Why Payment Giants Are Exploring Stablecoins

Cryptocurrency has generated surging institutional demand with more than $80 billion in stablecoins alone. This huge market has attracted payment giants such as PayPal who are looking to extend the reach of their services.

Stablecoins are cryptocurrencies whose value is pegged to an underlying asset. This can be traditional fiat money, exchange-traded commodities or another cryptocurrency. Examples of such coins are Tether (USDT), Paxos Standard (PAX) and Gemini Dollar (GUSD).

The advantage of this approach means that the value of these coins is backed by assets that fluctuate outside the cryptocurrency space. This means that there is reduced financial risk as compared to other unbacked cryptocurrencies which are known to be extremely volatile.

Advantages of Stablecoins

Stablecoins promise to be a secure store of wealth while providing users with a cheap, fast and accessible form of payment. They provide access to the cryptocurrency space without the same exposure to volatility.

The settlement technology behind stablecoins is based on blockchain technology. This means that the value of the stablecoin is calculated based on algorithms that run on smart contracts. In other words, the value of stablecoins cannot be easily manipulated. 

Additionally, some stablecoins are decentralized, allowing their users to transact via their wallets without the need for identification.

Further, stablecoins are an attractive means of payment. They offer low transaction costs, secure transactions, pseudonymity and global reach. Traditional fiat money simply cannot compete because of the inefficient legacy banking systems that support transactions.

Finally, the biggest advantage of stablecoins over fiat money is network effects. Stablecoins can make transactions as easy as using social media. This is possible because their value is consistent, effectively negating the need for fiat money. Thus, they’re easier to integrate into our digital lives providing seamless payment services.

Dollar-Pegged Dynamite

Stablecoins are promising. Infact, prohibitively so. The fact is, compared to legacy banking systems, blockchain technology is still in its infancy. Therefore, there are some legal concerns regarding regulation.

These coins provide an easy way for tech giants to become monopolies almost overnight. A good example of this is Facebook’s Libra. It has raised so much controversy with policy-makers that it might never see the light of day. Consumers are also worried about the privacy surrounding their transactions.

Another concern for policy-makers is the validity of banks. For most consumers it’s a no-brainer, low transaction costs, anonymity, transparency, security, stability and global reach. For banks, this is a nightmare. However, banks play a vital role in protecting consumers and are unlikely to disappear. The question lies in finding a fine balance between the two.

This is why payment giants are exploring stablecoins. They can easily fill in the gap between traditional banking systems and the cryptoconomy by providing access to stablecoins to their users.

By providing access to stablecoins, they can become gatekeepers to an $80 billion market while playing a key role in the larger $2 trillion cryptoconomy.