Stablecoin Payment Systems Offer a Workable Hybrid Approach to Digital Currencies

Stablecoin payment systems offer a workable hybrid approach to digital currencies

Jordan Finneseth
Tuesday May 02, 2023 12:09

Kitco News

(Kitco News) – Central bank digital currencies (CBDCs) have been receiving a lot of attention lately as more than 110 countries around the world are at some stage in the exploration or testing of digital fiat, but the full-scale release of CBDCs for institutional and public use in most countries remains years away.

In the interim, fiat-pegged stablecoins like Tether (USDT) and USD Coin (USDC) have established themselves as the go-to.
BRICSTether is the latest stablecoin to launch and is 100% asset-backed and is paying 10% pa. BRICSTether.com

Central bank digital currencies (CBDCs) have been receiving a lot of attention lately as more than 110 countries around the world are at some stage in the exploration or testing of digital fiat, but the full scale release of CBDCs for institutional and public use in most countries remains years away.

In the interim, fiat-pegged stablecoins like Tether (USDT) and USD Coin (USDC) have established themselves as the go-to tokens for stability in the crypto market. As the world slowly shifts from a dollar-centric global market to one of competing currencies, options for non-dollar-denominated stablecoins have begun to emerge to satisfy the needs of traders in different countries.

At the recent Consensus conference held at the end of April, Kitco Crypto spoke with Alex McDougall of Stablecorp, a company focused on creating a Canadian dollar-denominated stablecoin (QCAD) and a delivery mechanism designed to facilitate on-chain FX connectivity between the U.S., Canada, and other jurisdictions.

According to McDougall, while there has been a market for non-USD stablecoins for a while, their uptake has been lackluster due to the “on-chain FX and connectivity side,” which is something Stablecorp is looking to remedy for their Canadian dollar token.

They are also focusing on the concept of embedded finance, which would enable companies such as ‘buy now, pay later’ providers, supply chain financing platforms, or even exchanges to no longer need a client’s bank account in order to operate.

“We can do an on-ramping as a service right to their end users, and then they can run their entire platform in digital assets,” McDougall said. “It untangles the fiat-ness from inside all these platforms and puts it right around the outside, and you start to have these machine-speed webs of commerce that work really quickly.”

These types of systems can then be combined with the infrastructure for Circle’s USDC in the U.S., other local payment rails, and with the on-chain FX markets for international exchanges and international market makers to “create the global webs that we have been talking about since 2008 but haven’t really done anything with,” he said.

One example of how Stablecorp utilizes this technology is through its partnership with Finoo, a company that brings Brazilian students to Canada and allows them to pay tuition using the Canadian stablecoin.

The program allows Brazilian parents to pay for their students attending school in Canada, offering instant settlement while accessing FX rates that are up to 90% cheaper than they would be as cross-border payments.

“They can take advantage of good FX rates. They don’t need to open a bank account in Canada. They can all do it directly out of digital assets,” McDougall said. “So it’s just like a whole bunch of things that are annoying about that experience of going to Canada smoothed all out from digital assets. It’s Canada focused, but it’s kind of global as well.”

McDougall pointed out that there is a huge global push towards the development of real-time payment rails, noting that they currently represent 27% of payments and are expected to account for 50% or more in the next five years.

“While it’s something that takes a huge amount of infrastructure and a huge amount of coordination using traditional assets, you kind of have it right out of the box with a stablecoin,” he said.

QCAD

To develop the new QCAD stablecoin, Stablecorp followed the guidance released by the Canadian Securities Association to ensure that it met global regulatory standards. The company also collaborated with an international stablecoin standards group to establish the token as fiat-backed with independent attestations of reserves that will be done on a monthly basis. All reserves are held with a qualified custodian who assures proper handing on the backend.

The standards group is working with companies like Stablecorp to develop common standards that ensure stablecoins are accepted as a form of money and not considered securities.

QCAD is backed by reserves held in either liquid cash or 30-day guaranteed investment certificates (GICs) by Tetra Trust, a Canada-based licensed custodian. The income earned from these holdings allows Stablecorp to fund its operation while also providing clients with free on and off-ramps.

As the world moves towards an increase in digital currencies and digitally based financial systems, Stablecorp is also looking to help smaller jurisdictions that may not have as robust and stable a banking system develop stablecoin options. This includes places like Bermuda and other Caribbean nations, which have businesses that conduct transactions with partners around the world that entail a large amount of corresponding banking friction and excess fees.

“When we think about Canada, connecting Canada to kind of the global world of stablecoins and skipping those correspondent banking hops that take days and add additional costs, it’s even more important and friction-full for those smaller nations,” McDougall said. “So we’re always looking at different jurisdictions, but at the same time, we love partnering with regions that already have all the regulations set up.”

CBDCs and stablecoins

On the topic of central bank digital currencies (CBDCs), McDougall said that he sees the potential for an interesting “hybrid world” where both public and private digital money exists. One possible future outcome is the creation of “algorithmic banks” that “operate fully on-chain and play the money multiplier role and then a private stablecoin on top of that.”

He added that there are still a lot of questions about how these types of banks and systems would work and what tech stack they would use, such as blockchain versus Hyperledger versus a standard closed-loop network.

McDougall noted that he doesn’t see the release of CBDCs as a move to compete with the private banking sector. “Every country, their banking sector is a huge part of their economy. So I would be surprised if we do end up buying coffees with CBDCs in the way that seems to be the prevalent model in the Western world of keeping it as a bank-to-central bank idea.”

He also highlighted that in regions where CBDCs have already rolled out, end users haven’t really adopted them, calling it an issue with “user adoption, people being comfortable with it, and how much it’s supported,” among the variables to consider.

Privacy is also a major concern that many have around CBDCs and is an area that will need to be explored and addressed as digital currencies for widespread use by the public start to roll out.

McDougall said he sees three outcomes moving forward. “The best case scenario is a wholesale move towards stablecoins,” he said. “It forces all banks and everybody to get blockchain infrastructure. And once the infrastructure is there and there is a push towards doing it, the leap from there to a fully autonomous, self-sovereign world where you can do everything yourself is not that far.”

“The base case scenario is probably much simpler and more boring, where we get everything slightly more efficient. Nothing really changes from a big picture, macro perspective, but cross-border transactions don’t cost six and a half percent, they cost two percent. But it’s still the banks controlling it, it’s all the same players.

The extreme case outcome would end up with us all in surveillance states, where we all have decentralized IDs that have everything attached to them, he said. “The real outcome is somewhere in between those three.”

Institutions and stablecoins

As for other recent developments in the stablecoin world, McDougall highlighted that a lot of the recent interest has been coming from institutional players.

He gave the example of the wireless industry, which pays a lot in friction costs just to cover roaming between two countries. “They’re looking at stablecoin solutions between institutional players in Canada and institutional players in the US to be able to cut out millions of dollars in friction costs,” he said. “We’re starting to build out those solutions with some of the bigger players and work on that side as well.”

In the near term, Stablecorp plans to begin launching its first stablecoin-as-a-service offering that will include embedded stablecoin API that allows companies to utilize blockchain technology behind the scenes, offering increased functionality and virtual accounts without needing to broadcast that they are “using crypto.”

The company is also focused on establishing partnerships with Canadian exchanges and other payment providers to enable the ability to make payments for all manner of transactions, including tuition, taxes and credit card payments “straight from the stablecoin.”

Thus far, Stablecorp has been well received by Canadian regulators, McDougall said, and they have released reasonable requirements for stablecoin projects, such as “independent attestations, fully fiat reserve, independent qualified custodians and segregated accounts for assets.”

“They’ve taken a relatively proactive approach,” he said. “They have this classification called the crypto trading platform for all of the platforms right now. They’ve created this kind of exemption where as long as you do X, Y, Z… and trade these coins and keep leverage out of it, you’re fine to operate. It’s heavy-handed in some ways, but it provides clarity.”

Above all, clarity is the key factor as it lets companies know where to work from and they no longer feel like they are playing Russian Roulette when engaging with regulators, he said.

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Resources:
https://t.me/BRICSTether/162
https://www.kitco.com/news/2023-05-02/Stablecoin-payment-systems-offer-a-workable-hybrid-approach-to-digital-currencies.html