By Stefan Andjelic, RBI |
Payment systems are a vital part of the economic and financial infrastructure. Their efficient functioning, allowing transactions to be completed safely and on time, makes a key contribution to the overall economic performance. (Bank Of England, 2000). Against this backdrop, the role of banks, including the range of financial services and products they offer, has considerably transformed throughout the history under a continuous emergence of new technologies. Current trends imply that the field of payments, in specific, experienced intensive system reforms in satisfying the demand for improved financial services. (Rustamov, 2016). On a global level, many countries are either considering or have started implementing payment systems that allow for cheaper and faster domestic payments. (Intesa SanPaolo, 2019). Despite positive developments on a national level, the cross-border payments are still facing common challenges as they remain slow, expensive and opaque, particularly when it comes to retail payments. (Bank for International Settlements, 2019).
Due to the features and characteristics that blockchain as underlying technology offers, cryptocurrencies were originally regarded as a potential solution to some of the issues that traditional payment systems are associated with. Although cross-border payments can be easily facilitated using cryptocurrencies, their volatile nature has been the major barrier in fulfilling the original vision to date. Thus, cryptocurrencies have primarily been seen as an alternative investment vehicle, rather than a medium of exchange. (Bank for International Settlements, 2019).
In order to reap the benefits of the blockchain technology while marginalizing the volatility of cryptocurrencies, a crypto-asset class called stablecoin has emerged. Stablecoin is a type of crypto asset that is pegged to the value of traditional assets, such as fiat currencies, precious metals or other commodities, in order to maintain the desired price stability. Such a fully digital object directly linked to an underlying asset allows for peer-to-peer communication, transfer authorization and instant settlement between entities without any custodian intermediaries. These key features of blockchain technology in combination with minimized price volatility imply that stablecoins can be utilized both as a store of value and as a mean of payment. In fact, stablecoins did not only highlight shortcomings in cross-border payments, but also have the potential to stimulate the development of global payment arrangements that are cheaper, faster and more inclusive than the current ones. (Bank for International Settlements, 2019).
The term stablecoin has been in existence since 2014, when first attempts for implementation of such concepts were made. Currently, there are dozens of projects aiming to issue stablecoins with key differentiating factors such as client segments, for which stablecoins are intended, and underlying asset classes to which they are linked. (Berentsen & Schär). They have become a dominant topic in recent times, especially with the announcement of Facebook’s Libra, the stablecoin project that captured an instant media attention. The reason for that is simple – more than 2.4 billion people use Facebook’s applications as the main source of communication on a daily basis, making even the world’s largest nations appear quite small. (Bloomberg, 2019). By definition, Libra is a stablecoin backed by a basket of fiat currencies and short-term government securities from stable and reputable central banks, designed to give Libra its intrinsic value and reduce its volatility. Such a global stablecoin does not only aim at providing faster and cheaper remittances directly through Facebook social apps, but also at achieving a greater financial inclusion by directly targeting 1.7 billion adults globally who remain outside of the financial system with no access to a traditional bank. (Libra Association, 2019). In that regards, Libra as a stablecoin initiative highlights the need to step up ongoing public and private efforts to upgrade existing payment systems.
While Libra’s goal is ambitious and may deserve respect, it is not easy to achieve and the market is becoming increasingly saturated. Facebook’s Libra is not only confronted with various regulatory challenges, but also with other stablecoin initiatives launched by incumbent companies, such as JPM Coin. JPM Coin is a stablecoin initiative that aims to facilitate instantaneous peer-to-peer payments between JPMorgan’s institutional clients. More specifically, it is a digital coin representing US dollars held in designated accounts at JPMorgan Bank, meaning that one JPM Coin always has an intrinsic value equivalent to one US dollar. (JP Morgan, 2019). Such initiatives served as a wake-up call for central banks to engage more actively in the sphere of blockchain-powered payments. In fact, they recently started assessing the relevance of issuing central bank digital currencies (CBDCs) in the light of the costs and benefits in their respective jurisdictions. (Bank for International Settlements, 2019).
In order to investigate the potential and possibilities of blockchain-based payment solutions, traditional banks have also started to team up with fintechs. For instance, Raiffeisen Bank International has been cooperating with the Polish fintech Billon during its Fintech Partnership Program “Elevator Lab”. The goal of the project is to create a Distributed Ledger Technology system unifying national currency transactions, documents on-chain, and identity management into a single platform. Together, Raiffeisen Bank International and Billon aim at developing a blockchain-based digital cash platform with capabilities to mint, transfer and redeem tokenized fiat currencies, such as the euro. Currently, the solution is tested within the restricted scope of Raiffeisen Bank International’s subsidiary banks in CEE, designed to keep the complexity to a minimum while evaluating the potential of the technology.
Stefan Andjelic is leading RBI Blockchain Hub responsible for driving, monitoring and steering blockchain-based initiatives.
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