Central Bank Digital Currencies and Stablecoins: Game Changers for Crypto Payments? (Down)
Editor's Note: This article comes fromBixinInstitute（ID：gh_6efd45282f5b）Editor's Note: This article comes fromCryptoassets: Key Developments, Regulatory Issues and Responses, reprinted by Odaily with authorization.
, reprinted by Odaily with authorization.Central Bank Digital Currencies and Stablecoins: Game Changers for Crypto Payments? (superior)
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History books will likely record 2019 not as the year that interest in CBDCs peaked, but as the year that the public became familiar with Facebook’s Libra project and the concept of so-called “stablecoins.”
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2.1 Early coins could not be used as a means of payment because of volatility
To understand what "stablecoins" mean, and how they differ from popular cryptocurrencies like Bitcoin, Litecoin, or Bitcoin Cash, it's important to remember that the people who created the first cryptocurrencies Man does this in order to create a new means. However, things took a different turn. Instead of evolving into a new payment method or store of value, early coins became a more speculative asset class for some investors. As mentioned earlier, studies have shown that those who use coins such as Bitcoin as a means of payment do so mainly for illicit purposes in illicit markets.
Coins that cannot maintain a stable value generally cannot serve as a medium of exchange, unit of account, and store of value, the three functions of money.
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2.2 Stories of Stablecoins Overcoming Volatility Problems
In order to solve the volatility problem, many participants in the cryptocurrency market have come up with the idea of developing a new type of cryptocurrency. Interestingly, their main purpose is not to create a new crypto-asset that fulfills all three functions of a currency (which is more of a secondary purpose), but to protect the income earned from investing in crypto-assets from severe price drops influence, thereby hedging market movements. The resulting assets are now commonly referred to as "stablecoins."
2.2.1 What are stablecoins?
Like the term CBDC, the term "stablecoin" does not have a single definition. Various definitions of stablecoins have been proposed by legal scholars and international institutions, such as:
“A new class of cryptocurrencies that provide price stability and/or are backed by reserve asset(s), [combining] the instant processing and payment security of cryptocurrencies with the volatility-free stable valuation of fiat currencies value";
"a digital unit of value, not in the form of any particular currency (or a basket thereof), but relying on a set of stabilizing instruments that are believed to minimize price fluctuations of that digital unit of value in terms of that currency";
"a coin that represents a claim (to a particular issuer or underlying asset or fund), or other right or interest";
"a cryptocurrency generally pegged to the price of another asset, such as the U.S. dollar, and designed to maintain a stable market value"; and
"A cryptographic asset designed to maintain a stable value relative to another asset, usually a unit of currency".
At the most basic level, stablecoins can be described as a new type of cryptocurrency that is not only perceived by its users as a thing of value, but actually backed by something of value. Unlike CBDCs, stablecoins are not just experiments. Various cases are already in circulation.
Stablecoins are a new phenomenon, but not as new as one might think. The first stablecoin, Tether (USDT), dates back to 2014. Other stablecoin projects like Gemini Dollar (GUSD) and Paxos Standard (PAX) are newer, but they too are approaching their second birthdays.
Unlike most traditional “unbacked” cryptocurrencies, stablecoins typically have an identifiable issuer or require the intervention of a third-party responsible body (such as a custodian) for which regulators and users are held accountable. However, there are also stablecoins that cannot be linked to responsible parties.
Like traditional "unbacked" cryptocurrencies, stablecoins are cryptographic assets. They are private and digital in nature, and they use distributed ledger technology (usually the existing blockchain).
2.2.2 Types of stablecoins
Figure 2: Types of Stablecoins
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Source: Figure 2 was drawn by the authors. Its content is based on ECB provisional paper No. 230 written by D.BULLMANN, J.KLEMM and A.PINNA.
The first category of stablecoins that can be distinguished is the category backed by funds, sometimes referred to as "tokenised funds" or "depository receipt models". It involves units of monetary value stored electronically on a distributed ledger, representing a claim against an issuer (usually a legal entity), and issued upon receipt of funds for the purpose of making a payment transaction to someone other than the issuer. The issuer holds funds for this purpose or involves a custodian and ensures that the funds backing the stablecoin are redeemable (at equal value).
The second category of stablecoins that can be distinguished are those backed by an asset or assets rather than funds, and users can redeem their assets. Coins that fall into this category are called “collateralized stablecoins” and broadly speaking, there are two variants:
The first variant is backed by traditional assets (such as commodities and real estate, etc.), and usually requires a custodian for custody. Coins that fall into this category are called "off-chain collateralized stablecoins";
The second variant is backed by assets in digital form, usually other encrypted assets. They can be done in a decentralized way. Coins that fall into this category, such as multi-collateralized Dai (DAI), are known as "on-chain collateralized stablecoins".
Coins can be stabilized with collateral by linking their value to a basket of reference assets. Such baskets can include commodities and real estate, as well as government bonds and fiat currencies. Stabilizers are typically similar to exchange-traded funds, where holders do not own the underlying asset, but other technical implementations are possible.
The third category of stablecoins is a bit of an oddity, as it is fully backed by users' expectations of the future purchasing power of the holdings. Coins that fall into this category are often referred to as "algorithmic stablecoins". They attempt to maintain the par value of the reference currency through algorithmic trading (i.e. by automatically adjusting the supply of stablecoin units). Algorithmic stablecoins require no liability from any party, nor do they require any custody of the underlying assets. With the exception of NuBits (which failed to deliver on the promise of stability), their advent is still largely theoretical. Most plans are still in development.
Like CBDCs, stablecoins can be used for retail or wholesale purposes, meaning they can be used by anyone, or only by a certain number of participants. Most stablecoin initiatives in the current market are for retail purposes. An example of a wholesale stablecoin is JPM Coin.
2.2.3 What do the numbers say?
According to research conducted in 2019 at the request of the European Central Bank, the total market capitalization of stablecoins almost tripled from 1.5 billion euros in January 2018 to 4.3 billion euros in July 2019. The average monthly transaction volume in July was 13.5 billion euros. Of more than 50 stablecoin initiatives, most of which are still in development, the study found tokenized funds to be the most common type of stablecoin, followed by on-chain collateralized stablecoins. Interestingly, nearly half of all identified initiatives are said to utilize the Ethereum DLT network.
Despite a significant increase in their market capitalization over the past two years, stablecoins remain a fringe phenomenon in the cryptoasset space. For example, their overall market capitalizations appear out of reach when compared to those of first-tier cryptocurrencies such as Bitcoin and Litecoin. However, this could change quickly given the growing interest in these coins.
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2.3 Global Stablecoins and Local Stablecoins
Recently, several new stablecoin initiatives have emerged. The most important one is probably Facebook's Libra project. These new programs build on existing large and/or cross-border user bases. They have the potential to scale rapidly to achieve global or other substantial reach and are often referred to as "global stablecoins". Global stablecoins are currently under scrutiny because they can pose significant risks to financial stability and monetary policy.
2.4 Libra
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On June 18, 2019, the social media giant Facebook officially announced that it plans to issue its own global cryptocurrency under the name "Libra" in the first half of 2020. Given Facebook's massive user base and global reach, the plan immediately caught the attention of several prominent financial regulators, who didn't take long to express serious concerns about the project's potential regulatory implications. They urged Facebook to put the actual launch of the coin on hold until all regulatory concerns are resolved. In July 2019, Facebook confirmed that it will do so (Translator's Note: At the time of writing, the Libra 2.0 white paper has not yet been released).
2.4.1 What is Libra?
As you can imagine, Libra is a global collateralized stablecoin. According to Libra's white paper, its value will be fully backed by real assets in reserves, including a basket of bank deposits and short-term government bonds, in currencies from stable and reputable central banks, primarily the U.S. dollar, euro, Chinese yuan, Japanese yen and GBP.
Libra is a stablecoin and thus a cryptocurrency and a cryptoasset in a broad sense. It is built on blockchain technology (specifically the "Libra Blockchain"). Using blockchain technology, Libra hopes to make moving money as easy and cheap as sending a text message or sharing a photo, no matter where you are, what you do or how much you earn. The idea is that Libra will be a simple global currency and financial infrastructure that empowers billions of people. One of its selling points is that it will effectively promote financial inclusion by helping those who are currently "unbanked" use banks.
2.4.2 How does Libra work?
Without going into all the details and technicalities, but merely descriptive, the functionality of the Libra scheme is as follows. In short, to start using Libra, people first have to purchase Libra units with fiat currency. Similar to how other cryptocurrencies are acquired, for this they have to go to an authorized exchange. To hold and store Libra, Libra users will most likely be required to have a Libra Account or a Libra Wallet with a Libra Custodian or an authorized exchange. Authorized exchanges will satisfy users' Libra demand by: (i) selling Libra units from their own Libra supply; (ii) buying Libra from other Libra users in exchange for fiat (i.e., from those who want to cash out) or (iii) request additional Libra from the Libra Association. Libra holders have only one non-secured claim to convert their Libra into local fiat currency at a value (which may fluctuate) that reflects the value of assets held in the Libra Reserve. They will not make direct claims against the Libra reserve, which means they will lose money if the reserve is to be liquidated.
The Libra Association, a non-profit membership organization based in Geneva, Switzerland, will be the only entity that can create and destroy Libra. It will govern the Libra Blockchain and manage the Libra Reserve. The role of the Libra Association is to keep Facebook away from the Libra project and is made up of various members who will operate the nodes that validate Libra transactions. Libra will be built as a permissioned system: only members of the Libra Association will be allowed to operate nodes and participate in transaction validation.
Contrary to cryptocurrencies such as Bitcoin, Libra will not be a fully decentralized system. As the central governing body, the Libra Association will serve as the final decision-making body.
To achieve the separation between social and financial data — after all, Libra will be available to Facebook users — Facebook has also created a new subsidiary called “Calibra” to build and operate services on top of the Libra network on its behalf.
2.4.3 Libra issuance is currently on hold, but regulators are not idle
