Why are Stablecoins Safer than Traditional Payment Methods?

Region: Europe
Feb 25, 2021, 9:30:00 AM Published By Dom Simon

When we think about cryptocurrency, we inevitably think about volatility. Since its inception, the value of bitcoin has fluctuated on such a scale that it has enabled bitcoin owners to vastly change their wealth in a few short years, for better or for worse. This opportunity, amongst volatility, is what speaks to so many speculators, and what scares so many others. And yet, many of us correctly predicted that cryptocurrency is a spark of a much wider financial revolution, granting financial opportunity to a wider cohort of the population than the traditional financial systems afforded, and drastically changing financial services such as banking and payments.

Besides minting millionaires overnight, the technology behind cryptocurrency is quietly and diligently transforming a key industry: payments. Bitcoin has certainly left its mark on this industry, demonstrating how cryptocurrency could be used as a means of payment and remittance. But the volatility of bitcoin and other cryptocurrency does not lend itself to a stable form of payment or remittance. Stablecoins, on the other hand, are designed exactly with the intention to make payments and remittances cheap, fast, and secure, as they require less infrastructure and intermediaries, and can be transmitted very quickly using blockchain.

However, widespread knowledge of stablecoins and their benefits is still in its infancy. A recent survey by Wirex and the Stellar Development Foundation showed that although 84% of survey respondents had heard of cryptocurrency, only 25% had heard of stablecoins. Stablecoins are like cryptocurrency without the volatility. The most common ones are pegged to a unit of traditional currency. For example, one USD Stablecoin equals one USD. Stablecoins have an issuer, someone who will take your traditional currency and give you stablecoins in exchange. Likewise, that same issuer will always be obligated to give you back your traditional currency in exchange for your stablecoins. Most importantly, the issuer of stablecoins cannot do anything with your traditional currency; they must safeguard your traditional currency in a separate bank account and not use it for anything other than returning your money to you.

The most important feature of this arrangement is that you will always be able to get your traditional currency back, even if the issuer of the stablecoin goes bankrupt, because your traditional currency is separated from the assets of the stablecoin issuer. This arrangement is familiar and tested under e-money regulations in many jurisdictions, like in the United Kingdom, Singapore, or in the European Economic Area countries, and many regulators have already determined that most traditional stablecoins are subject to e-money requirements. The US has also recently stated that banks could operate as stablecoin issuers.

Stablecoins are pretty exciting, because they eliminate the need for huge transaction fees and time delays when making payments or remittances. As more people get comfortable with cryptocurrencies and how to use them, it is becoming much clearer that the technology behind cryptocurrencies can make payments and remittances much easier, much cheaper, and much faster. Major players such as Paypal are also entering the space and beginning to integrate their systems with cryptocurrencies. This is accelerating adoption and building trust as people become used to cryptocurrencies and stablecoins through already-familiar payments technologies, and Wirex’s survey responses suggested that 74% of respondents believed crypto was a viable alternative to the traditional economy.

There’s also a lot of development going on in the background, with fintech companies like Wirex acquiring more licenses and permissions to provide a next-level platform, and countries such as Singapore testing central bank digital currencies (“CBDC”). What’s interesting is that the companies working with stablecoins are the companies that are already licensed and heavily regulated. These companies have been safeguarding customer funds since inception, and are now applying the model to cryptocurrencies and stablecoins as well. What many people don’t realise is that safeguarded funds are better than the insurance protection you have on your bank account. Most insurance protections on your bank account, where the government is guaranteeing the funds in your account, only extend to a certain limit. After that, you have no protection. Safeguarded funds must all be safeguarded, and cannot go to anyone else except you.

There’s also a major technological drive behind the transformation happening in payments. Many of us have accessed banking and payments apps via our phone, so we are more used to better accessibility and the security features we need to keep our accounts safe. As countries develop CBDCs and digitise their currencies, there’s also a huge development effort on the cybersecurity side, and not only are better technologies being developed and already implemented with these apps, but companies already have a lot of experience dealing with cybersecurity threats and keeping their apps, and most importantly their customers’ funds, safe from threats.

With the development of technological safeguards, the increased regulation and licensing requirements, and the sophistication of payments and remittance companies in handling these new technologies, there’s never a better time to get comfortable with cryptocurrencies and use stablecoins as a means of payment and remittances. Although there’s a long-held misconception that crypto is unsafe, it’s for these reasons that concerns about cryptocurrency are changing. Wirex’s survey shows that 86% of respondents stated that they feel safe using crypto, although there’s a long way to go amongst the general public.

It’s extremely easy now to speculate with bitcoin, buy Ether and participate in projects on the blockchain, or exchange your cryptocurrency into stablecoins for use of payments or to send funds to someone else. Most importantly, your traditional currency is safe when you exchange it for stablecoins. This technology is here to stay and it’s here to make our lives easier and give us access to financial services most of us were excluded from 20 years ago.