Stablecoins as the future of financial infrastructure

The entire financial ecosystem is rapidly changing, across the globe and here in the UAE.

Writing for Khaleej Times, Mohammed Ali Yusuf (Mo Ali Yusuf), CEO of Digital Assets Infrastructure Provider Fuze, describes how one form of digital currency, stablecoins, will further advance the UAE's cashless agenda, and underpin the financial infrastructure of tomorrow.

What is a stablecoin?

It's very easy for someone who works in digital assets or cryptocurrency, to understand the concept of stablecoins, but for everyone else it can seem like gobbledygook. Perhaps it's easiest to provide a short history of currency to understand why stablecoins are the true digitisation of payments.

First, there was physical barter of goods, where you could swap one thing for another. But, as the world evolved, people realised they needed a way of doing business more conveniently. This ushered in the advent of currency which was initially things of value (for example a gemstone or a commodity), but then became coins and paper notes (what’s known as fiat currency) with the backing of governments.

Over time, banks grew as places to store money and the first 'rails' were developed, where instead of exchanging physical money, people could use cheques or promissory notes. Later in the 20th century, payment rails became digital and replaced paper processes with money wired electronically instead. Debit and credit cards could be used to complete transactions and then, the growth of the internet spawned online transactions.

Now, many people have online bank accounts, where your money is already in a 'digital' form. Stablecoins are similar in that they are a digital representation of currency, but the difference is that a stablecoin is issued as a token which can be accessed anywhere across a globally accessible, interoperable network. Crucially, as opposed to other cryptocurrencies, leading stablecoins are 'pegged' to a leading fiat to maintain stability.

For example, popular stablecoins, like Tether (USDT) and USD Coin (USDC) are pegged to the dollar. Alternatively, stablecoins can be backed by commodities, like oil or gold. Other types include where the stablecoin is backed by another cryptocurrency, or possibly the most complicated to understand is algorithmic stablecoins which use market tracking to identify whether more or less stablecoins should be issued to keep value balanced.

The many benefits of stablecoins

As we have seen with currency in the past, when there is a technological advancement, the financial ecosystem becomes more efficient. Just like being able to deposit and send money through a bank was easier than riding a horse to the next town with a bag of coins, stablecoins help customers and financial institutions do things more easily.

Firstly, stablecoins can be sent to anyone, anywhere in the globe, 24 hours a day (even at large volumes). And, rather than it taking days for money to settle into an account, settlement is instant. When moving money around, costs can come down too, as there is no need to route the money through intermediaries. Stablecoins are often on a public network (permissionless), and smart contract technology ensures trustless exchange (in other words, every transaction is automated through a secure ledger, where all trades are transparent and verifiable, and do not require trust in a central authority or 'middleman'). Technologically, the rails can also be upgraded easily, so when there are blockchain advancements, stablecoins are not left behind. In essence, it allows continuous improvement of financial products and services to better serve customers.

Another benefit of stablecoins is that they have a dual purpose. Typical bank accounts are either savings (with interest earned) or current accounts (for day-to-day transactions). Stablecoins allow both functionalities, so they can be saved or spent easily.

And for residents of the UAE, who remit around 200 billion dirhams a year, stablecoins could provide a smoother, faster and lower-cost way of transferring money at the most competitive rates.

We have seen some strong global examples of stablecoin implementation. For example, you can pay businesses with US-dollar pegged stablecoins (USDC) through fintech Stripe and Visa which have a program to empower global transactions in USDC. Meanwhile, Japan's largest bank, MUFG, has a platform that allows banks and money agents to transact in yen stablecoins.

Increasing use cases

Interest is growing in secure transactions and the movement of real-world assets on the blockchain. Stablecoins are expected to play a big role in making this happen. We anticipate a significant shift, where more people and businesses will prefer to use stablecoins instead of traditional fiat money channels.

This is important because it paves the way for 'on-chain' foreign exchange. The current global foreign exchange market is the largest financial market in the world, with up to $ 7.5 trillion traded every single day. The rise of non-USD stablecoins means transactions can be cleared easily via blockchain-based systems. Real-world assets, in the form of digital tokens, could easily be bought and sold.

And, as foreign currency and global payments develop on the blockchain, we predict the emergence of crypto banks. Entire banking operations could occur via blockchain, facilitating a seismic shift in financial services, where customers can store, trade, exchange, make and receive payments without their money ever entering fiat channels.

Growing volume of stablecoins

Stablecoins have grown significantly in the background, to a point where a huge $11 trillion was settled with stablecoins last year. To put that into comparison, that's approximately the same as Visa's entire transactional volume, and bigger than the GDPs of India, the United Kingdom and Japan combined. This will only grow, as large financial institutions like banks increase their interactions with stablecoins for their operations, from investments to money exchange.

One key step in such growth is through the right regulations. For example, the Singapore Monetary Authority has introduced such a framework to add stability to the stablecoins regulated in Singapore, including minimum capital and liquidity, transparent processes and disclosure requirements. This followed significant consultation and collaboration with organisations in the financial ecosystem - ensuring product market fit.

Takeaway for the UAE

If regulators, incumbent banks and fintechs come together, stablecoins could transform the UAE's financial landscape. The UAE is forward-thinking in this way, with the Central Bank and regulators proactively driving collaboration and innovation, underpinned by robust regulation. A dirham-pegged stablecoin can support the UAE's ambitions to be a leader in digital assets, and in turn, propel the country to be the world's next great financial hub. For customers, it won't be long before the money you earn in the UAE can be shared globally with friends and family via stablecoins while maintaining transparency and security.

To learn more visit: https://www.fuzefinance.com/