26th September, 2023
Article by Paul Hearns, Blockchain Ireland
Stablecoins are being used in the real world for income protection and bridging assets. They are a means of taking the volatility out of using a cryptocurrency, argued Lory Kehoe, Adjunct Assistant Professor, Trinity Business School, and Chair of Blockchain Ireland.
At the latest in our techBREK series of network-and-learn events (19th Sept, 2023), Kehoe described how since the start of 2023 there has been a flurry of regulation and legislation in relation to stablecoins across the world, from Hong Kong to Singapore and Japan, to the UK, the US and in Europe with the Markets in Crypto-Assets Regulation (MiCAR).
Faster settlements, lower costs
The techBREK event, a collaboration between Technology Ireland ICT Skillnet, Technology Ireland Ibec and IFS Skillnet, heard that stablecoins are enabling faster settlements with lower costs across the financial world, with the market in 2022 hitting $11 trillion (€10.35 trillion). Describing the use of stablecoins as evolutionary rather revolutionary, Lory Kehoe contextualised that figure by drawing parallels to payments giant Visa’s annual figure of $11.6 trillion (€10.91 trillion). This ‘overshadows’ the numbers posted by Paypal and Mastercard during the year, which were $1.4 trillion and $6.57 trillion, respectively, said Kehoe. Of the cited use cases, three quarters were for income protection and one quarter for asset bridging.
Kehoe went on to explore tokenisation, which is also seeing a surge in activity. He cited Larry Fink, CEO of investment giant BlackRock, who said tokenisation is “an opportunity to provide investors fractions of shares or products.” Kehoe cited forecasts from Citi of $5 trillion of tokenised digital securities and $1 trillion of distributed ledger technology-based trade finance volumes by 2030. He added that data from the European securities regulator Esma just prior to the event, showed that just $800 million of traditional assets had been tokenised – or put on the blockchain – so far.
‘Democratisation of assets’
Kehoe emphasised that anything can be tokenised, such as property, stocks and bonds, or art, describing it as “the democratisation of assets” giving people “access to those financial instruments on a cheaper, better, faster basis.”
“The key thing here is, is there value in tokenising something and is there then a market for those tokens to be bought and sold?” said Kehoe.
Far from rhetorical, Kehoe argues, the answer is: “absolutely.”
He highlighted how tokens, such as non-fungible tokens (NFT) feature a programmability that can allow them to “perform in certain ways,” such as in the case of an art work. Kehoe said artists could specify in an art-related NFT, 5% of sale price at every sale in perpetuity, could go to the artist, ensuring a lifelong relationship with the work.
Central Bank Digital Currencies (CBDC) are also seeing significant activity, reported Kehoe, with around 15 countries engaged in a proof of concept, with a further 10 at pilot stage.
Central bank digital currencies
Speaking more specifically about a digital euro, Kehoe said that a European CBDC would be an electronic means of payment that anyone could use in the euro area, that would be “secure and user-friendly, like cash is today.” However, CBDC’s are seen as a way of meeting the increasing demand for safe and trusted electronic payments, as they are “accessible, robust, safe, efficient and compliant with the law.”
Though Kehoe did say that there are questions being asked as to whether a digital euro is really needed.
Kehoe reported the European Central Bank CBDC investigation phase started in October of 2021, and is expected to conclude in October of 2023.
Future outlook
As something of a contrast, Dr Joshua Daniel, R&D lead, coin systems, Onyx by JP Morgan (JPM), presented an outlook under a number of headings that says central bank commercial money will remain the dominant form of money in the near term, with CBDCs, stablecoins, and the like, remaining at the periphery. However, Daniel added that messaged-based payment networks will give way to token-based networks, and will rely on “a web of central and commercial bank accounts.”
The Onyx view based on research and analysis says that closed loop payments networks will be superseded by open loop, as payment infrastructure becomes feature rich and liquidity becomes expensive.
Financial and real world assets will transition to atomic settlements, said Daniel. Delivery versus payment (DVP) will fundamentally transform capital markets, removing the need for collateral. Furthermore, tokenisation is driving the next wave of innovation over digitalisation. He said as digitalisation-based innovation runs its course, the next wave of innovation will be tokenisation-driven, echoing Kehoe’s position. Daniel said this is a big jump, and characterised it as similar to a jump from 2G mobile communications technology straight to 5G.
Interoperability and differentiation
The next of Onyx’s posits is that liquidity portability and interoperability is key to differentiation. The ability to move liquidity across distributed ledger technologies (DLT) and non-DLT payment infrastructure will be a key differentiator as networks proliferate.
There will also be a native integration of products and money, as part of Industry 4.0. Money, will be embedded into products with machines and devices having wallets, creating capabilities for M2M payments, pay-per-user, etc.
Bank accounts will be given to multi-asset wallets, said Daniel, as a transactional store of value. Multi-asset wallets holding a variety of bank agnostic tokens will be the future stores of value for transactions, replacing bank accounts, custody accounts, etc, said Daniel.
All of these considerations fed into the design and use cases of the JPM Coin System, said Daniel. The system is a “digital representation of depository accounts facilitating cross border movements of funds between JPMC networks of branches, in real time,” and is subject to “the same financial and regulatory reporting.”. The JPM Coin is not a bearer token, and balances are treated as general deposit liabilities of JP Morgan. The coin systems runs on a private, permissioned blockchain ledger, that serves as both a ledger reflecting balances and BDAs, and a payment rail to facilitate and record fund transfers.
Use cases for this kind of coin system were for ecosystems leveraging liquidity saving mechanisms (LSM) to optimise liquidity, covering netting, flash loans and digital asset collateralisation. These mechanisms were likely to be of use in ecosystems such as digital assets, margin financing, energy and commodities, offshore clearing, and card schemes.
From experimentation to commercialisation
Collectively, said Daniel, this could move from “experimentation with central banks to commercialisation with industry,” to move towards a universal ledger system. This could facilitate deposit tokens for peer to peer payments. Describing a potential “new architecture for a new world”, Daniel also described a network-based architecture for a universal ledger with deposit tokens.
Having explored the developments in technology, and their impact and potential in the financial world, the speakers were joined by experts for the panel discussion. Deborah Hutton, managing partner, DEH Law; Mai Santamaria, head of Financial Advisory Unit, Department of Finance Ireland; and Fiona Delaney, CEO, Origin Chain Networks, and strategic lead at SEEBLOCKS.eu, brought unique perspectives from their respective areas, adding context from legal and regulatory, government and public services, and start-ups and SME views.
A show of hands revealed the audience was broadly 50-50 between those from a technology and a finance background, while around a quarter were actively involved with the technologies being discussed from a business perspective. Questions from the audience covered areas such as the future of large custodial networks, the emerging crypto exchange traded funds (ETF), and the skills and training that will be necessary in the sector and adjacent areas in the near future.
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