27 July, 2018
Digital currencies called 'stablecoins' may be the catalyst for bringing crypto-assets into the mainstream if they are linked to traditional currencies, an expert has said.
Fiat-collateralised stablecoins can act as the bridge between traditional fiat currencies and emerging crypto-assets and in future may offer consumers and businesses cheaper and faster ways of transferring value without being exposed to the major fluctuations in valuation typically associated with the crypto-asset market, said crypto-assets regulation expert Charlie Clarence-Smith of Pinsent Masons.
Stablecoins can be pegged to any external assets too such as alternative pools of crypto-assets or a set of smart contract protocols, but Clarence-Smith said that stablecoins linked to the value of fiat currencies may be the catalyst for bringing crypto-assets into the mainstream.
Clarence-Smith was commenting after the launch of new crypto-asset 'Stronghold USD'. He said the product is one example of a fiat-backed stablecoin – a type of crypto asset that has its value linked to that of a fiat currency. In the case of Stronghold USD, the value of the tokens is pegged to that of the US dollar.
Stronghold, the company behind the token, said it "can act as a new liquidity tool for real-time foreign exchange and international settlement, as well as enable banks to issue credit into transactional networks and trade ecosystems".
Clarence-Smith said: "Stablecoin is a concept that has been much talked about in the crypto-asset market, so it is exciting to see a real example emerge. Interest in stablecoin stems from the fact that liquidity concerns are eradicated, and from the principle that the coin's value mirrors that of the fiat currency. Furthermore, stablecoins are transferred on a blockchain rather than using traditional payment schemes."
"It could be argued that if the value of any stablecoin is the same as that of a fiat currency it may call into question their relevance and why businesses would elect to transact using stablecoin rather than the traditional currencies and through the secure and reliable payment systems in operation globally. The answer may be that, in the future, blockchain technology will mature and become scalable enough to reduce the time and costs involved in the processing of asset transfers – the challenge is therefore a technological one and also in changing habits and culture and in building trust in the innovative new solutions," he said.
In its statement, Stronghold confirmed that it has partnered with IBM to "explore" how the Stronghold USD could be used with the "blockchain business networks" that IBM has built on its blockchain platform.
"The aim is to experiment with ways for financial institutions and other organisations to achieve faster, safer and more efficient transaction processing and money transfer throughout the world’s economy," it said.
Pinsent Masons financial services expert Tony Anderson said: "Stronghold USD crypto-dollar having the benefit of insurance from the FDIC, a US government corporation which primarily provides deposit insurance to depositors in US commercial banks and savings institutions, would appear to legitimise its status as a stablecoin providing access to liquidity rather than a speculative investment which has hampered the acceptance of some other crypto-currencies.
This goes a distance to stablecoins being more widely accepted in payment and settlement systems."
Clarence-Smith said IBM's involvement signals the seriousness with which major technology companies are taking innovation in the crypto-asset market, including developments with stablecoin. He said it should be noted that fiat-collateralised stablecoins requires the trust of a centralised third-party to store the users' fiat currency, therefore steering away from the concept of decentralisation commonly associated with crypto-assets.
"Blockchain technology is still in its infancy but there is great potential for its use in payments and financial services more generally," he said. "Many of the innovations that could emerge with blockchain in the future cannot currently be envisaged, but it is clear that IBM sees potential in the market and wishes to be at the heart of those developments."
This article was published in Out-law here.
For further information, please contact:
Tony Anderson, Partner, Pinsent Masons
tony.anderson@pinsentmasons.com
