Central Bank Digital Currencies & Stablecoins: What´s Next?
Due to the pandemic outbreak, trillions of dollars will be injected into different economies. As we have previously analyzed, central bank digital currencies could enable governments to articulate better monetary policy transmission. Central banks were not created to interact directly with end-consumers and there’s usually a lag between monetary policy implementation and their direct effects on an economy. In order to reduce these lags, blockchain technology could definitely help in the process through government-backed digital assets and self sovereign identities.
Self sovereign identities would enable governments to identify and link individuals to specific public addresses on a private blockchain. Combining both digital identities and government-backed digital legal tender, relief for citizens in need could be almost instant while at the same reducing intermediation costs. This doesn’t mean that traditional methods like paychecks wouldn’t be needed anymore. It just means that through smart contracts execution and blockchain technology, citizens of any country could apply for unemployment benefits, generate a digital ID through biometrics and get cash relief through a CBDC. All these three steps could be perfectly be automated by blockchain technology exponentially speeding up the process while at the same time reducing intermediation costs.
As we know, digital currencies have some interesting features:
1 – Higher security for individuals on remote regions or countries with high levels of insecurity.
2 – Possiblity to include billions of persons into the financial system through digital identities based on blockchain technology.
3 – Volatility risks mitigation through stable coins.
4 – Reduction of intermediation costs.
When it comes to the drawbacks, eliminating paper money would could create a confiscatory framework as well as reducing individuals’ privacy while at the same time enabling negative interest rates policies which would be probably be rejected by a big portion of the population in the absence of paper money.
Now, are central bank digital currencies pure theory or are there any governments actually exploring implementations? According to media coverage, China has filed several patents for their digital yuan and Japan has recently urged the G7 to actively explore the implementation of a widely accepted central bank digital currency. Jerome Powell has also commented that it’s a topic that has been explored for a while and the Fed seems to be interested as well. It looks like CBCDs could be just around the corner on many different countries.
Though CBCDs seem to be the next move in some countries, a big portion of investors will be interested on decentralized stable coins as well. Ethereum 2.0 and the staking model is expected to be released during 2020 or 2021 and there are high expectations from the DeFi community. However, another actors in the DeFi ecosystem have actively been working to provide alternative options. MakerDAO is the most popular option running on Ethereum with the MKR & MCD DAI. However, Bitcoin has its own approach as well when it comes to stablecoins. Based on RSK technology, Money On Chain, solves the volatility problem of cryptocurrencies providing a bitcoin-collateralized stablecoin and enabling DeFi for Bitcoin. It has three different tokens:
1 – The Dollar on Chain (DOC) is a stable token that will be pegged to the US dollar with a value of USD 1 per DOC. This makes it ideal for individuals who are averse to the risk of Bitcoin and seek stability in the volatile cryptocurrency environment.
2 – BPRO is a token for Bitcoin holders that will absorb the unwanted Bitcoin risk from the DOC. It will pass part of this on to the leveraged Bitcoin operations exchange, earning BPRO holders a passive income, while also keeping some free leverage.
3 – The MOC token will have three functions:
a) MOC holders will have a discount when paying the fees for the use of the platform using MOCs.
b) MOC holders will have the power to vote and veto the platform updates.
c) MOC is used as an incentive for those who run “MOC” nodes and as an incentive to BitPro holders.
So just like Ethereum has Maker DAO and similar projects, RSK enables bitcoiners to take advantage of the DeFi ecosystem on top of Bitcoin’s blockchain not only with MakerDAO but with the recent launch of RIF´s Dollar On Chain which has been expanded to mobile. RSK is also exploring the benefits of blockchain technology with a proof of concept with the Argentina´s Central Bank.
Looks like the short term future will have an interesting influx of new technology adopters as the volatility problem could be mitigated with both government-backed and decentralized stable coins and some central banks have expressed a positive view on stable coins.