Stablecoins: A staple in our future wallets?
What’s worse: getting paid by check, or getting paid late? In many cases, it amounts to the same thing.
Checks that go out in the mail typically take a week for delivery and longer after that to clear from the time they’re issued. And not only are checks slow to process, they’re prone to mail theft and fraud and can have bank-imposed transaction costs.
For businesses, checks are not a reliable foundation for cash flow management. Yet checks have a substantial role in B2B payments, with many companies relying on paper to pay bills. Now this is changing, as many businesses migrate to faster, more efficient electronic payment methods like ACH. While ACH payments aren’t as slow as checks, they’re not instantaneous. They usually take around two days to reach the recipient. True, two days isn’t too bad. But it can seem long to a company with a negative cash flow.
The closest thing to instant payments today is the RTP Network, the real-time payments system from the Clearing House. Transactions made over the RTP Network give businesses the ability to receive payments almost immediately. However, another method of payment is gaining traction: stablecoin, which allows for real-time payments. And it will have a more visible position in the payments landscape in the next 12-18 months.
Bitcoin and stablecoin: What’s the difference?
Stablecoin is very different from highly volatile currencies like bitcoin and ethereum. While these digital coins might be attractive to ultra-aggressive investors, they are not a great way to pay your bills because they’re prone to wild swings in value and high transaction costs. Not many businesses want to be paid in a currency that could plummet in value the very next hour.
Stablecoins are stable-value coins, cryptocurrencies designed to minimize price volatility by pinning value to currencies like the U.S. dollar or to exchange-traded commodities like gold.
Even if cryptocurrencies like bitcoin and ethereum ultimately crash and burn, I believe stablecoins — and their underlying blockchain technology — are here to stay and will play a larger role in payment transactions in time.
Think of it this way: Even after the dot-com crash circa 2000 in which hundreds of online businesses went bankrupt, the foundational internet technologies developed during that time — including web services, e-commerce applications and cloud software — survived and thrived. Similarly, blockchain will be a persistent technology whether volatile cryptocurrencies implode or not.
Blockchain and stablecoins will flourish because they fundamentally improve the way financial transactions get done. Take, for example, international payments. Making international payments today requires navigation through a complex maze of legacy payment systems, like ACH, wire transfer and Swift. These involve currency conversion, verification and a lot of other friction, which result in higher costs and longer delays. However, today we don’t have much choice; these legacy payment rails power the majority of international payments.
Is stablecoin trustworthy?
Stablecoins are a better way. When customers use a stablecoin, they can bypass the traditional hurdles of transferring funds and dealing with local currency conversions. They get real-time payments, better exchange rates and lower transaction costs. That’s why leading banks like JP Morgan and Wells Fargo have launched their own stablecoins — to make it easier for customers to conduct cross-border transactions and to ease the foreign exchange burden. Even the government of China is considering its own coin. In many ways, China has gone more digital with payments through Alipay and WeChat.
But are stable-value coins trustworthy? Stablecoins are backed by real monetary assets, such as fiat currencies held in a bank. Stable-value coins are also audited. As a result, their value is more real than other forms of crypto like bitcoins. Take JP Morgan’s recently introduced JPM Coin, a stablecoin tied to the U.S. dollar and backed by assets. Essentially, if you trust JP Morgan — a financial titan with a 2018 operating income of $764 billion — you can trust JPM Coin. And if you trust JPM Coin, you can settle payments instantly and transparently at any time of the day or night.
Detractors might point out Facebook and its Libra stablecoin system. True, that project has not gone well so far. In fact, that’s probably an understatement. But Libra’s troubles have less to do with the usefulness of stablecoins and more to do with the fact that Facebook sidestepped compliance and government regulators when launching.
The reality is stable-value coins offer tremendous promise, and not just for payments but for managing the entire vendor-to-vendor relationship. Let’s say your client runs a high-end coffeehouse in San Francisco and she buys beans from a farmer in Colombia. With blockchain, she can pay the farmer instantaneously in stablecoin when the coffee beans ship. The coin maintains its value and is easily convertible to Colombian pesos.
The transaction is recorded on the blockchain in black and white, so there can be no dispute. What’s more, contracts between your client and farmers can be programmed into the underlying blockchain as smart contracts. Once a smart contract is in place, all the details — including things like purchase orders and payment terms — live on the blockchain.
This kind of smart contract reduces friction and accelerates payments. When the smart contract is executed, payments are automatically deducted from the coffee shop owner’s digital wallet and funds are moved into the farmer’s digital wallet, so payment happens seamlessly. Terms can also be programmed into a smart contract. For example, bills paid within 10 days could get a 2 percent discount.
The Wild West vs. regulation
In my mind, stablecoins are the future, even if the market is currently experiencing a degree of Wild West uncertainty. Yes, the Wild West was chaotic during its early days with every bank offering its own currency, resulting in many kinds of banknotes floating around. But ultimately the government got into the business of issuing currency, and it all worked out pretty well.
Could the same happen with stablecoins? As more organizations launch them, like JP Morgan and Wells Fargo, government interest will continue to develop. Eventually, there could be a government entity that either regulates or issues stablecoins in an effort to control the market or add transparency, much like the government oversees the Federal Reserve and wire transfer system or Nacha oversees the ACH Network. We may even see more governments issue their own stablecoins. Either way, when conducting global commerce becomes faster, cheaper and more efficient, everyone stands to benefit.
For accountants, awareness of the evolution of the payment landscape is a critical component of success. Right now, not many clients are asking for cryptocurrencies or stablecoins. But as convenience surpasses trepidation, more companies will begin to explore paying with stablecoins.
Remember: As the world gets more connected and supply chains become more global, there is a growing need to pay in different currencies. Anything that can reduce transaction times and foreign exchange fees will accelerate the pace of commerce. When you make and receive payments in stablecoins, you eliminate many of the current obstacles in the global commerce chain.