This article originally was originally published on Jinse.com and translated for our English blog audience.
Earlier this week, Facebook decided to move forward with its plans to create their new digital currency, Libra, despite immense pushback and criticism from several high-profile voices, including regulators and politicians. The Libra Association was launched on Monday 14 October, with over 21 members signing up to be a part of what stands a revolutionary shift in the digital currency space.
Libra is a digital currency that is known as a stablecoin. Stablecoins have been in circulation — and breaking ground — for a longer time than Libra has been around. However, Libra is said to be one of the leading currencies bringing stablecoins directly into the spotlight.
What Are Stablecoins?
Stablecoins are a new class of digital currencies that form the next attempt to give price stability to the market. These coins continue to garner traction because they are seen as the “best of both worlds” by offering instant processing and security that is typical of other digital currencies that have been present, while also providing users with volatility-free valuations.
“Given the pervasive volatility of digital assets, stablecoins are incredibly important for providing a hedge against volatility and enabling digital currency holders to retain purchasing power in the short and long term,” says Daniel Popa, Founder and CEO of Anchor. “Some possible implementations of stablecoins include sending remittances, digitizing sovereign currencies, and paying foreign contractors in the ever-expanding freelance economy.”
To illustrate, one of the leading digital currencies reached a price of over US$19,700 in December 17, 2017, but dropped significantly to US$6,200 by February 6, 2018 — 68.5% in a span of less than two months. This volatility is what is hindering these digital currencies from being used by the general public for means of trades and making transactions.
Challenges in the Stablecoins Industry
“Navigating regulatory ambiguity and variation from country to country are two of the biggest challenges projects face,” says Popa. “In the US, for example, the SEC came out with a framework for investment in digital assets in April 2019. The framework defined what constitutes a security digital asset to be quite broad, leaving little room for genuine utility digital assets. Unfortunately, this strict definition has led many projects to move their headquarters elsewhere taking innovation and jobs with them.”
Another common problem most players in the stablecoin space face is the accusation that they lack transparency. These claims, unfortunately, are not unfounded.
Critics of digital currencies, stablecoins in particular, have long called for several, renowned stablecoins to be audited, considering how some have market capitalizations reaching billions of dollars.
Most of the companies behind these stablecoins are yet to acquiesce to a reliable audit, causing concerns among the general public and among regulators. While this may not be a clear indicator of anything suspicious, it does give people — especially interested investors and regulators — a reason to doubt the benefits of these digital assets.
“As a company that advocates stablecoin trading, we have to be always identifying the risks involved in the stablecoin projects,” says Adam Cai, Chief Executive Officer at digital assets exchange VirgoCX. “The stablecoin industry is still in its early days, and it still has a long way to go to educate the industry players about what stablecoin can do and what value it can add to the digital asset industry overall.”
To address these concerns, it would be highly beneficial for companies to be transparent about any claims they make regarding their stablecoin. There have been incidents of companies claiming that their digital currencies are fully backed by fiat alone, with this turning out to be untrue.
This calls for proper and advanced monitoring frameworks that will foster transparency and curb the rife manipulations or false claims.
For stablecoins to gain a wider acceptance, trust is a vital factor. One of the definite ways of enhancing trust in the ecosystem is by facilitating transparency.
“There is the traditional dilemma on whether a company really has sufficient funds to cover digital assets,” says Anatoly Ressin, Chief Blockchain Architect, PARSIQ — an advanced blockchain monitoring and analytics platform. “This can be inferred from the blockchain itself. However, there is always the need to entrust this to external auditors.”
He adds: “For digital assets such as stablecoins, we can use algorithmical means. For example, we can apply technology that allows us to monitor flows, turnovers, and make decisions if statements about stability are true or false.”
Pushback From Regulators
Another problem stablecoins face is regulation. While these digital currencies bring the promise of greater stability and reliability, regulators from country to country are still trying to find a place for stablecoins in their financial oversight frameworks.
Japan, for example, is known for its friendly stance towards blockchain and digital currencies. One could say they are at the forefront of discovering a feasible way to regulate stablecoins. Regulators in the country believe that these digital currencies have the potential to make remittance systems (often used by the diaspora to send payments to friends and family in the country) faster and more reliable.
In the U.S., regulators are taking a more careful approach to digital currencies, basing their regulation on the methods these stablecoins use to make their stability as a reality. This would mean stablecoins pegged to the U.S. dollar would be treated in a different light compared to the digital assets that maintain their prices through other means.
Sheldon Xia, Founder, and CEO of BitMart, advises that the current complex regulatory frameworks involving stablecoins will be a challenge to mass adoption. “For example, the Libra Association initially proposed by Facebook is facing challenges from different countries such as the legislative and/or administrative bodies from the United States, France, and Germany due to the fact the adoption of stable coins will dramatically compromise the current foundation of the financial market.”
Xia stresses that there is more to than simply having clarity of regulation: “Having the clarity of regulation is just the first step; more importantly, the channels of the usage of the stable coins are critical. For example, in the current digital assets industry, the traders are not necessarily concerned about whether USDT is 100% backed by the cash or other equivalent assets. The truth that the USDT could be converted to USD in various OTC markets … building up the confidence of utilizing USDT as a stable coin.”
Strategies To Resolve The Present Challenges Against Stablecoins
As mentioned earlier, transparency is a major challenge in the stablecoins ecosystem and one of the ways to tackle it is adopting effective monitoring frameworks. PARSIQ for instance has already developed an advanced monitoring and analytics framework that can provide realtime coverage across various blockchain platforms, which can provide the ability to help monitor digital assets in realtime and provide transparent analytics.
“Right now, a blockchain’s transparency is clouded by its complexity,” says Ressin, whose platform can give the ability to help monitor digital assets to secure reserves and for stablecoin platforms to effectively self-regulate supply and demand. “Tools have not previously been available that allow developers to simply and quickly create automated triggers, or program complex logic conditions that will act in realtime to give new insights and more advanced levels of monitoring than are currently possible.”
Instituting advanced monitoring and analytics frameworks will facilitate better trust and transparency in the ecosystem. This boosts the level of confidence in the positive potentials of stablecoins, and promote wider adoption on a global scale.
“PARSIQ treats blockchains as live streams of actionable events which can be interactively retrieved and reinterpreted in real time using its powerful built-in language, ParsiQL,” says Ressin.
Enhancing trust also requires cooperation between technology companies and regulators. “Currently, prejudice comes from the public and they think digital assets are equal to scams. Increasing the awareness and legitimacy of the digital assets shall be a shared goal with all the industrial players,” concludes BitMart’s Xia.
The continued efforts of companies such as PARSIQ, BitMart, Anchor, VirgoCX and others, are what will move stablecoins to the forefront of the future’s new way of transacting.
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