Stablecoins gaining traction

SOME developments in the cross-border payments arena are worth noting.

This week, Italy’s economy minister said something puzzling. Addressing an asset management event in Milan, Giancarlo Giorgetti posited that the US’ policy on stablecoins is more dangerous than the impact of trade tariffs, Reuters reported.

What Giorgetti was referring to was the prospect of the widespread usage of stablecoins in the European Union as a means for payment for goods and services, thereby bypassing the need for the use of the euro or any digital version of the latter.

Stablecoins are a type of cryptocurrency designed to maintain a constant value and are typically backed by real world assets.

The most popular stablecoin today is tether, also referred to as USDT and is backed by the US dollar. To be sure, one of the main reasons why tether is popular is because it has been used over the years by China nationals seeking to bypass capital controls in their country.

Stablecoins can be issued by private enterprises. In line with President Donald Trump’s plans to overhaul cryptocurrency and promote the asset class, legislation being passed in the US now could popularise stablecoins even more, particularly those backed on the US dollar or other US assets.

World Liberty Financial, the decentralised finance venture backed by Donald Trump and his family, has launched a stablecoin dubbed USD1.

It will be pegged to the US dollar and be backed by short-term US government treasuries, US dollar deposits, and other cash equivalents. Blockchain company Ripple also released its own stablecoin, RLUSD, after receiving approval from the New York Department of Financial Services.

Hence, the Italian minister’s alarm – could individuals in Europe begin using more US-issued stablecoins to settle their transactions thus jeopardising the use and sovereignty of the euro?

“It is therefore easy to foresee the attractiveness (of stablecoins) for citizens of economies with unstable currencies, but its appeal for people of the eurozone should not be underestimated,” Giorgetti reportedly said.

It is noteworthy that the key legislation being passed in the US regarding stablecoins has some eye-popping targets.

The Stablecoin Transparency and Accountability for a Better Ledger Economy Act aims to establish a framework for regulating stablecoins, particularly those used for payments. It is aimed at ensuring stability and transparency of the stablecoin and most notably aims to treat permitted payment stablecoin issuers as financial institutions.

You can see where this US government is going with this – an attempt to create possibly a new global payment system using US-issued stablecoins.

Meanwhile, central banks of many countries have also been trying to ensure they don’t lose control or lose out on the digital asset revolution by launching their own Central Bank Digital Currencies (CBDCs).

Most though are only toying with using their CBDCs for interbank transactions within the country and with certain selected cross border transactions with banks overseas. There is a plethora of challenges to issue CBDCs to the public.

These include having the right robust technology that withstands hacks, the country’s digital infrastructure to use it, impacts on banks as users may no longer need to keep their money in bank accounts as well as securing the public buy-in, into using a new digital currency.

In Malaysia’s case, there is also less of a need to have a CBDC considering that the country’s existing domestic retail payment systems are highly functional and digitised.

China’s digital currency, the e-RMB, is possibly the most successful CBDC issued albeit still in pilot stages. But even the e-RMB pales in comparison to the country’s private sector digital wallets namely WeChat Pay and Alipay in terms of daily transactions.

Going back to stablecoins, in light of the current economic uncertainties, there could be increasing interest among users.

As the US dollar still remains the world’s reserve currency, putting it in a digital form via a stable coin, enabling instant transfers with very low fees plus even with a yield (if you store it at certain exchanges), the use case is attractive.

But as one official from the payments industry explains, stablecoins could also be facilitating tax evasion and possibly money laundering and other illegal activities.

“If you are a legitimate person running a legitimate business and paying your taxes and not doing anything dodgy, there is very little use case for you to use a stablecoin,” he quips.

We have often heard this criticism of cryptocurrencies but it is also often explained as being an early technology that will eventually develop into something that is more regulated.

Another observation that crypto enthusiasts note is that even in the traditional world, money laundering and other illegal activities take place using hard cold cash.

This is something that we Malaysians are well aware of, following raids by the authorities in recent years involving government-related scandals whereby massive amounts of fiat currencies have been confiscated.

In Malaysia, another related cross border payment story relates to foreign workers. ​It is estimated that 50% of foreign worker remittances in Malaysia are unaccounted for, as they are sent through informal or unregulated channels.​

That more than RM30bil seeping out every year through means such as the archaic “hawala” method of transferring money without any physical money actually moving.

A key reason why this continues is that many of the workers do not have sufficient documentation to be in the country – they are the ones we refer to as illegal workers – and so they are deprived of the legitimate systems that facilitate their remittances.

It remains to be seen if this problem can be fixed. Don’t rule out a stablecoin which could be created specifically to serve this market.