Stablecoins, are the digital assets used as an exchange medium backed by assets and specifically held for that aim. They have grown immensely in the past two years. Stablecoins have increased its market capitalization from $5.7 billion on 1st 2019 to $155.6 billion on 21st January 2022. Additionally, a market once only had one stablecoin called Tether (USDT) and now has five stablecoins having $1 billion worth. But In this post, we will describe why we think stablecoins are unlikely to be the future of payments.
Unnecessarily Engagement of Liquidity by Stablecoins
some policy creators now seem connected to the concept that only digital currency is viable that is 100% backed by safe liquid assets. Nonetheless, such an idea can act as a double-edged sword. On the contrary, it must help stablecoins holders limit credit and liquidity risk. At the same time, there is lawful & operative certainty that the liquid assets would be available to fulfill the claims of digital coin holders.
The other concept is that if the liquid asset gets tied up in stablecoins arrangements, then they wouldn’t be available for other uses, like helping the financing institutions satisfy their legal requirements to manage the sufficient liquidity. (There can be massive shortages of safe & liquid assets).
Stablecoins are Risky and Do Not Connect to Liquidity
These digital coins are the same as traditional private bank notes, especially those issued during the Free Banking Era in the U.S, as asserted by Held, Gorton, and Zhang. Besides the legal foundation and safeguards to support the bank deposits, such private monies were under several problems, mainly due to the issuers and the backed-up assets being of undetermined & opposing quality.
As a result, private bank notes were not convertible, and people handling them had to consider accepting a particular note at face value. Provision of that same economic procedure underlies stablecoins and private bank notes; according to the historical basis in the free banking era, stablecoins may suffer problems like those private bank notes.
Efficient Digital Money is already present; currently, you just try to adapt it to
Over the last century, the central bank’s actions resulted in a well-functioning payment and banking system. So take its advantage, and provide tokenized deposits. Several practical reasons need to be implemented, and the concept of tokenized deposits is simple. People who deposit in the bank can change their deposits into/out of digital assets (the tokenized deposits) and circulate in a DLT platform (distributed ledger technology). The tokenized deposits represent a claim on the investor’s commercial bank like a regular deposit does.
A few Reasons to Tokenize the Bank Deposits’ Desirability are
Customers maintain their deposits in commercial banks; reserves back these deposits to avoid liquidity locking. These deposits enhance the bank lending power to the actual economy and the monetary policy transmission.
- These deposits can be exchangeable by customers for goods or services by utilizing well-functioning infrastructures of existing payments. Traders who receive such funds should not worry about the sources of these deposit-based payment systems as they pass on at par.
- The role of the central bank in such issues also makes a payment network that helps generate funds from multiple private sources that can bring significant economic advantages.
- The other attractive option of bank deposits is their issuance is regulated by formal institutions and secure by insurance which makes them very safe. Moreover, banks have law compliance policies, which may reduce the risks of criminal activities, like money laundering.
To enhance the stablecoin features, tokenized deposits are among the many options. But these deposits are a perfect example of a money type that can do many things in limited capacities while circulating in DLT platforms like the thequantumai.app. They give a realistic approach to following that goal.
The evolution of DLTs is a cause of the multiplication of new money types, like stablecoins and other kinds of financial instruments. We mentioned in this article that if DLT platforms hold the transfer mechanism for the future, it is worthwhile to seek the best money option to utilize that transfer mechanism. We can indeed say that tokenized deposits can be a fruitful avenue to chase.
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