Libra is expected to be released in January next year. What kind of future will stablecoins enter?

According to the Financial Times, Facebook plans to release the cryptocurrency Libra in limited form as early as January next year. But initially only a single currency anchored to the U.S. dollar will be issued, and Libra, which anchors other currencies and a basket of currencies, will be launched later.

Libra is a fiat-collateralized stablecoin that needs to maintain the value of a 1:1 reserve fiat currency (such as the U.S. dollar) and is maintained by an independent custodian and audited regularly.

The other three types of stablecoins include: commodity-collateralized stablecoins (such as PAXG), crypto-collateralized stablecoins (such as DAI), and algorithmic (non-collateralized) stablecoins (such as Terra).

Stablecoins are defined as "pegging market value to an external reference to provide price stability" and are designed to maintain a stable value over time, making them suitable for use as a medium of exchange and store of value.

Due to the explosive growth of DeFi protocols and the demand for tokens in liquidity pools, the total market capitalization of stablecoins is now approaching the $25 billion mark, a staggering increase from the overall market valuation of $5.4 billion in March this year .

Due to pressure from the U.S. Congress, the Federal Reserve, the G7 Group, and even global regulators, the release of Libra has been delayed for more than half a year. According to a BBC report in March, Libra was originally planned to launch in the fall of 2020.

This time, Facebook re-announced the Libra issuance plan, which may have passed the review and approval of the US regulatory agencies to some extent.

The U.S. Office of the Comptroller of the Currency (OCC) has announced in an explanatory letter that it will legally allow national banks and federal savings associations to hold stablecoins as reserve currencies. It also stipulates that it only applies to stablecoins backed 1:1 by another currency, and when the tokens are held in custodial wallets.

With this determination, the bank will be able to verify on a daily basis that the reserve account balance equals or exceeds the issuer’s outstanding stablecoin amount.

The entry of Libra may provide guidance for central bank digital currencies (CBDC) of various countries and accelerate their issuance.

The ECB’s October paper briefly outlined how a CBDC could create a scheme that would make stablecoins’ “value proposition (at least for domestic payments) redundant.”

The People’s Bank of China, the leading global bank currently working on CBDC, has reportedly conducted initial trials in four cities: Shenzhen, Suzhou, Chengdu, and Xiong’an. China’s Ministry of Commerce announced in August that it would expand the scope of the trials Expand to major cities in the most developed regions.

In October, the People's Bank of China carried out a pilot project of digital RMB red envelopes in Shenzhen, which will be rolled out to Suzhou and more cities in December.

Compared with other stablecoins, fiat-collateralized stablecoins represented by Libra and CBDC can provide more consumer protection, inclusiveness and security.

However, in terms of privacy, legal and regulatory protection, financial stability, and payment ecosystem-related aspects, Libra and other fiat-collateralized stablecoins face considerable challenges and are still in the exploratory stage.

Stablecoins have experienced truly exponential growth since March 2020, fueled by the explosion of DeFi protocols and the demand for tokens in liquidity pools.

Stablecoins are less volatile than Bitcoin and other cryptocurrencies, so they are widely adopted as a store of assets, which makes them suitable for use as a medium of exchange in everyday life:

1. Stablecoins offer a host of benefits that mainstream finance cannot, as borders can be eliminated, currency exchanges can be minimized, and asset protection or store of value can be provided in countries facing hyperinflation.

2. Stable currency is a low-cost, fast, secure, transparent and seamless payment method or transaction method that has global influence and promotes financial inclusion.

However, like everything else that is growing and developing, some potential risks of stablecoins have also been revealed. One risk that is often overlooked involves securing stablecoins with security solutions such as cold wallets.

Second, the online and digital nature of stablecoins makes them vulnerable to theft or loss in a different way than physically carried cash.

Third, complex international or domestic regulations and policies would also need to be addressed to address the myriad risks introduced by stablecoins that could threaten central bank dominance.

The development of fiat-collateralized stablecoins represented by Libra has attracted global attention, and has inherent advantages in capital layout and operation coordination, which will have a great impact on the existing stablecoin system. In the process of its improvement, there are It may greatly reduce the market demand for the other three encrypted stablecoins (such as USDT).

Perhaps this is the biggest threat to the future of the stablecoin system as a whole, making the diverse stablecoins currently on the market redundant.

But considering the complexity of fiat-collateralized stablecoins represented by Libra, it seems that it will take several years for this race to be fully realized.