Global experiments with digital currency: Do stable coins have a role to play?

We’ll soon hear the clink of the digital rupee to keep up with the era of the cryptocurrency. In a way, it may wean you away from the volatile and unreliable tools for investment. A lot needs to be worked out in due course, including a new definition for a bank note to account for the incoming digital currency as well as the small matter of stability and risk elimination, something crypto currencies don’t do very well.

This does make us wonder how have the experiments in other countries to counter crypto currencies with digital currencies worked out so far? And how will you be able to use them? Will this tie-in with the crypto wallets that you may already be using such as Coinswitch Kuber or CoinDCX or will there be a separate application launched by the government which will work as a digital Rupee wallet? And how will this be interoperable with payment methods such as UPI (Universal Payments Interface) and mobile wallets including Google Pay? A lot remains to be answered.

India’s need for a digital rupee

According to data by Bloomberg Wealth, the cryptocurrency market cap in India clocked $6.6 billion in May, up from $923 million at the same time last year. It is estimated that as many as 15 million Indians have investments in cryptocurrency. The government has been very clear that there is no chance that cryptocurrency will be considered legal tenders for payments.

“While interest in Central Bank Digital Currencies (CBDC) is near universal now, very few countries have reached even the pilot stage of launching their CBDCs. A 2021 BIS survey of central banks found that 86% were actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects,” T Rabi Sankar, deputy governor, Reserve Bank of India said in July at a webinar.

Cryptocurrencies such as Bitcoin and Ethereum, all use publicly available ledgers that trace transactions back to crypto wallets that were used. Yet, there are some cryptos that are meant to provide complete anonymity. These cryptos cannot be tracked. The route that any given transaction takes is meant to obfuscate means of tracing the source. It is impossible to chart a route for transactions done using private cryptocurrencies, opening them for potential deployment in money laundering and terror funding purposes.

Digital currencies and fiat money: a handshake?

There are two types of digital currencies which have a relation to fiat money, or a government-issued currency that is regulated and controlled by the central bank of that nation. First is the official currency, issued and regulated by the central bank. For instance, the Rupee is regulated by the Reserve Bank of India (RBI) while the Pound Sterling is regulated by the Bank of England, the central bank of the UK.

Digital coins of these currencies will be regulated by the same rules which apply for the paper notes. These are referred to as Central Bank Digital Currency (CDBC).

Also Read: Nothing ear (1) black edition arrives with carbon neutrality and crypto payments

‘Stable’ crypto coins inspired by fiat money

The other are crypto coins which fall in the category of stable coins. Why are they called stable coins? That is because these were designed by their makers to be cryptocurrency equivalents of fiat currencies, such as the US$. Not officially endorsed or affiliated in any way but linked to the real-world exchange value. The idea behind these coins is to eliminate the volatility (read, risk of losing your money) that is all too common with crypto currencies such as Bitcoin. Investors and holders stand to lose very little.

For instance, there is a stable coin cryptocurrency called Tether, which is always going to hold value of $1 for each digital coin. The same is true for some popular stable coins such as USD Coin (USDC), Binance USD (BUSD), Pax Dollar (USDP) and Dai (DAI). An illustration of stability—the price of Tether over the past 12 months has swung between $0.9985 to $1.0023 per Tether coin, depending on the value of the US Dollar. Bitcoin, arguably the most popular cryptocurrency in the world and prone to volatility has seen lows of $18,058.9 and highs of $67,566 in the same period.

Numbers by research firm McKinsey suggest nearly $3 trillion in stable coins such as Tether and USDC were transacted in the first half of 2021.

If volatility had a buzzword, that would probably be very similar to cryptocurrency. Stable coins aren’t as risky, because they do have a centralised system (not the same as a central bank, but these are privately owned and run) linking it to an underlying unit of a fiat currency. But will this system hold up in case of a crisis, such as inflation of the underlying currency? The very idea of stable coins comes from the 1:1 ratio that is maintained with real currencies, and hence the value. We haven’t yet seen that put to the test, in the economic realm.

Government experiments with official digital money

Even as India embarks on the long and arduous path of identifying the contours of a digital rupee, some countries have dabbled with the idea as an antidote to the volatility of crypto currencies. Yet, they are very much in an experimental stage, evolving as times goes on.

Nigeria has become the first African nation to introduce a digital currency. It is called the eNaira, the digital version of the nation’s currency, Naira. It will be used just like cash, in place of cash. “Unlike these crypto-assets, the eNaira is not a financial asset in itself but a digital form of a national currency and draws its value from the physical naira to which it is pegged at parity,” the International Monetary Fund (IMF) points out.

Tajikistan announced a CBDC earlier this year. The Bahamas, Saint Lucia, Grenada, Antigua and Barbuda already have central bank digital currencies circulating in their financial systems.

Earlier this year, China became the first major economy to issue a CBDC as part of a large-scale test. The People’s Bank of China says the digital renminbi (also called the yuan) is very much a legal tender for payments and holds the same value as yuan currency bills.

In China, Digital Yuan can be transacted using a digital wallet that needs to be enabled and verified for each user. This starts with a phone number, that allows basic operations with daily transaction caps. A higher privilege wallet with unlimited daily usage can be signed up for at a bank, after identity verifications are done. As of June, e-CNY wallets in China had clocked 24 million users. Transactions of 62 billion Yuan already done, confirmed Mu Changchun, head of the PBOC’s Digital Currency Institute, at the Hong Kong Fintech Week last month.

Canada became the first country to approve a Bitcoin-traded fund in February. The UK considers cryptocurrency held by citizens as property and investors pay taxes on crypto profits. Singapore has a similar definition for crypto ownership. In Japan, cryptocurrencies are recognised under the country’s Payment Services Act (PSA). Cryptocurrency is legal in most of the EU countries.

More countries boarding the CBDC train

UK says that consultations over a digital currency will start next year. “CBDC would be a new form of digital money issued by the Bank of England and for use by households and businesses for their everyday payments needs. It would exist alongside cash and bank deposits, rather than replacing them,” says the Bank of England.

Japan has announced the “DCJPY” project for a digital currency linked to the Japanese Yen. This is a consortium of 74 Japanese firms, working to ensure wide compatibility. The companies that are part of this consortium include Mitsubishi UFJ Financial Group, Mizuho Financial Group, Sumitomo Mitsui Financial Group, Nippon Telegraph, East Japan Railway Company and Kansai Electric Power Company with all activities done in consultation with the Bank of Japan. The digital currency is expected to be issued sometime next year.