Considered a bridge between digital money and fiat currencies, stablecoins as a concept arose due to the volatility of existing cryptocurrencies, which have fixed total supplies. Stablecoins solve the volatility issue by having expanding and contracting money supplies, and by being pegged to assets such as gold or stable fiat currencies.
Of course, stablecoins are also cryptocurrencies
Depending on their design as such, they can bypass the traditional financial infrastructure to be custodied independently and traded anonymously across borders. The widespread adoption of such a stablecoin could, for example, provide citizens holding currency in collapse with an easy outlet to a stable value that can’t be confiscated or censored. While such a lofty outcome may be optimistic, at the very least stablecoin promise to speed up the transition to a fully digital economy because of their negligible transaction fees combined with vastly reduced settlement time relative to traditional currencies and assets. Finally, as programmable money, stablecoins can be used in long-term smart contracts that are currently not viable due to the volatility of standard cryptocurrencies. This would allow many of the promises made blockchain-based projects to be delivered, including insurance-related products, dividend payments for STOs, more equitable credit networks, and so on.
The obvious potential of stablecoins has attracted large investments from financial institutions within and beyond the crypto world. According to Blockchain.com’s “The State of Stablecoins,” more than $350 million has been invested so far, split almost evenly across asset-backed and algorithmic stablecoins. The report concludes:
“Stablecoins are helping to usher in a new era of monetary innovation and encouraging established institutions like central banks to re-examine the nature and possibilities around one of our oldest institutions, money, and its role in the financial system.”
Types of Stablecoins
The stablecoins that have emerged thus far can be divided into two groups:
These stablecoins, by far the most adopted so far, are fully collateralized (in the case of crypto-asset backed stablecoins, they are overcollateralized) and fully redeemable.
These stablecoins are uncollateralized and non-redeemable. Instead, they typically rely on a two or three coin system that algorithmically adjusts the money-supply, rewarding backers with dividends in times of growth and incentivizing speculators in times of contraction.
The funding and creation of asset backed stablecoins so far has been dominated by exchanges (both crypto and traditional) and by traditional asset custodians such as gold bullion depositories. These entities are incentivized to develop an in-house stablecoin because of the potential increase in volume (read trading fees) they represent. In the case of crypto exchanges, by providing a stable hedge in times of volatility, traders are likely to move in and out of stablecoins, paying trading fees each time they do so.
Several algorithmic stablecoin projects have been launched by non-exchange entities. Relative to asset-backed stablecoins, algorithmic stablecoins have not yet gained significant traction but they have attracted large amounts of speculative investment due to the potential for returns: early investors in algorithmic stablecoins stand to benefit by receiving dividends as the money-supply grows. The largest algorithmic stablecoin project thus far, Basis, has secured $133 million in funding. While asset backed stablecoins still rely on the traditional financial infrastructure to custody holdings – making the issuing and redeeming process slow and cumbersome – a major advantage of algorithmic stablecoins is their ability to quickly scale. It’s entirely possible that this scalability will allow algorithmic stablecoins to dominate market share in the near future, thus providing huge payouts to early investors.
Several tier-one exchanges have already issued their own stablecoins, while several others have new stablecoins in their roadmap. Exchanges that don’t offer their own stablecoin have been eager to list a variety of stablecoins issued by other exchanges. The number one exchange by volume Binance, for example, lists four stablecoins as of this writing. It has been estimated that trading in and out of stablecoins now represents at least 20% of total crypto trading volume (equivalent to 60% of Bitcoin volume).
Launching a Stablecoin
What’s needed and how IBC can make it happen
Regulatory Approval and Banking Connections
While trust for algorithmic stablecoins is built on code, asset backed stablecoins largely rely on regulatory approval and reliable banking connections.
The first asset backed stablecoin to gain traction, Tether, was issued in 2014 in conjunction with Hong Kong based crypto exchange, Bitfinex. Tether remains the dominant stablecoin: research shows Tether represented 98% of the total stablecoin volume as recently as September 2018. However, with the recent introduction of alternatives and a short-lived panic break of its peg to the USD in October, Tether has seen a marked reduction in its market share. The differentiating feature of the new entrants is their focus on regulatory approval and transparency, something that has been perceived to be lacking with Tether. For much of its 4-year history Tether has been mired in controversy, with questions about whether it truly is backed 1:1, difficulties with traditional banks and auditors, and accusations that it has been used to prop up crypto markets.
Gemini Coin (GUSD) and Paxos Standard (PAX), are examples of stablecoins that have positioned themselves as a “trusted” alternative to Tether. Both have obtained regulatory approval in the state of New York, and both have gone to great lengths emphasizing trust and transparency in their white papers and with their subsequent issuing and redeeming structure. Both GUSD and PAX employ regular audits of holdings with strict KYC/AML built-in to each coin. GUSD, for example, can only be redeemed for USD through the Gemini Exchange. Gemini coin’s trustworthiness is also boosted by its close relationship with centuries old, FDIC insured State Street Bank.
With its global network of legal experts, IBC has established close relationships with regulators in multiple jurisdictions. IBC’s industry-leading consultants can also assist in building long-lasting partnerships with the respected banks needed to allow a stablecoin to flourish. IBC is thus well-positioned to assist exchanges and other entities wishing to obtain regulatory approval for a new stablecoin offering.
Coding and Code-Auditing
Entities looking to launch any type of stablecoin will need access to top blockchain developers. For algorithmic stablecoins, in particular, the complexity of the stabilizing mechanism is such that the project will require almost entirely original code. Although significantly less complex than algorithmic stablecoins, asset-backed coins still require a very high-standard of coding to ensure their reliability and trustworthiness. In both cases, industry standard best practice is to conduct multiple-rounds of code auditing before going live.
With its global network of developers and consultants, IBC Group can assist your stablecoin project in both code development and independent code auditing.
Marketing and Exchange Listing
The path to success for any stablecoin involves marketing and connections with exchanges. When it comes to image, managing a stablecoin’s brand is essential to ensure its public perception is one of trust and reliability. A stablecoin that gains widespread adoption will also need to be listed on all top-tier exchanges. The image of a stablecoin and the number of exchanges it is listed on are, for the most part, mutually reinforcing: the more exchanges a coin is listed on, the more likely it is that other exchanges will want to list. Likewise, the cleaner the stablecoin’s image, the more likely it is that exchanges will go through the effort to list it.
IBC Group has a network of marketing experts that can assist in crafting your stablecoin’s image and disseminating it widely. Crucially, IBC’s global network of consultants also have the connections needed to facilitate your stablecoin’s listing in top-tier exchanges, enabling it to gain the initial traction needed to allow the coin to grow beyond a local exchange.