The hype surrounding decentralised finance has focused on exchanges, staking, yield farming and non-fungible tokens, but the often ignored stablecoin market continues to enjoy record growth. Stablecoin supply has exploded over the last two years, growing to $112bn from $3.2bn.
One of the major drivers of this has been the denomination of cryptoassets in stablecoins. Trading crypto-to-crypto has less frictions than crypto-to-fiat transactions, so many exchanges have evolved to suit this.
Alongside this, the emergence of the decentralised finance ecosystem presents opportunities for crypto participants, who are able to derive yields on stablecoin deposits well above those available from bank accounts in a zero-interest rate environment.
It is important to separate the ideology of fans from the technology underpinning bitcoin. What bitcoin enthusiasts miss, either intentionally or otherwise, is that the management of an economy is more than just overseeing the money supply. It is a vast and complex exercise of government, policy, geopolitics and public infrastructure.
Cryptocurrencies such as bitcoin, however, have spurred innovation in the banking system, both in technology and by challenging incumbents. Ultimately, this could be bitcoin’s most valuable contribution to the public good. Bitcoin was and continues to be a successful proof of concept of a decentralised monetary system that natively integrates into the digital economy. From a user experience perspective, cryptoassets are simpler and more seamless to use for transfers than traditional banking solutions. Banks and fintechs need to deliver this convenience for consumers, while still fulfilling controls and other cybersecurity best practices.
Decentralised finance creates both opportunities and risks. Locking money in a decentralised protocol, in an environment where ‘code is law’, is hardly the same thing as keeping it in a bank account regulated by actual laws. Central bankers and policy-makers would do well to understand new technologies, including cryptoasset custody solutions, anti-money laundering solutions, exchange mechanisms and e-wallet systems. Decentralised systems are remarkable innovations that have proven resilient to the world’s most sophisticated hackers for over a decade. Effective central bank digital currency and fintech infrastructure will need to balance regulatory requirements with the inventiveness of the free market.
An abundance of capital and the advances enabled by open-source code have sparked a rapid rate of innovation. The power of open-source cannot be understated. It allows for developers to reuse existing code and to iterate on it, instead of operating in walled garden environments.
Public-private partnerships are necessary if CBDC systems are to be successful, as highlighted by Tobias Adrian, director of the monetary and capital markets department of the International Monetary Fund, in a 2019 speech. The public and private sectors need to focus on what they do best. Distribution of money should be left to the private sector. The formation of fintech layers and credit creation should also be handled by the private sector. Central banks should be the issuer of money, with the state being the ultimate backstop. Trust has to remain vested in public institutions underwritten by the democratic process and due process, rather than for-profit companies.
As the European Central Bank recently warned, central banks and governments that choose to ignore decentralised finance innovations do so at the risk of their own financial stability. In particular, the ECB noted that banks that do not consider their own centrally controlled stablecoin solutions could see their power eroded.
Stablecoin innovation, with its ease of use and potential rewards, can be used for the public good, but the arms race to control this new technology is only just beginning.
Kenneth Bok is Chief Executive Officer of Blocks.