Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
A Brilliant Fintech Future – Banking on Stablecoins
Finance Magnates | Maxim Bederov | Feb 3, 2021
There is no recent fintech concept that has taken root in the banking community quite like the stablecoin. Of all the technical innovations brought forth by the invention of Bitcoin, this has succeeded in capturing the greatest attention of powerful financial leaders across the globe.
While Bitcoin as peer-to-peer electronic cash was specifically designed to evade banks and bankers and bypass the need for these middlemen to exist at all, a stablecoin at its core does not pose the same explicit existential threat. That is not to say that there are not risks, of course. But, you get my point.
See:
OCC says Federally regulated banks can use stablecoins to conduct payments and other activities
UK Consultation (Mar 21, 2021): Regulatory Approach to Cryptoassets and Stablecoins
Central bankers of all stripes now agree that stablecoins will radically alter the payments landscape. At the European Central Bank, for example, executive board member and noted Italian economist, Fabio Panetta believes that:
“Global stablecoins could drive further innovation in payments, responding to the need for cross-border payments and remittances that are more efficient and cheaper.”
And over in the US, we have just seen a slew of guidance from the national bank regulator, the Office of the Comptroller of the Currency (OCC), which not only allows banks to custody crypto assets for their clients but now says regulated bank entities can use stablecoins to settle cross border payments, participate as nodes in blockchain networks to help verify transactions and even issue their own stablecoins. That last bombshell news came in the form of Interpretive Letter 1174, by the way.
Leading that agency for the moment (and due to step down any day now, according to multiple reports) is Brian Brooks. It will not be lost on the eagle-eyed among you that Brooks is a poacher-turned-gamekeeper.
Before taking up the role as acting Head of the OCC in May 2020, he was Chief Legal Counsel for the San Francisco crypto exchange Coinbase. And of course, since 2016 Coinbase has been operating its own US dollar-backed stablecoin: the USDC.
Bank on This
Now the best banks in Canada are increasingly interested in stablecoin markets, and institutions are interacting in ever greater numbers with these payment rails.
So, this is the situation. With the OCC guidance, US banks can not only legally use stablecoins to facilitate payments, but may also issue their very own stablecoins. JP Morgan was ahead of the curve here with the JPM Coin, an institution-to-institution stablecoin that became commercially available in October 2020, almost two years after it was announced.
See:
Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements
Are Stablecoins Better Than Bitcoin?
And, we can see this strategy starting to play out in Europe, too. As in the US, lightning-speed innovation in Germany has followed regulatory clarity.
The financial regulator, BaFin enforces the laws of the land, and as of 1 January 2020 incorporated crypto custody businesses into the German Banking Act. This legalises regulated entities to custody crypto assets for their clients.
As reported, one of the world’s oldest bank institutions, Munich-based Bankhaus von der Heydt (BVDH), launched a Euro-backed stablecoin on the Stellar blockchain. The reason? To use this fintech modernisation ‘to expand its digital asset offering to clients’. The bank holds fiat currency transfers in escrow accounts, which then trigger the stablecoin issuance. Because of strict KYC requirements, this Euro-backed stablecoin will not be made available to trade on exchanges.
Bank spokesman, Lukas Weniger argues the point that the main flaw in current stablecoins is the lack of a licensed banking institution to guarantee them.
“The stablecoin is a very sensitive product, and requires a lot of trust from users,” he said. “If we look at other projects, for example, Tether, there is a trust issue.”
Tether remains a disaster waiting to happen. The USDT stablecoin provides some 80% of the liquidity in all Bitcoin trading, according to the Wall Street Journal, and its 1:1 convertibility with the US dollar has long been disproven. Trust has been broken. As Coindesk reported on 11 January 2021, Tether minted a record 2 billion USDT in just one week. How long this can continue is anyone’s guess.
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