In the past week we have seen the price of Bitcoin spike by 19 per cent following the announcement that IBM have partnered with financial services provider Stronghold to launch a US dollar-backed “stablecoin”.
Stablecoins are digital currencies which are pegged to assets such as gold or major currencies including the euro, US dollar and pound, as well as external assets such as alternative pools of crypto-assets (a term encapsulating crytocurrencies and other digital assets).
It is possible that, if linked to traditional fiat currencies, stablecoins may be the catalyst for bringing crypto-assets into the mainstream. Looking ahead, stablecoins may offer consumers and businesses cheaper, faster ways of transferring value, without being exposed to the major fluctuations in valuation typically associated with the crypto-asset market.
Stronghold USD is the latest example of a fiat-backed stablecoin. Stronghold claimed the token “can act as a new liquidity tool for real-time foreign exchange and international settlement, as well as enable banks to issue credit into transactional networks and trade ecosystems”.
Interest in stablecoin, a much anticipated concept in the cryto-asset market, stems from the fact that liquidity concerns are eradicated and the coin’s value mirrors that of the fiat currency. Furthermore, stablecoins are transferred on a blockchain rather than traditional payment schemes.
It could be argued, if the value of any stablecoin is the same as that of a fiat currency, businesses may question its relevance and purpose over traditional currencies using secure payment systems.
The answer may be that, in the future, blockchain technology will mature and become scalable enough to reduce the time and costs involved in processing asset transfers. But the challenge is more than technological, it is to change habits and build trust in innovative solutions.
Stronghold confirmed that it has partnered with IBM to explore how the Stronghold USD could be used with the “blockchain business networks” that IBM has built on its platform. The tokens are solely designed as a B2B solution for financial institutions, multinational corporations and asset managers, but they may become available to retail customers in the coming months.
Via an arrangement with a custodian, Stronghold USD crypto-dollar has the benefit of insurance from the FDIC, a US government corporation which primarily provides deposit insurance to depositors in US commercial banks and savings institutions. This would appear to legitimise its status as a stablecoin by providing access to liquidity rather than a speculative investment, which has hampered the acceptance of some other crypto-currencies and is a step towards thesebeing more widely accepted.
IBM’s involvement signals the seriousness with which major technology companies are taking innovation in the crypto-asset market, including developments with stablecoin.
Jesse Lund, global vice president of IBM Blockchain said the digitisation of real-world assets could dramatically transform many forms of financial transactions. He said: “New types of fiat-backed instruments like Stronghold’s USD token, have the potential to improve the backbone of international banking operations and payments, giving banks an easier way to integrate with public blockchain networks without significant changes to their core banking and compliance structure.”
Blockchain technology is still in its infancy but there is great potential for its use in payments and financial services more generally. Many of the innovations that could emerge with blockchain in the future cannot currently be envisaged, but it is clear that IBM sees potential in the market and wishes to be at the heart of those developments.
Charlie Clarence-Smith, financial products, payments and crypto-asset regulation specialist, Pinsent Masons