Second-generation cryptocurrencies may work better
Published: 7 November 2019
“Stablecoins” are cryptoassets that are constructed in order to maintain a more stable value. There are two main types. The first type is “algorithm-based” stablecoins, the value of which is kept stable by adapting the volume of stablecoins issued to the demand for them, with the help of rules and routines (algorithms). This type is less common. The second type is based on each issued stablecoin being in some way backed by assets such as securities, commodities or bank assets in, for example, dollars or euros. Central banks are currently discussing whether to open the way for stablecoins backed to a hundred per cent by central bank reserves. There are also variants of stablecoins backed by other cryptoassets.
Stablecoins where the backing fulfils specific legal requirements can be approved as “e-money”. Their price can then be expressed in national currency and used for payments. An example is Monerium, which has a licence to issue Icelandic króna on a blockchain. It remains to be seen whether such stablecoins become widespread and hence start to affect the payment market and how we pay.
In June 2019, a consortium of companies active in finance, IT and social media, the Libra Association, announced its intention to launch a new stablecoin called Libra. Libra differs from other stablecoins as the proposal comes from companies that already have global reach. It is therefore possible that Libra could quickly achieve the network effects and economies of scale necessary for a means of payment to successfully be able to establish itself. Even though Libra is still in the developmental stage and has a long way to go before it can constitute a practical alternative, it still poses a challenge to traditional forms of money and payment systems. There are a number of question-marks around how Libra is intended to work; its forms of governance are still unclear, for example. It is also unclear how it shall fulfil applicable regulatory frameworks regarding anti-money laundering, counter-terrorism financing and consumer protection. Authorities in several countries and international organisations such as BIS and the G7 are examining whether Libra can be allowed to start. The Riksbank is closely monitoring the development of Libra.