Social media giant Facebook unveiled plans last month to launch a cryptocurrency called Libra, allowing money transfers over its messaging infrastructure – WhatsApp, Instagram, and Facebook Messenger.
Backed by a reserve of fiat currencies and low-risk securities from different countries, Libra will operate as a “stablecoin”, a type of cryptocurrency whose value is pegged to real assets with set prices to help combat price volatility.
Stablecoin has been touted as an important step toward the greater acceptance of cryptocurrencies. Many digital currency startups and exchanges have created stablecoin projects. Tether, also known as USDT, has been a mainstay for years.
US-based blockchain payments startup Circle launched its own stablecoin last year, called USD Coin or USDC for short, which is pegged to the US dollar, i.e. each token always worth US$1 and redeemable at US$1.
Joao Reginatto, USDC Product Lead at Circle, shared his views recently with EJ Insight on Facebook’s Libra, as well as how stablecoin can stimulate mass adoption of cryptocurrency.
According to Facebook, Libra will enable the group’s billions of users across the world to buy things or send money to people with nearly zero fees and friction. Yet, Reginatto believes Libra will face regulatory uncertainty when rolling out for use in 2020.
“Anything Facebook does is going to receive a lot of government scrutiny,” he said. “But their entrance into crypto should be a tipping point for regulation and for mainstream awareness.”
Asked whether Libra would be an overwhelming competitor for USDC, Reginatto said he believes Circle and USDC will benefit from the increased awareness that Facebook brings to cryptocurrency field.
In October 2018, Circle, Coinbase and a bunch of other companies created CENTRE, to develop the open standard technology and define the policies around stablecoins. In the process of being spun out into an independent member-based consortium, CENTRE allows firms and companies, which meet requirements, to join the consortium and become an authorized issuer of USDC, with Circle being the first.
Coinbase, the largest US-based cryptocurrency exchange, is one of Libra Association’s founding members, along with Visa, Mastercard, PayPal, Uber, Lyft and others, which will govern Facebook’s new digital currency.
USDC stablecoin is fully collateralized by US dollars, according to Circle. Fungible exchange and redemption of USDC tokens are supported by the issuers, which also hold reserves on a 1:1 basis with issued tokens and provide monthly published proof of reserves attested to by certified public auditors.
As of June, more than US$795 million in USDC has been issued, while over US$11.9 billion has been traded on over 40 supporting cryptocurrency exchanges, according to Circle, with over 100 companies globally spreading the adoption of USDC.
“We’re continuing to see robust demand for USDC within the investing and crypto exchange use cases, whether it is by platforms using USDC as a fiat on/off ramp for their customers, or by investors looking for hedging opportunities in volatile market conditions,” said Reginatto.
He added that his firm has also observed demand from retail users in developing economies, in terms of holding stable value virtual assets and having access to money markets and credit applications directly from their smartphones, without the need for a bank account.
USDC stablecoin follows the “ERC-20” standard, the most widely known among token structure and technology standard on Ethereum blockchain, which means it can be used with any mobile application that accepts tokens based on that standard.
In his interview to EJ Insight, Reginatto highlighted USDC’s use cases in remittance and cross-border payments.
“USDC can be used by any Ethereum compatible wallet running on any smartphone, and USDC transfers are global and near-free,” he said. “That is pretty appealing when it comes to global transfers.”
Despite the global attention around the meteoric surge in price, cryptocurrencies such as bitcoin remain niche currencies, not widely used for everyday transactions or peer-to-peer payments.
For now, there are stablecoins which provide incentives to spur adoption and drum up business. US-based crypto exchange Gemini offers its stablecoin Gemini Dollar to some trading desks at a discount, meaning that each US$1 token could be bought for less than a dollar, while Paxos, another blockchain technology firm, offers rebates for some market makers.
Allowing financial incentives can be a powerful way to drive stablecoins’ adoption. Reginatto said USDC has become the second largest stablecoin by market cap organically, “and that growth is something we’re proud to let continue.”
He added that CENTRE is in constant collaboration with companies in diverse industries to deliver partnerships that continue to expand the utility of USDC, particularly in the retail payments and e-commerce use cases.
Facebook has partnered with a portfolio of powerful merchants and brands, including Spotify, eBay and Booking Holdings, among others, with an aim to help Libra gain widespread adoption in the retail and e-commerce sectors during its infancy.
As for the ways to move toward mainstream use of cryptocurrency in retail, Reginatto believes there are still improvements to be made around scalability and user experience before stablecoins can be used as alternative rails for consumers.
“Most customers today don’t hold crypto assets and aren’t used to handling transactions that directly expose them to cryptocurrencies,” he pointed out.
But he believes fiat tokens such as USDC have the potential to become a de-facto open standard for programmable money that merchants and corporates can use to deliver more efficient payment experiences to their users.
“An interesting alternative angle could be continuing to allow customers to use their preferred payment instruments (cards), but introduce merchants to the idea of settling transactions in fiat tokens,” he said, while noting that mainstream users want the benefits of cryptocurrency — global reach, nearly instant and low-cost transmission, open standards, and programmability -– along with price stability.
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