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Fiat Currencies Are About to Become Essential to Public Blockchains

Paul Brody is a principal and the global blockchain leader at EY. 

The following article is the third in a series. Read part one here and part two here.

Cryptocurrenices ask you to put your trust in math and not in fallible central bankers, but they come with a lot of political baggage of their own.

In particular, cryptocurrency boosters talk a lot about how central bankers have debased currencies over the years and how the printing of money by central banks has done much to impoverish people around the world.  In an imagined future world of cryptocurrencies, fallible and politically influenced central bankers are replaced with algorithms and currencies get more valuable over time, not less so.

There are a lot of problems with this narrative, starting with the fact that a little bit of inflation is actually useful and the painful era of stagflation is more than 30 years in the rear-view mirror.  Independent central banks are among the most trusted institutions in our economies, and also the most transparent. And while the market capitalization of cryptocurrencies seems large by absolute standards, it’s tiny compared to the rest of the global economy. Daily trading of cryptocurrencies is between $5 billion and $6 billion right now. Daily trading on the foreign exchange markets is closer to $5 trillion.

Even if cryptocurrencies continue to grow (and they most likely will), if we want blockchains to deliver upon their promise, we must be able to transact using traditional fiat currencies. There are lots of practical reasons for this, the most important of which is the management of risk for enterprises.

Nearly all business transactions today are done in traditional fiat currencies. Traditional enterprises generate most of their revenue in those currencies and they also handle all their debts and payments in the same currencies.

In order for firms to transact on the blockchain, they will want to transact in those same currencies.  If I have a deal to buy a product at a set price in euros, and I execute that contract on a public blockchain, then I also want to settle it in euros, most likely. Every time I move money between currencies or hold substantial amounts of a different currency, I’m adding foreign exchange risk to my business, which serves no purpose if it can be avoided.

One option for companies engaging in smart contracts on blockchains is to arrange payment settlement through the banking system separately and simply record that payment on the blockchain.  This option works, but we believe it is a less-than-ideal solution when you start to consider the broader economic ecosystem that you are enabling on a blockchain.

All in one

The best option for companies entering into business contracts on a blockchain is to complete the full exchange of asset tokens within the same blockchain.  Asset tokens (representing product) are exchanged for money tokens in the simplest format, but with all the tokens being represented in the same blockchain, more sophisticated options are possible.  Companies can borrow against inventory, with loans repaid automatically upon the sale of the inventory, for example.

At EY, we’ve taken to calling this a “full cycle economic contract” as the gold standard for what enterprises will want to achieve using blockchains for commerce.  Full-cycle digital contracts will not only be lower risk, since both assets and liabilities will be transparently managed on the blockchain, but almost any kind of financial service can be delivered against those flows with minimal cost for the transactions.

Ultimately, this means billions of dollars in tokenized fiat currencies must be available on the public blockchains to facilitate these transactions and payments. If this path does come to pass, however, it means that central banks will have to find a regulatory structure or approach that allows for multiple currencies and tokens to co-exist on public blockchains – networks they do not regulate or fully control. It also means that private central-banking blockchains are not necessarily likely to have a big role ahead.

We believe, however, that there are mechanisms for regulators to control their own currencies in decentralized public networks, and I will dive into that and more in my next post.

Fiat currency image via Shutterstock

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Crypto Cries Foul In Wake of Tether's Dollar Token Report

Too good to be true?

That’s what some are wondering after Tether, the makers of the dollar-pegged crypto asset, USDT, made an announcement Wednesday insisting that its tokens – valued at $2.6 billion – are fully-backed by real cash (according to one law firm, at least).

For months, Tether has fought accusations that it is falsely issuing tokens without actually having the dollar reserves to back them. The company had even initially partnered with an audit firm to undergo a full inspection. That working relationship, however, was dissolved back in early January.

Some background on Tether: Unlike bitcoin or ethereum, which does not have traditional assets affirming its value, USDT can boast a relatively secure store of value being pegged to the dollar. As such, investors view tether as less of an investment and more of a tool to move funds from one cryptocurrency exchange to another.

Sounds ingenious, right?

The problem is that if allegations over tether not having the funds to back their tokens are indeed true, there’s less money than is currently being depicted in the cryptocurrency markets and in fact more reason to believe cryptocurrency prices are inflated.

So, bringing this story back around to the latest announcement, the general consensus is that no, the claim still can’t be proven.

As explained by @Bitfinexed, a well-known critic of the company, the issue with the review is that it isn’t really an audit.

This is important to note because audits are generally held to a greater degree of accountability and integrity than legal reviews, which is what many are saying needs to be done for claims of tether’s reliability to be even remotely affirmed.

Nonetheless, amidst the chatter, there are still those who see this legal review as one more reason to keep on using Tether’s token.

Still, there are those who see even this announcement as one that is ill-intended, labeling it just another way USDT is boosting (or manipulating) the price of cryptocurrencies in general.

Warning: proceed with caution

The concern over price manipulation is especially timely given a study published this week alleging that tether was an active instrument used by investors to boost the price of bitcoin in times of market downturns.

Not to mention that tether is a cryptocurrency closely linked to cryptocurrency exchange Bitfinex, which, like tether, has a history riddled with hacks, lost funds and a resistance to greater transparency.

The worry over the increased impact of tether and, by consequence, Bitfinex, has caused outcry on social media by notable voices such as the creator of litecoin Charlie Lee, and professor at NYU Stern School of Business, Nouriel Roubini.

Tether seems well aware of the concerns voiced on social media and recent reports.

The company wrote in a blog post on their official webpage that their efforts in “transparency” are far from over and that they will continue with “steps aimed at opening up Tether to the general public and clearing away any uncertainty that may exist.”

Tether image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Bank of Canada Paper Weighs Central Bank-Issued Cryptocurrency

Central banks might benefit from issuing cryptographic versions of fiat currencies, but the benefits would vary depending on whether they did so in an advanced or developing economy.

At least that’s according to Ben Fung from the Central Bank of Canada and Walter Engert from the Office of the Superintendent of Financial Institutions, both of whom published a paper this week discussing the pros and cons for central banks issuing cryptocurrencies.

Notably, the paper ends on the question of whether it’s worth it for such institutions to offer cash or central bank digital currency (CBDC), should such demand drop deeply enough, though it ties the query to the idea this would need to come at the expense of cash use.

It reads:

“Is it sufficient for a central bank to supply only reserves to qualified financial institutions? Put differently, is a ‘cashless society’ a sound outcome?”

The paper explores six different supposed benefits to a central bank for issuing a digital currency, but largely dismisses all but three: payments for consumers, financial inclusion and stability.

For consumer payments, the authors write that a “CBDC would facilitate transactions that are currently foregone because of frictions that inhibit some types of transactions.” In particular, it would reduce friction for online payments and entice smaller merchants to offer services over the internet. In some economies, they also see benefits in reducing costs for retail payments to consumers.

The authors argue that financial inclusion would only really benefit in developing economies, though it cites several other existing solutions around the world (such as Africa’s M-PESA system) that seem to be closing the gaps just as well as digital currency could.

“Financial inclusion does not provide a compelling motivation for CBDC in most advanced economies, including Canada,” they write.

Lastly, the paper gives mixed results for improved financial stability.

On the one hand, “the financial systems in Canada and other countries feature highly levered banks conducting liquidity and maturity transformation and operating at the core of the payment system,” the authors write. “It is well known that under some conditions this set-up can be unstable, and in severe cases the stock of inside money can contract, with adverse negative externalities for the economy.”

Digital money would give consumers a largely risk-free way to store money without exposure to that risk. On the other hand, the ease of leaving bank deposits for a fiat crypto could accelerate financial turmoil.

The paper also briefly considers the potential for an interest-bearing digital instrument, which would give central banks another way to influence short-term interest rates. The paper represents the views of its writers and does not necessarily reflect that of the Central Bank of Canada.

Canada tile flag via Shutterstock.

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First Time Tokenized USD on Ethereum to be made possible by Tether and Ethfinex

Sometimes to make it, you have to be the first!

In cooperation and partnership with Ethfinex – an Independent different version the Hong Kong based cryptocurrency exchange platform Bitfinex, the leader in delivering tokenized government supported currencies TETHER – today has declared the launch of Tether ERC20 token on the ETH blockchain network. This will be making possible tokenized US Dollar to be exchanged on the network for the first time since in history its has initiated.

Very well known and famous throughout the crypto-community, Tether is the first blockchain network-enabler of traditional known currencies to be tokenized. In example using fiat money to get transactions done in between of different exchanges with no volatility associated with virtual currencies.

The Co-founder of Tether, Craig Sellars stated:

“Following the success of our widely used US Dollar tokenization on the Bitcoin blockchain, this latest version enables interoperability with Ethereum-based protocols and DApps. We believe this new development will reduce the current interbank delays often involved in exchange withdrawal and allow our users access to tokenized USD – a first for the industry.”

“We believe this development will not only open up the world of cryptocurrencies to more mainstream consumers, but also set the standard, and encourage other companies to be more innovative and accessible in their product and service offering at this pivotal time for money and payments.”

Forming the partnership with Ethfinex, makes it possible having a large range of approach to users, keeping in mind it is the leading trading and information place for projects and developments on the Ethereum blockchain network. This will give Tether access to a very back and forth liquid and advanced trading platform for the tokens.

Project leader at Ethfinex – Will Harborne, commented:

“The number of tokens and assets being tokenized on top of the Ethereum platform is growing rapidly, with many proving disruptive to traditional business models. By enabling all ERC20 compatible applications and protocols to integrate tokenized USD, we expect to see enhanced efficiency and further stability on the Ethereum network.”

Joining the pack is a smart-contract project powered debit card which you might have heard before: TokenCard and which also is ETH gateway formed in 2016. With this integrated and the Tether ERC20 accepted, users throughout the market can use traditional fiat currencies for the transactions.

Co-founder of TokenCard – Mel Gelderman stated:

“The launch of Tether fiat tokens on the Ethereum network is a huge step towards mass consumer adoption. This blurs the boundaries of what is considered a blockchain asset versus a ‘regular’ asset and will enable people to own the fiat currencies most familiar to them but in a tradeable digital form.”

“This will make it much easier for the majority to use Ethereum powered platforms, like TokenCard. The option of choosing TokenCard over traditional banks becomes even easier if a national currency can be held in token form. The strength and versatility of the Ethereum blockchain enable a safe and secure means of transferring funds anywhere in the world without needing to use a bank of any kind.”

The upcoming data, list of balances issued to all tether can be verified, viewed and checked on the on-chain deployments of Tether contracts by anyone in particular. This will indicate a 100% transparent demonstration at all time which information and reports will be publicly published on the website.

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