Could ‘Stablecoin’ Save the Future of Digital Currency?

Published On June 10, 2021
In Investment Research, Blog Archives

According to Google Trends, in the previous year, the word ‘Crypto’ was searched and used more than the word ‘Pandemic’.  

It isn’t hard to guess what that flood of searches was aimed at: Will this coin go up? Will that coin go down? Is it worth investing in any coin in the first place? 

It is.  

Rather, to be cautious, we’d say it should be. For isn’t digital currency the future? Won’t it revolutionize our very concept of money as we know it?  

And so, it should be. But probably not in the coin you would think.  

Yes, that’s right.  

Forget Bitcoin, the oldest and most sensationalized digital currency on the planet, that is valued, at least when this sentence was written, at 34,992.90 USD.  

Digital Currency

Forget even Dogecoin, one of the newest and most speculated coins, so anticipated that it could fund a mission to the moon!  

Yes, forget even Ethereum, the closest competitor to Bitcoin, the coin which could surpass Bitcoin, thanks to its better reputation, for it’s more likely to be used to buy art instead of guns.  

Forget BTT and possibly the thousands of other coins you could invest in.  

There’s a new coin in town. It’s called — or could be — stablecoin. And stablecoin, it’s believed, could save the future of digital currency.  

Here’s how.  

How does digital currency work? 

Simply, digital currency is a currency that is exclusively digital in form.  

On the surface, digital currency should not seem any different from ordinary currency. And it’s not.  

A small share of the currency in supply today is actually physical — coins and paper — while the rest is electronic, deposited in banks worldwide.    

The difference is that the digital currency we are familiar with can be converted into physical currency, when, say, you withdraw cash at an ATM.  

Digital currencies like cryptocurrencies are truly and exclusively digital. They can’t be converted into physical money. They can only be exchanged via digital means.  

Again, if that sounds like PayPal, Apple, or Google Pay, it really is. In use, they are identical. Cryptocurrencies, like money on your PayPal account, can be exchanged by the means of your phone.  

That sounds neat. Simple!  

So, what’s the rage and mania about? What’s got the world so firmly divided?  

“Which digital currency to invest in” 

On one side, investors, legends even, like Cathie Wood and Mark Cuban, are wagering hundreds of millions on digital coins, assured that they represent the future.  

While stalwarts like Jamie Dimon, CEO of JP Morgan, are assured that cryptocurrencies, especially Bitcoin, represent a bubble. A good ol’ pump-and-dump.  

Given this, even at our most certain, the answer to the question, “Which digital currency to invest in”, should be, “we don’t know.”  

“Digital currency is a currency that is exclusively digital in nature.”
“Digital currency is a currency that is exclusively digital in nature.”

In fact, a better question to ask is, whether I should even invest in a currency that is decentralized, independent, not managed by any central authority like a bank or government? 

Yes, that’s right.  

That’s the difference between digital currencies like Apple Pay and digital currencies like Bitcoin — one is regulated and managed by a central authority, issued in the name of a government. While the other is independent. Instead, it is issued and managed by… nobody.  

Well, it’s a little more complicated.  

Bitcoins are not issued, but ‘mined’ by special computers that are part of a blockchain. To explain in dangerously simple terms, a blockchain is a network of computers, each possessing a register, like a spreadsheet.  

Each time a transaction occurs, a node of computers creates a new cell in that register — a new block. The block’s information accounts for everything about the transaction — whom, when, how much.  

Lastly, the system is decentralized. Remember that the register is shared with every computer on the blockchain. This means when a new transaction occurs and a new block is created, it has to be created on every single node of the network.  

Since the information about every single transaction is copied and replicated on every single system, blockchain results in transparency.  

Read more: How Can Blockchain Enable Sustainability? 

It also results in a mind-blowing electricity bill. That’s why you need special computers to mine coins, computers that are tremendously power- and resource-hungry.  

But doing the hard work is also tremendously rewarding: users that mine coins are also rewarded with them. (If a Bitcoin costs 40,000 USD, would you rather buy it or mine it?) 

Here’s a neat illustration that explains how mining works.  

How does digital currency work?

Apart from being an environmental threat, digital currencies are frowned upon because — 

  • Independent, they compete with the government  
  • They are extremely volatile 
  • Their use is highly inefficient 
  • Could risk financial stability, as people withdraw from banks 
  • Encourage crime, as decentralization means no arbiter of what’s wrong; no accountability  

It’s also worth mentioning that the newest sensation, Dogecoin, was invented by two software engineers as a joke — a parody of the staggering hype around cryptocurrencies.  

If that wasn’t obvious, its stock symbol is a meme-fied Shiba Inu called Doge. For a joke currency, in the last one year, it has grown by more than 10,000%. Make of that what you will. 

‘Stablecoin’ to the rescue  

A recent study by the Bank of England warned against cryptocurrencies, highlighting that when people move their money from their accounts to buy digital assets, they risk destabilizing the economy.  

The Bank reasoned that taking the money away from banks means taking away a prominent source of funding. Since the funding affects credit and borrowing, our actions essentially affect the rates of interest.  

The problem isn’t digital currency itself, but unaccountable forms like Bitcoin. In fact, digital currencies have shown immense promise. It’s claimed that they could run the economy in the (remote) future.  

Enter ‘stablecoin’.  

A stablecoin is a digital currency that has all the benefits of Bitcoin, but unlike Bitcoin, it would be regulated by a bank, and therefore, the government.  

Digital Currency

By regulated, we mean that the value of a stablecoin would be linked to a stable, government-backed currency like Euro, Pound, or Dollar.  

The result is a digital currency that is accountable and stable.  

Central Bank Digital Currency (CBDC) 

Although stablecoin isn’t the first digital currency to be issued by a bank.  

The idea of issuing a Central Bank Digital Currency (CBDC) has been long debated. 

China’s digital currency Yuan was launched in 2014 and is still being tested in five cities on a lottery basis. A CBDC, termed ‘Britcoin’, an alternative to Bitcoin, was already being debated, given the rise of cryptocurrencies.  

The US, of course, also wants in. The Federal Reserve and MIT have been collaborating to understand digital currencies in greater depth, outlining the economic risks and opportunities of a Reserve-backed CBDC. The project is called Hamilton.  

The possibility of a Central Bank Digital Currency is still remote. But it is a possibility nonetheless.  

Many economists are optimistic since digital currencies are — 

  • Faster: Much faster than wire transfers which can often take days. 
  • Less expensive: Moving money from one nation to another is expensive. A digital currency standardized between two nations or the world could be exchanged at no additional costs.  
  • More efficient: If the currency is mined by banks, instead of us, transactions become highly efficient. Imagine a world where relief funds and food stamps can be transferred instantly. 
  • Benefit unaccounted agents: Many people still don’t have a bank account. Bar the learning curve, digital currencies stored in digital wallets, say, in a phone, could prevent them from cashing their every check, which is expensive.   
  • Have 24×7 access: Transactions can be sluggish, if not impossible, on weekends. Transactions with a digital currency could be made outside business hours, 24×7.  
  • Less taxed: Bitcoins are taxed as capital gains. A CBDC would only be taxed the applicable sales tax.  

Read more: The Future of Fintech 

Yet, everything is shrouded in speculation.  

Which CBDC will be standardized first? What will be its value? Will its stock symbol be a medium-sized furry dog? 

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