Stablecoins: Cop Out Or Compromise

I would call myself a cryptocurrency purist. The reasons why digital assets appealed to me in the first place are their decentralized nature and the fact that the blockchain is ‘trustless’. Furthermore, it is a riposte to the banking community, which for a very long time has controlled us all unchallenged. And then they caused a financial of the collapse of such proportions that stability was ripped away from the average citizen. People lost their jobs, their homes, and there were even worse tragedies.

So when the Bitcoin whitepaper was published in 2009, it felt like a way forward. One of the problems was that the early Bitcoin believers were perceived as being anarchic hackers and the techie equivalent of punk rockers. And yes, some of them were, but there were also technology entrepreneurs like myself who embraced its possibilities.

In the early days, the buzz suggested that the crypto revolution would be an easy process, but of course, we have discovered that it is a rocky road and we are nowhere near mass adoption a decade later. Much of this is attributed to the price volatility, the lack of opportunities to spend crypto and the opposition of regulatory bodies in numerous global jurisdictions.

Along Came Stablecoins

And then along came stablecoins. If cryptocurrency was a sport, the purists were all shouting ‘foul’ and ‘cheat’. What I want to consider in a calm way is this: are stablecoins a cop-out, because they are ‘fake’ crypto’ to some extent? Or are they a compromise that could ultimately open the floodgates to mass adoption of all forms of digital assets?

In respect of a compromise, I’d compare stablecoins to the trainer wheels on a child’s first bicycle. They help the child get used to the idea of balancing on two wheels. Eventually, these ‘stabilisers’ can be removed and the child can progress to the reality of riding a bike without them. Now, even as a purist, I can see the potential advantage of this. I recently met an economics student, a Generation Z crypto enthusiast, who is invested in a small way in digital assets. He happily extolled what he believed would be the benefits of Facebook’s Libra, as just that kind of ‘trainer crypto’ that would enable mass adoption. I don’t put this forward as a conclusive argument for this view of stablecoins, but only as anecdotal evidence about possible public feeling, especially amongst Millennials and Gen Zers.

How else might stablecoins benefit us? I looked up some expert opinion on the topic.

MakerDAO says,

“A successful stablecoin implementation would be a major catalyst for disruption to global financial infrastructure, challenging weak governments and mismanagement of national economies. Furthermore, stablecoins allow for decentralized insurance, prediction markets, transparent credit and debt markets, and create a level playing field between small and large businesses in global finance.”

If MakerDAO is correct in their assertion, then isn’t it the case that stablecoins are performing the same kind of disruptive element crypto purists believed Bitcoin would deliver?

Stablecoin As Cop Out

As you know, stablecoins are tied to fiat currencies such as USD, GBP, Euro, etc. And there are those who believe that is their fatal flaw. What they are saying is that stablecoins are only as good as the asset they are tied to, and the way in which the two assets are tethered. This is a more complex debate. But, if I can simplify it at all, I’d say this: the core problem purists see with stablecoins is that they are still centrally controlled, they can be manipulated by market forces, and they are certainly not ‘trustless’ in the same way that BTC, ETH or LTC are. Some, such as Ben Prentice argues that stablecoins will simply lead us into the same trap as the old order of fiat currencies. He writes, “I believe inflationary fiat currencies where monetary policy is decided by few individual humans is not a sound form of money.”

So, I ask you — what do you think? Do stablecoins have the potential to help people slowly adapt to the decentralized digital assets, or are they a cop out intended to ensure that fiat currencies, controlled by a global elite according to some, remain dominant in the way we make all of our financial transactions?

How to be a winning neobank

In Europe the neobank sector is looking very healthy. It has been boosted by the implementation of PSD2 (Second Payment Services Directive)

This September, otherwise called Open Banking. This effectively means that all the incumbent retail banks have to “release their data in a secure, standardised form, so that it can be shared more easily between authorised organisations online,” as WIRED reports. Open Banking has been happening in stages since 2017, but now we have reached peak Open Banking.

This new legal framework, along with the creation of EMIs (Electronic Money Institutions) supported by PSD1, is about to revolutionise user interaction, and it will also make a major contribution to the rise of the neobanks. It basically gives them an even greater opportunity to increase their market share in the retail banking sector.

However, there are some issues. The neobanks can’t yet offer all the services that the traditional retail bank does. That is not because of regulatory issues, or an inability to deliver a service, but because they don’t have enough funds. While neobanks may raise capital during funding rounds, and even though it may look like quite a significant amount, the big retail banks already have much more capital than any of the neobanks in their coffers.

Customer trust is another issue, especially for those consumers who are used to having a bank branch to visit. The concept of a ‘virtual’ bank with no branches makes them nervous. This has not been helped by some of the neobanks experiencing security issues. For example, Monzo asked a large proprtion of its customers to change their PIN when an unexpected level of fraud was discovered. Hacking is a security concern, as is data privacy. The latter is a problem for all banks, but neobanks are especially vulnerable.

We are also seeing the incumbent banks step up their digital activities through acquisitions, which they can easily afford. Neobanks cannot compete at this level, not can they become more exposed to risk at any cost just. There is a very real opportunity for neobanks, because they are more agile and can offer a better consumer experience, but what they need to work on now is building up consumer confidence — the neobank that nails this one, will be a winner.

Canada needs get ahead in fintech

Canada is an innovative nation, but for some reason or other it is lagging behind its peers when it come to new financial technology. More co-operation between the banks and the fintechs is needed if the country is not to be left behind, as Financial Post suggests.

In the summer of 2018, the Canadian government announced, “it needed someone to study the landscape for financial technology companies, or fintechs, and figure out how they were getting along with the big banks and other financial institutions,” journalist Geoff Zochone reported. As he said, “Large multinational companies have jumped out to a headstart in the race to succeed, and Canada runs the risk of falling behind. At stake is nothing less than our prosperity and economic well-being.”

Toronto-based Fintech Growth Syndicate Inc., won the contract for the study, which became a 240-page report, the first of its kind made available in Canada.

The report used only publicly available data sourced from more than 60 different websites and discovered, amongst other things, that there were “approximately 1,000 fintechs across Canada offering services or products related to crowdfunding, insurance, wealth management, cryptocurrency, artificial intelligence, capital markets, lending and payments.”

Although most of the companies were startups and had small staff numbers, when combined they employed more than 30,000 people and they had an estimated combined value of $30.5 billion. This was exciting. However, what it also showed that very few of the fintechs had partnerships with the banks. Instead the study found “Canada’s Big Five banks may have been increasing their engagement with fintechs, but “the majority of their efforts” were still on building their own products and digital experiences.”

The result is that one of Canada’s biggest industries is innovating at a snail’s pace, plus the country is lagging behind its peers in adopting new financial technologies. It also means the Canadian consumer is probably paying more for financial services than they should.

Sue Britton, director at Fintech Growth Syndicate Inc., said, “To the extent that we could find publicly available information, we were able to show that, yes, there are some fintechs that are partnering with financial institutions. But certainly the majority of those partnerships are on the financial institutions’ terms. They’re not groundbreaking new business models … It’s not going to make the marketplace more competitive, because it’s going to, in fact, if anything, grow the business for the incumbent.”

Sticking with the status quo may be Ok for the banks in the short-term, and consumers may not mind, because they are used to the ‘traditional’ banking services. And it appears that they see no need to shake up Canada’s acclaimed stability on financial services. However, as Zochone says, “the incumbents could wake up one day to find their lunches being eaten by big-tech firms such as Amazon.com Inc. and Apple Inc., which are already offering a payments solution, some more aggressively than others.”

Britton added, ““What our big banks aren’t doing is moving as quickly as other parts of the world, innovating their business models, extending financial services to more small businesses or reducing their fees.” She added, “Perhaps, as Abraham Lincoln famously said, ‘give me six hours to chop down a tree and I will spend the first four sharpening the axe,’ they are still sharpening the axe.”

Royal Bank of Canada chief executive Dave McKay reported in March of this year that he was increasingly concerned with the prospect of Facebook Inc., Amazon.com, Apple, Netflix Inc. and Alphabet Inc.’s Google (the FANG companies) getting into banking. He told Bloomberg, “They are getting between us and the moments of truth of our customers, and currently what they do with that is they sell that insight back to us in the form of search and advertising and other perspectives, and they earn a certain amount of economic rent.”

It will take time for Canada to begin adopting tech like other countries, Britton said. But it will happen.

“It’s not a blip, it’s not a bubble, it’s not a one-off,” she said. “It is the future.”

Bank-fintech collaborations are the way forward