Last week we saw how Cryptocurrencies are not currently legitimate currency alternatives, due to their low usage rates for payments, wildly fluctuating prices and almost sole use as investment instruments.
However, can tweaks to the traditional Crypto model in the form of Stablecoins solve these issues?
What are stablecoins? Will these help Cryptocurrencies become more legitimate currency alternatives?
Cryptocurrencies price volatility has long been seen as a negative and barrier to true currency legitimacy, given that it stops them from performing the three key purposes of money in being a unit of account, store of value and means of payment (Mersch, 2018; Carstens, 2018).
One solution to this issue has been the idea and introduction of ‘Stablecoins’ that have been hailed as a way to bring Cryptocurrencies into mainstream use.
In essence they are a digital asset similar to a coin of Cryptocurrency, but are pegged to fiat currencies such as the Dollar or pegged to more stable asset prices such as Gold (Burchardi et al., 2020).
Proponents of their introduction say that by using these coins, consumers will be able to get access to benefits of Crypto such as speed of transactions and lack of need for a middleman in the form of a traditional bank, whilst also being more certain that the value of the currency will not wildly fluctuate leaving them significantly worse off.
This was the idea behind Facebook’s Libra coin that was due to launch in 2020 and be pegged to firstly a basket of and then select individual currencies. Whilst the coin is yet to fully launch and find success, there will surely be others who will look to use the Stablecoin model to help bring some legitimacy and stability to Cryptocurrencies that we could end up using in the future.
How do new digital currencies compare to Crypto? What can we do to prepare for a future in which Cryptocurrencies may play a role?
Even if the jury is still out as to how pervasive a role Cryptocurrencies will play in the future, to believe that new age technologies such as blockchain that most Cryptocurrencies run on will not play a pervasive role in the future of our personal finances is unrealistic.
Given the notoriety that Cryptocurrencies have gained and potential to offer a decentralised form of money, this has naturally worried many governments and central banks.
One way they are looking to counter these is through regulation, but also through the introduction of their own digital currencies that through being issued by their own central banks offer the opposite of a decentralised currency (Kynge & Yu, 2021).
This was the rationale behind the introduction of the Digital Renminbi in China this year. The government aims to use the currency to hold a greater financial grip on the population (Popper & Li, 2021) and counter the world of Cryptocurrencies that although not in mainstream use for payments now potentially could be in the future.
Although China has raced ahead in its introduction of a digital currency, it could likely not be too long before we see a digital Dollar or Euro that uses some of the same technologies as Bitcoin come into existence give that in the past year over 60 countries have experimented with the technology (Carstens, 2021).
How can we prepare ourselves for the future?
To finish off this blog series, it’s important to remember that given the rate these technologies and currencies are being developed and adapted, it’s crucial for us to continually keep learning more about them.
Within this blog I have demonstrated how Cryptocurrencies are currently more being utilised as investment instruments rather than real currency alternatives. They also pose significant risks to consumers in terms of security and price volatility that could inhibit their use in everyday transactions at the moment.
Even if it is too early to tell to a full extent what role they will play in the future, being aware now more than ever of both the risks and benefits of decentralised Cryptocurrencies as well as centralised Government digital currencies is crucial.
By doing this, we will be able to make informed choices about our currency usage decisions in the future and be prepared for the potential digital frontier in personal finance that could arrive!
Bitdeal (2021) How Stablecoins Differ From Bitcoins? | Stablecoin Development, Available at: https://www.bitdeal.net/difference-between-stablecoin-and-bitcoin(Accessed: 14th March 2021).
Buchardi, K., Mikhalev, I., Song, B., Kok, S.A. (2020) Get Ready for the Future of Money, https://www.bcg.com/en-gb/publications/2020/get-ready-for-the-future-of-money: BCG.
Carstens, A (2018) Money in the digital age: what role for central banks?,https://www.bis.org/speeches/sp180206.pdf: Bank for International Settlements .
Carstens, A (2021) Digital currencies and the future of the monetary system, https://www.bis.org/speeches/sp210127.pdf: Bank for International Settlements .
Kynge, J., Yu, S. (2021) 'Virtual control: the agenda behind China’s new digital currency', Financial Times, 17 February , p. https://www.ft.com/content/7511809e-827e-4526-81ad-ae83f405f623.
Mersch, Y. 2018. Virtual or virtueless? The evolution of money in the digital age. In: European Central Bank – Speeches. Accessed via https://www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180208.en.html
Popper, N., Li, C. (2021) 'China Charges Ahead With a National Digital Currency', The New York Times, 1 March, p. https://www.nytimes.com/2021/03/01/technology/china-national-digital-currency.html.
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