Future of Payments: Stablecoins, Libra or CBDC?
The Growth of DLT
Despite a tonne of articles and the magnitude of discussions, it is still unclear how the world will be transacting financially tomorrow. The most promising innovations in the payment space are undoubtedly backboned by technology, and DLT (Distributed Ledger Technology) seems to be the most promising development.
DLT is a type of database that exists in multiple locations, allowing payments to be spread out and not fixed in one centralised location like the traditional economy at the moment. Many argue that the global economy will benefit significantly from DLT, since it addresses some of the biggest paypoints in the payment industry: high fees, long settlement times, working capital requirements, traceability of transactions and financial inclusion. Not only will this benefit consumers, but in turn encourage local small-to-medium enterprises to go global by giving them easier and cheaper access to a larger international population.
Libra – A Regulatory Nightmare?
Libra is a Facebook-backed DLT project that will allow Facebook users the ability to make financial transactions online and aims to use cryptocurrency to offer these benefits to its customer-base. Libra were endeavouring to create the basis for a new global financial system, and had planned to support merchants of all sizes by integrating their goods/services into the platform, thus giving them access to billions of Facebook customers. These users would purchase from the merchants using the native Libra currency.
Whilst US Congress, along with other governments and central banks were terrified that this project could undermine their power over the economy, it could benefit merchants, customers and Facebook itself greatly by decentralising the economy, and allowing millions of people globally, including the unbanked, to have access to this currency.
As a result, regulatory scrutiny meant a series of investors pulled out last month and the scheme was re-evaluated. Nevertheless, besides the anti-money laundering, KYC (Know Your Customer) and other regulatory issues it posed, regulatory bodies also had issues with the structure of the Libra currency itself, since it was intended to be a single global currency that was pegged to a series of fiat-backed cryptocurrencies. The Libra Association has attempted to address these concerns by ensuring the platform acts more like a traditional payment network – dividing the single currency into multiple currencies that will each be pegged to local fiat currencies, thus easing pressure on central banks since local trades will technically be executed in local currencies.
Nevertheless, The Libra Association have said that they won’t launch Libra without regulatory approval, and as continues to work hard to convince regulators of the need for a DLT project such as theirs, having recently appointed a new CEO to push the project forward.
Are Stablecoins the Solution?
The concept of Libra cryptocurrency project is very similar to other stablecoins that are already available on the market. However, there are some major differences. For example, Libra is a closed-loop project, meaning that they will only allow internal transactions within the platform, which will help to reassure regulators. Coins such as USDT, USDC, BUSD, PAX, and EURW represent open-loop solutions, meaning the transactions can be made outside of their issuing platforms. Secondly, the vast majority of those stablecoins are designed for hedging and trading purposes rather than payments.
The Future of CBDC
Nevertheless, the central banks of at least twenty countries are closely exploring how to leverage DLT and issue CBDC (Central Bank Digital Currency). From the Bank of England’s point of view, reducing physical cash in circulation makes economic sense, which is especially true in the current COVID-19 era. The fear is that this may lead to a reduction in the number of households wanting to hold their money in UK banks (since they will likely be able to send and receive CDBC independently from intermediaries). This would in turn lead to smaller bank reserves and a reduced ability to fuel the economy by providing long-term loans and other debt tools. The relationships between central and other banks may have to be reassessed and it may cause the decentralisation of banks in the future.
While CBDC may be distributed and processed by the banks, private and corporate stablecoins require payment platforms to provide on- and off-ramp solutions. The best examples of those should be able to process as many payment methods as possible, including debit and credit cards, local and international bank wires, blockchain based payments. For example, digital payments service, Wirex, is a currency-agnostic platform that helps customers to get access to a transferrable form of value they choose to use. At the end of the day, people deserve fast, efficient and innovative payment systems.
It is possible for large corporate companies (Libra, JP Morgan etc), central banks and private stablecoins to co-exist by covering different use cases, so long as they are interchangeable. Nevertheless, innovative, technology driven multi-rail payment platforms will help to shape the future of payments.
About the Author, Dmitry Lazarichev
Dmitry co-founded Wirex in 2014 and has been an integral force in the rapid growth of the company. Dmitry and his co-founder Pavel Matveev invented the concept of the cryptocurrency linked payment card along with the term “bitcoin debit card” in 2014 and designed many other innovations within the blockchain and fintech industries.He leads a team that have expanded into Europe, North America, Canada, Singapore and Japan. The company currently serves over 3 million users in 130 countries and to date, the platform has facilitated over $3 billion in transactions.
Dmitry also leads Finance and Compliance teams and is responsible for Corporate Strategy at Wirex. He is seen as a significant voice in the crypto and blockchain arena. His experience as a financial adviser has been developed as a result of several international projects in a variety of industries including finance, oil & gas and real estate.
His aim is to create a platform, which provides everyone with access to the most innovative financial services. He has 20 years’ worth of Financial experience and a serial entrepreneur. He holds an Executive MBA from London CASS Business School and a Bachelor of Economics and Management.
Wirex is a UK FCA-licensed global digital payment platform that has forged new rules in the digital money arena. In 2015, the firm gave the world the first payment card that lets users seamlessly spend their digital and traditional currencies in real life, wherever Visa is accepted.
The company offers currency accounts that let you buy or exchange multiple currencies instantly at live interbank rates for free. Quick and simple money transfer options are available, as well as the freedom to spend whilst travelling abroad in over 150 currencies in more than 46 million locations in 200 regions around the world. Wirex is constantly striving to incorporate additional functionality and cryptocurrency options to their platform to achieve their vision of a world in which people are in total control of their money, traditional or digital.
Wirex is based in London with offices in Singapore, Kiev, Tokyo, Toronto, Dallas and Atlanta. With over 3 million Wirex users in 130 countries and over $3bn worth of transactions processed, Wirex is uniquely placed to support and promote the adoption of digital currencies.