What to Make of the Newfound Wave of Bank-Issued Stablecoins Being on the Rise
The crypto space continues to grow and expand, even with the prices of most coins still being extremely low. Not only that, but institutional investors are finally making their move, although most are approaching crypto indirectly, in their own way. In mid-February, JP Morgan announced plans to launch its new cryptocurrency, JPM Coin.
In the last week, multiple banks decided to announce their own involvement, stating that they too have crypto-related projects. IBM approached the crypto space as well, and the company's made a joint announcement with Stellar stated that up to six major banks operating around the world might soon launch their new stablecoins on IBM blockchain.
Obviously, quite a few companies and financial institutions are joining the trend of embracing crypto and blockchain. However, there are also many who still do not want to make a move for their own reasons. But, the new trend also caused some new questions, such as — is this a turning point for cryptocurrencies and methods in which they are used or an experiment not unlike those made back when digital money was still in its early stages?
One corporation, Citigroup, recently announced that it would abandon its crypto project in order to focus on SWIFT and potential ways to improve it. Their decision was inspired by the desire to preserve the current forms of money transfers, which is a step back for mass crypto adoption. The move also seems to indicate that the bank was only experimenting and that it did not like what it discovered.
Are The New Coins Truly Cryptocurrencies?
Recently, when JP Morgan announced its new coin, the crypto community did not receive the news with a lot of enthusiasm. In fact, many were quite skeptical of the idea. Many influential figures in the crypto space — such as Ripple's Brad Garlinghouse and Cardano's Charles Hoskinson — stated that these are not cryptocurrencies and that the bank clearly ‘doesn't get it.'
After all, the coin will only allow users to move dollars between JP Morgan bank accounts. The transfers will be instant, but that's pretty much where the coin's usefulness ends. In addition, many were started asking why this was not already a possibility, and why did the bank have to create a “cryptocurrency” in order for this to be possible?
Further, JPM Coin will only be available to the inner circle of the bank's largest clients, and for private use only. As such, it is hardly surprising that many call it a ‘joke' and ‘fake crypto.' It seems more like the banks are abusing the word cryptocurrency, as cryptos, by definition, need to be permissionless with an open consensus. In other words, this announcement of a new coin is nothing by a marketing play.
Even FairX's founder and CEO, Michael Dowling, stated that bank-issued coins are not real cryptocurrencies, and cannot compare to the likes of Bitcoin or XRP. Instead, they are simply cryptocurrency implementations of fiat currency — stablecoins. However, he still does not believe that regulated institutions will start announcing their personal pure-play coins. However, he does seem convinced that these institutions will come up with their own deposits on the ledger.
One curious thing, however, is that, while JP Morgan's announcement received the most attention, this was not the first US-based bank to make such a move. In December 2018, Signature Bank headquartered in New York did a similar thing, calling it Signet Platform. It is basically a private blockchain that allows participants to move funds within 30 seconds, which is exactly what JPM Coin will do. In addition, their project is also pegged to the USD. Of course, Signature Bank is far smaller than JP Morgan, which makes it understandable why this move was overlooked.
What Can A Bank-Issued Coin Do?
Banks have already recognized the potential of blockchain technology. Furthermore, they appear to understand that they will have to implement it, as the alternative is to disappear in the long run. Currently, their goal when approaching blockchain is to use it for instant international payments, which is exactly what Ripple products fueled by XRP are doing.
There is a lot of potential in this field, as old systems tend to require days for transactions to be completed. Additionally, they also make transaction costs much lower as a number of intermediaries get removed from the equation. Apart from Ripple and its product, xRapid, there is also IBM with its BWW (Blockchain World Wire) to consider. Where Ripple's product is fueled by XRP, BWW works with XLM, and the blockchain has already completed its beta in September of the previous year.
Both projects have become quite influential, and are currently large forces in this sector. RippleNet, for example, supposedly already has over 200 banks as members of its network. On the other hand, BWW has only 54, but it gathered these 54 partners in a considerably shorter period of time. Both networks are also open to a wide range of banks and financial institutions. On the other hand, JP Morgan's project would deploy a private ledger. In addition, several other banks have come up with the same idea.
One thing that makes BWW better than RippleNet is that BWW supports multiple digital assets within its blockchain, with bank-issued coins being included. This is why it was possible for the company to announce that six different banks will launch their stablecoins within the network. This is a major advantage for IBM's project, while a big blow to RippleNet, which only works with XRP.
How Do Bank-Issued Stablecoins Compare To Public Stablecoins?
Stablecoins became big in 2018 after the market turned bearish and crypto winter started reducing coins' prices. During that time, investors needed an asset that is able to resist the volatility, and they originally found it in Tether (USDT). While Tether became a dominant stablecoin, it quickly found itself in the center of a controversy, as many started wondering whether the company can back its coins with an appropriate amount of USD. As the firm failed to provide insight into its bank account, many started seeking an alternative.
Meanwhile, projects such as USD Coin (USDC), Gemini dollar, Paxos, and others, saw their opportunity to rise and bypass Tether. While this has yet to happen, as Tether still holds quite a lot of influence, these projects continue to grow and inspire others to emerge.
But, how will open stablecoins fare against the bank-issued ones? Well, the CEO and founder of a payment company Circle, Jeremy Allaire, believes that the open-standards approach is better and that it will ultimately prevail. He also welcomes Facebook Coin, which has yet to be confirmed but has already made quite a lot of headlines. While there are no confirmations regarding the issue coming from Facebook, it is difficult to predict what their coin might be like.
However, Allaire believes that the open standard is critical for the project to succeed, as no one would bother with a coin issued by a single company when they could support global participation from a number of actors.
There is another disadvantage that bank-issued stablecoins have, which is the fact that only the banks can ‘take deposits.' Some of the institutions, like Gemini, have created special trusts where they can store cash. However, this may require quite costly monthly attestations. But, for the banks, this is completely free. This is seen as short-term thinking which will not attract new clients or partners. In the end, crypto innovators will have to use banks to move their funds, which is more of a partnership than a real threat for the banks in question.