BLOCKCHAIN, Expert opinions

Could stablecoins become a response to sanctions?

This February, four Iranian banks took part in launching the gold-backed stablecoin cryptocurrency PayMon. The new cryptocurrency will be used for tokenization of financial institutions’ assets and will allow to ease pressure on the national economy after the disconnection of Iranian banks from SWIFT system. This is possibly the first such precedent, and soon we will see an increasing number of stable currencies launched by major state companies or national governments that are facing US sanctions.

In the past few years, the cryptomarket market has made active attempts to mature and build relations with traditional financial markets. The key problems that the digital asset market has yet to solve are minimizing the notorious volatility of cryptocurrencies and the lack of a stable connection between these markets. Stablecoins seem to be the most prospective solution to this.

Unlike most cryptocurrencies, stablecoins are backed by traditional assets. These are mostly euros or US dollars, but there are also stablecoins pegged by commodities such as gold and oil. Stablecoins have all advantage of cryptocurrencies, with unlimited divisibility and the ‘account opening’ time equal to the time spent for downloading the app; plus, they can be transferred to any part of the world with a low fee.

The importance of stablecoins for the industry cannot be overstated. Tether, the most popular stablecoin, already ranks second in terms of daily circulation after the Bitcoin. For investors, it is an ideal opportunity to lock in profits on the volatile market, and for common users to keep their savings in a stable currency. The largest corporations are keeping up: in July 2018, the financial giant IBM began testing the Stronghold stablecoin to be used for cross-border payments within the company.

It is noteworthy that any stablecoin is stable until the price is stable for the asset that backs it. Due to the longest ever U.S. government shutdown, the growing Brexit uncertainty and political tensions in the European Union, it has become obvious that even the main global currencies can be volatile.

It was probably this that, besides ideological reasons, moved Iran to issue a digital gold currency. In 2018, gold was quite popular: central banks all around the world replenished their official reserves by 651.5 tons, the largest amount since 1971. Interestingly, Russia was the largest buyer of gold: it purchased 274 metric tons.

It seems that the SWIFT financial messaging system will not ban Russia in the nearest future, therefore the country will unlikely issue a state stablecoin. However, it is obvious that the sanctions negatively affect the ruble, and large national corporations are losing profits. In these conditions, the tokenization of the assets of such companies like Nornickel, Gazprom and Rosneft seems a smart choice. All the more that the country’s gold reserves were significantly replenished last year.

Stable cryptocurrencies are prone to the risks common to all cryptocurrencies, such as theft or denied access to the wallet. In this case, it would be practically impossible to return the money. An illustrative example of it was when the QuadrigaCX bitcoin exchange lost the access to its users’ money worth $190 mio because of the death of its CEO Gerald Cotten.

In addition, the responsible issuers of stable currencies should regularly hold an independent audit of backing assets and solve the problem of the centralized storage. Otherwise stablecoins would not differ from any usual cryptocurrency, whose price depends only on market demand.

By Alexei Kiriyenko, EXANTE managing partner

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