Digital currencies are alternative forms of currency on blockchain and DLT systems that can be used to facilitate payment. Many examples exist, with Bitcoin as the progenitor. New forms of digital currency overcome some of the problems with Bitcoin, such as scalability, speed, privacy and energy efficiency.
Stablecoins are digital currencies that are designed to manage volatility by being backed by a different asset to stabilise their price. There are different types of stablecoins based on stabilisation mechanism and issuer. They leverage all the benefits of digital currencies without the price volatility.
Stablecoins can be designed to maintain a real-world asset price, such as a traditional fiat currency or a commodity, a combination of assets in the form of a multi-collateralised stablecoin or to a digital currency (e.g. Bitcoin).
Stablecoins can be issued by private institutions (e.g. Tether), decentralised autonomous organisations (e.g. Maker) or Central Banks in the form of central bank digital currency. Stablecoins, which leverage blockchain technology, can create new payment rails offering cheaper, faster and better payments than existing means. Stablecoins also establish programmable digital money and therefore have the potential to introduce new use cases to the financial services industry.
Digital Currency benefits and outcomes
Digital Currencies can benefit the enterprise as a new means of facilitating payment, both for the enterprise to utilise and for their customers
- Accessible and portable store of value – Stablecoins are more secure and portable than traditional fiat currency. Furthermore, stablecoins can support financial inclusion by reducing the barrier to accessing electronic payments
- Faster payments – Stablecoins offer an alternative to traditional payment rails, with the potential to remove intermediaries and create low-cost, transparent and secure payment rails.
- Low-Cost Remittances – By creating a decentralised payment rail, stablecoins can act as low-cost alternatives to existing cross-border remittance services. Anyone with an internet connection can create a digital wallet and receive or send stablecoins across borders without any additional fees.
- Instant settlement – Stablecoins supported by blockchain protocols settle in near real-time and automate delivery versus payment, eliminating settlement risk in transactions.
- Programmable money – Stablecoins can enable new automated and decentralised use cases such as DeFi applications