Why Stablecoins are a key part of the future of digital assets and capital markets

By OSL Head of Distribution and Prime Matt Long

Usability will determine the success of digital assets as a truly mainstream tender, and two developments concerning stablecoins indicate that a breakthrough is on the horizon: Facebook’s global Libra project and a potential China-backed Asia-regional stablecoin.

Designed to combat the volatility that has dogged privately-developed digital assets while being easily convertible to fiat cash, stablecoins point to the future of digital assets and capital markets. Around 120 have sprung into existence over the past three years, the best-known being Tether. Pegged to existing assets, they promise to make cross-border transactions far cheaper and more efficient than under the traditional financial system.

At OSL, we have already witnessed increased demand for stablecoin transactions in the past year from a broad range of customer segments, including institutions. We expect this upward trend will continue over time as product innovation occurs and awareness grows. 

While stablecoin growth has some central banks worried, others see the potential. In May, China announced plans to lead the development of a regional digital currency tied to the yuan, Hong Kong Dollar, Japanese yen and Korean won. The government has so far awarded licenses to 12 private companies, including Tencent’s WeBank, to work on creating the stablecoin, which is expected to launch before an official Chinese digital currency.

Short-term, the move stands to hasten economic revival post-coronavirus by facilitating international trade. Longer-term, it will likely prompt widespread business and ultimately personal usage. 

In parallel, the Facebook-initiated Libra stablecoin project is expected to launch in the later part of this year, providing a payments mechanism for the approximately 2.5 billion active Facebook users around the world. Libra (which counts Singapore’s Temasek Holdings as its first state-based member) will advance the digital assets and payments ecosystems in a way that stablecoins like Tether cannot.  

Imagine if 20% of Facebook users spent US$600 per annum in Libra, which is what the average Amazon user spends [1]. That's an estimatedUS$192 billion of Libra deposited in Novi, Libra’s native wallet. This would effectively make Facebook effectively a quasi-, neo-digital bank. 

Unlike with traditional banks, Novi users will be able to make instant, low-cost transactions via Whatsapp and Facebook Messenger as well as through the standalone Facebook application.

In short, it will likely be the innovation that spurs people who have never used digital currencies before to begin using them in daily life, and in doing so will revolutionize the way global payments are made.

This combination of factors has helped grow the market capitalization of stablecoins to more than US$10 billion from US$4 billion less than a year ago. Though currently still small against Bitcoin’s $118 billion, the implications for traditional digital assets are considerable. Led by Libra, we expect stablecoins to draw focus to digital assets as a whole, ushering in new regulations and ultimately recognition of value.

 

[1]: Business Insider

 


 

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