There are questions as to whether the mainstream adoption of stablecoin can facilitate stability in the traditional banking system. Stablecoins are cryptocurrencies with less volatility because they are pegged to stable assets. Most of the assets that fall under the stablecoin category are usually on a 1:1 ratio peg with fiats, especially Euro and U.S. dollar. With this, they carry the same value as the fiats that they are attached to. Although the extent of the stability of stablecoin is debatable, there is no doubt that they are not extremely volatile. Apart from this attribute, they are not in any way different from crypto assets as they are also traded on exchanges like Binance.
Occasioned by the stability of stablecoin, crypto investors usually dabble into it as a backup plan against a possible market crash. Whenever there are indications of this downturn, Bitcoin investors, for instance, would convert their tokens into stablecoins. By doing so, they would be able to avoid any financial loss that may be caused by the crisis. Likewise, stablecoins also offer optimal decentralization, transparency, security, and privacy. All these features explain why investors are now shifting their attention to the asset.
Types of Stablecoins
Meanwhile, it must be established that there are several types of stablecoins. They include commodity-backed stablecoins, fiat-backed stablecoins, crypto-backed stablecoins, and algorithmic stablecoins. While community-backed stablecoins are attached to commodities like gold, real estate, and more, fiat-based stablecoins are attached to real-world money like euros and dollars. Crypto-backed stablecoins adopt crypto assets as collateral to sustain their stability in the market. Lastly, algorithmic stablecoins rely on algorithms to achieve their own stability.
With the extreme volatility in the crypto market and its implications on the financial world, there are calls for the mainstream adoption of stablecoin, particularly by banking institutions. This article will analyze if the adoption can help stabilize the banking arena.
Can Stablecoin stabilize the banking sector?
Like every other financial innovation, stablecoins to an extent can help achieve a stable atmosphere in the banking sector. Foremost, it is essential to note that the adoption of stablecoin is not necessarily important for stable banking. Instead, they can only play a significant role, if properly monitored, in attaining a steady and smooth-running banking system.
Without a doubt, stablecoins have illustrated how they can help users facilitate fast, cheap, anonymous, smooth, and peer-to-peer payments. Consequently, they stand in as a good alternative to the absence of a globally accepted system that could facilitate, cheap, swift, and seamless transfer of funds.
Existing payment platforms lack enough enabling infrastructure to facilitate cross-border transactions that offer a smooth payment gateway which is similar to cash person-to-person transactions. However, stablecoin has illustrated its efficiency as a globally accepted means of payment; both local and cross-border through a single unit of account.
Furthermore, with the support of its blockchain infrastructure, stablecoin can help enhance wholesale clearing and settlement systems. Also, it can ensure a more transparent financial system owing to how its transactions are recorded on-chain. Meanwhile, this particular attribute of stablecoins has its respective advantages and disadvantages. The transparency of the blockchain can help regulators easily detect heavy transactions that could indicate money laundering or terrorism financing traces. On the other end, this attribute still violates one of the major principles of banking; the oath of secrecy.
Conclusion
Apart from contributing to a stable banking system, Stablecoin can as well disrupt the existing structure in the financial sphere. Some financial institutions have pointed out how stablecoins don’t possess satisfactory attributes that could facilitate their injection into the existing banking systems. They cited how stablecoins are not totally stable due to their dependence on an underlying asset. In their submission, they highlighted how the state of the underlying asset could affect the price of stablecoin.
Similarly, they noted how it’s difficult to recall a transaction for a refund in the event of fraud. Lastly, illustrated how stablecoin could trigger significant market risks relating to consumer and investor protection. These factors according to their submission could unbalance the existing banking system with the injection of stablecoins.Â
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