined. But such fluctuations and movements in general masses of both money and people can be controlled, channeled and used for the advantage of those partaking in the processes shaping the future.

The market is the main driver of both economic and technological progress, with new applications and services finding application and liquidity based on their profitability. As such, the volatility factor that plays into the hands of investors, allowing them to scalp profits, makes for a poor ally to those seeking to make use of financial instruments for their direct application, rather than their value-generating capabilities.

The ongoing transformation of the global economy is ushering forth entirely new forms of assets that can be adapted and adopted for the new digitalized format of transactioning and doing businesses. As digital assets seek stability via stablecoin formats, far from the reaches of volatility profiteering via pegging to real-world assets for collateral backing, states are catching up and preparing for stiff competition.

Going Digital

Digital transformation is not merely a fashionable term, but a process that is currently being incorporated not only into every facet of the economy by industries seeking optimization of their processes, but by governments striving to remain competitive and up to date with global economic developments.

The world is going digital fast, as recent statistics indicate that 65% of global GDP is going to be digitalized by 2022. Over $6.8 trillion in direct investments are going to be injected into the digital transformation frontier from 2020 to 2023. The figure is predicted to grow at a compound annual growth rate of 15.5% during the same period. As companies build on their existing strategies and investments, essentially turning into digital-at-scale enterprises, the future is starting to demand the instruments that would cater to the growing transition of users into the online space, considering the limitations of fiat currencies.

Considering the growing importance of digital channels in the global economy, and the looming prospect of the transition to Web 3.0 with the leveraging of decentralized technologies, questions are being raised about the capabilities of currently existing financial systems and tools to answer the challenge.

The Stablecoin Factor

A potential answer to the need for a stable unit of transaction capable of carrying value and interoperating with digital and decentralized economic systems was proposed in the form of stablecoins.

As digital currencies are pegged to a backing asset bearing real, intrinsic value in the physical world, stablecoins can act as virtually volatility-free means of payment. Being divided into types based on backing collateral – valuable commodities or global reserve currencies – stablecoins are interoperable between blockchains and can be used as both value carriers and tradable assets for cryptocurrency enthusiasts, providing liquidity.

Stablecoins are not just another type of digital asset, since they also have some real applications. The main of which is that they can be used as value carriers. Just as commodities that appreciate over time on the market, while maintaining relative stability of value, stablecoins, being bound to certain real-world assets, maintain their values. This distances them from the overall volatility of the crypto market. Their nature that binds them to real-world assets makes stablecoins the first type of digital asset that actually bears “real” value.

Stablecoins can also become a source of liquidity for decentralized projects, acting as backing for their economic models. However, given the nature of the digital assets market, it is questionable whether such a source of liquidity is needed outside the digital economy, considering the separate and distinct natures of the traditional and digital financial markets. The given assumption is also being backed by the general perception that cryptocurrencies will eventually become a generally accepted means of payment, freeing them from the bond to the real world.

Cryptocurrencies are also still considered as a means of speculation, but solutions that are being developed by some market participants are disrupting the financial system, providing more opportunities for average online users via a variety of instruments. The latter include tokenized assets, liquidity pools, P2P lending mechanisms and other options that mimic their traditional counterparts and often surpass them in terms of yields.

If volatile coins like Bitcoin are given an alternative, users will opt for stablecoins as a more secure store of value that replicates its counterpart of fiat. However, more technologically advanced and regulated coins will open access to the financial world for millions of people. Large institutional investors are still cautious about crypto and DeFi solutions, because they are interested in assessing the value of assets in US Dollars, which reverts the issue back to stablecoins, some of which are tethered to the US Dollar, like Tether.

Stability As a Factor

The most important question regarding stablecoins is their stability. The US Dollar pegged USDT stablecoin project, with its 62.7 billion circulating supply, fervently adheres to the mantra that every one of its coins is backed by a US Dollar at a bank. Recent scandals surrounding the coin have cast doubt on the validity of its claims, but that is not stopping the spread of the coin, which boasts a market cap of almost $62.6 billion.

Commodity-backed stablecoins are a completely different matter, as indicated in a report by Clifford Chance. The most dubious example is the Venezuelan El Petro, which is supposedly backed by the country’s oil reserves. However, commodities like oil and gold are highly volatile, unlike global reserve currencies, making the value-retention capabilities of such stablecoins highly questionable.

When it comes to use cases, apart from USDT, there are few stablecoins on the market that can boast any kind of comparable market caps, with the closest competitor being the USD Coin2USDC at $23 billion. Though USDT is a popular trading asset, its application as a payment instrument is limited with only a few resources like Pornhub and Travala accepting it. Apart from that, USDT is mostly a tradable and value-storage asset, vividly illustrating the meager use cases and, most importantly, user confidence of stablecoins as the transaction carriers of the digitalized economy.

The real applications of stablecoins resides in their ability to act as counterweights to the volumes of fiat in the digital economy needed to sustain its viability and provide a link for businesses and individuals seeking to use decentralized services while retaining price stability for their assets. The use cases for stablecoins are largely connected with the preservation of value and acting as a means of payments within the digital economy.

State Competition

Though susceptible to devaluation and inflation, state currencies are still the staple of financial transactioning. The confidence populations have in their national currencies is directly translated into their desire to use said currencies for online operations in the new digital environment of the economy of the future.

However, using national currencies through gateways for transacting is not always convenient, nor can such an approach pose competition to the direct approach of digital currencies when acting on a peer-to-peer basis. That is why states have developed their own Central Bank Digital Currencies, or CBDCs, which are state-issued digital assets pegged to national currency exchange rates.

The advantages of such assets are instantly evident from the point of view of price stability and control at the expense of individual financial freedom and anonymity. Naturally, CBDCs will not contend with competition from other digital assets, which is why states issuing such assets will certainly be adopting strict regulations towards cryptocurrencies, as is the case with China, which is issuing its crypto Yuan, and Turkey that is eying the possibility of releasing the crypto Lira.

The main advantages and mechanisms that CBDCs grant are largely related to their government-based issuance, which allows states to use them much like fiat in the economy at large. The ability to have a bridge to the digital economy with extended benefits of technological control make CBDCs the ideal instrument for projecting state influence over both digital services providers and users of digital currencies.

Control over transactions and a completely new approach to assessing and working with liquidity is what CBDCs are all about, as they will be issued and controlled by the central bank of the state in question. Their low transaction costs will be making many of the current gateways like Visa obsolete, thus granting control over such gateways to states, or creating entirely new, state-controlled ones. CBDCs are also the off-ramp for the creation of an ecosystem of government services that can be fully funded and controlled by the state, giving populations the confidence and accessibility they need to start using such CBDCs in a broader range of areas.

For end users, such inclusion of CBDCs alongside fiat as a means of payment for a variety of state and private services will result in increased protection against fraud, fast and cheap, or entirely free transactions, giving freedom of transfers of funds between banks, as well as added convenience.

Economic Feasibility

BCG gives reason to believe that digitalization is the sole way of tapping into the potential of the 1.7 billion unbanked individuals around the world. It is also the sole means of ensuring the interconnection and merger of the traditional economy with its digital reflection. Given the onboarding of states into the digitalization race, there is little doubt that legislation-wielders will gain the upper hand.

Corporations are also in the race for adoption as Visa and MasterCards are leveraging the power of digital currencies, including stablecoins. This will not only allow the powerhouses of the financial gateway economy to stay up to date with the latest trends, but will also allow them to issue new products that cater specifically to the audience of digital currency users.

But no matter which company starts issuing its products, states will always have the power to limit or impose their instruments on both the players and the populations relying on local economic sectors. China is in the lead with the creation of its crypto Yuan, which will be made available as a means of payment for visitors of the Olympics in 2022, being handed out for use in the capital. The crypto Yuan is currently undergoing testing, but the Chinese Central Bank is adamant in its strive to make the asset the leading form of digital payments in the country. The given desire is clearly backed by the country’s crackdown on other cryptocurrencies, eliminating competition.

CBDCs are also being explored by Britain with its “Britcoin”, Russia with the proposed “crypto Ruble” and other states willing to enter the digitalized arena with an asset of their own. Deloitte gives insights into the prospects of CBDCs, making it clear that fiat will soon be making the transition online with all the benefits of digitalization and the attached factors of state control.

Whatever the outcome of the battle between stablecoins and CBDCs in the struggle for market dominance, it is only a question of time before both of these assets become mainstream and the original reasons for the struggle are forgotten.