May 17, 2018 Reading Time: 3 minutes

Imagine bitcoin’s price was as boring as that of the dollar. This is the premise behind stablecoins, privately issued cryptocurrencies pegged to an existing currency like the dollar or euro or yen.

Stability is an important feature of money. To cope with an uncertain future, people generally hold inventories of highly liquid instruments in anticipation of unplanned payments. When the price of a potential medium of exchange is capable of falling 50 percent overnight, it ceases to be usable as a tool for coping with future uncertainty.

Although stablecoins debuted in 2014 with the introduction of NuBits, BitUSD, and Tether, a flood of new entrants has recently emerged, including Basis, Dai, Carbon, and more. There are several ways to stabilize a cryptocurrency. I won’t delve into these techniques and will just assume they work. Even if they operate flawlessly, what role — if any — might stablecoins have to play in the future? In this post, I’m going to focus on domestic retail payments, say the ability to buy a meal at a restaurant, order shoes online, or send some money to a friend.

Let’s introduce the competition first, and it is formidable: M-Pesa and Alipay. (I don’t include credit cards, since they don’t let you send money to a friend.) Like stablecoins, both of these systems are privately run and issue stable versions of their respective national currency. They are wildly popular in their home countries, Kenya and China. What do stablecoins provide that these cutting-edge mobile-money schemes do not?

One important difference is that stablecoins are decentralized whereas mobile money is centralized. In a centralized system, a single authority — M-Pesa or Alipay — is responsible for storing information and updating it. Stablecoins, on the other hand, reside on a blockchain, which relies on a network of dispersed and independent nodes, or validators, for maintaining records. Each node keeps its own copy of the database, synchronizing every few seconds to ensure that the whole network is working off of the same information.

Because this reconciliation effort takes time, stablecoins can’t process the same amount of transactions per second as Alipay or M-Pesa, which, as single-node systems, do not require constant synchronization. Given the extra step, it is debatable whether stablecoin processing speeds will ever be capable of catching up to mobile money.

Resources are consumed as the network of stablecoin validators synchronizes on the proper version of the blockchain. Validators will only engage in this process if it is profitable, which means users must pay them a synchronization fee. Because centralized systems such as M-Pesa or Alipay can skip this step, they will likely always be cheaper than a stablecoin.

But decentralization also brings an advantage: anonymous transactions. Now, there is no technological reason that Alipay and M-Pesa could not offer users a large amount of secrecy, say by allowing pseudonymous usage of their system (like e-gold did back in the 2000s). However, there are sociological reasons that prevent anonymity and pseudonymity. Various laws including anti-money-laundering regulations require Alipay and M-Pesa to collect the real identities of all their users. Because both are centralized systems with actual addresses, the authorities can easily enforce anti-money-laundering laws by threatening to shut down offenders.

Stablecoin nodes do not have physical addresses, so in theory it would be much harder for the authorities to shut down these systems for non-compliance. So while stablecoin transactions would probably be slower than mobile money payments, presumably the inapplicability of know-your-customer requirements would facilitate a set of transactions that mobile money cannot, thus generating a natural base of users.

However, stablecoins are not without other central points of failure. Whereas Satoshi Nakamoto, the mysterious creator of bitcoin, took great pains to hide him- or herself, the coders and investors behind stablecoins such as Dai and Basis have not been shy about sharing their identities. If monetary authorities were to pressure these teams to implement the same know-your-customer requirements that Alipay, M-Pesa, and other money-service businesses currently implement, then stablecoins would become just another type of vetted payments, albeit a bit slower.

Stablecoin projects thus seem a bit like bets on regulatory forbearance. As long as the authorities hold off on asking stablecoin teams to implement rules that reveal who their users are, they have a good reason to exist. But after that point, I have trouble seeing a role for them, although I am open to other viewpoints.

That said, the effort to provide a stable form of anonymous payments is an important one. By virtue of their monopoly on banknotes, governments have become the world’s only provider of payments anonymity. Having bungled into this responsibility by accident, the government has compounded its poor stewardship of this resource by failing to upgrade it. Banknotes, after all, have not yet gone digital. Stablecoins may be one way to fill this gap.

J.P. Koning


J.P. Koning is a financial writer and blogger with interests in monetary economics, economic history, finance, and fintech. He has worked as an equity researcher at a Canadian brokerage firm and a financial writer and publisher at a large Canadian bank. More recently, he has written several papers for R3, a distributed ledger company, on the topics of central bank cryptocurrency and cross border payments. He founded the popular blog Moneyness in 2012. He designs economics and financial wallcharts at Financial Graph & Art.

Koning earned his B.A. in Economics from McGill University.

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