Here Come the Private White-Labeled Stablecoins

When it comes to stablecoins, 2019 could be remembered as the year of the big bang project that wasn’t — or at least, isn’t yet. That sets up 2020 to be the year of the little whimper that will. Projects like Libra, JPMC and USC generated a lot of attention, but are still nowhere to be seen. Some of the blame goes to the over ambitiousness of those initiatives. Some goes to the challenges of forcing something new into a regulatory framework designed for something old. A lot goes to the irrational overreaction by the powers that be, many of whom never took the time to understand the difference between Libra and Litecoin, and more than a few (cough cough central bankers) who are a bit too regulatory-captured to be objective on disruptive tech.

Either way, nothing is live, and it remains unlikely that any of the Big Stablecoins will launch at full scale. But the overall thesis, as I’ve written before, has been validated. All of that fear mongering carried a subtext of “this technology clearly works, and that’s why we fear it!” That opens the door to less ambitious but easier to launch white-labeled stablecoins for niche applications. They could be issued on public or private chains (the distinction is not as big of a deal for cash-backed tokens given the required KYC bridge to the outside world) and created by banks, payment companies, legacy tech players or crypto startups.

They will mostly likely be domestic and B2B at the outset to minimize regulatory headaches. Some will solve blockchain-native problems, such as instant settlement for security tokens, but most will focus on industry-specific needs, like an insurance company paying subsidiaries, an industrial conglomerate paying suppliers, a franchiser interacting with its restaurants, a shared-economy platform paying service providers, a legacy capital market platform trying to speed up payments, a supply-chain looking to more directly integrate credit issuance, and so on.

They will not be nearly as sexy as Libra, but they will still be transformative. They won’t solve all the headaches because recipients will still have to rely on traditional rails to cash out their coins, but they’ll solve the biggest headache of all: the need to freaking pay someone right now.

Here, we can take a moment and call a spade a space. For all of the great progress made by the payments industry in the past decade, it still lags the rest of the internet. Just ask any corporate treasury official who has tried to make an important payment on a Sunday afternoon in August. The email confirmation that a payment has been issued travels instantly, but the payment itself does not. Sometimes it takes minutes, other times hours or days. This distinction should not be, since a payment, just like an email, is nothing more than data. But it’s not, and the complicated reasons why one type of data travels instantly and another might take 3 days is not the treasury officials problem.

The payment guru will hear this argument and say “Oh but look at SWIFT GPI, half of all payments are now credited within 30 minutes!” Yes, that’s true, and 56k modems were a huge upgrade over 28.8 — just ask your parents (also, what happens to the other half?) For the record, GPI is indeed a fantastic upgrade, one that took a herculean effort to pull off globally. But it’s an extension of the old architecture. You can only squeeze out so much efficiency from a network constructed half a century ago until the world moves on to something new, and that something is stablecoins.

Aside from instant payments, PWLS (private white-labeled stablecoins — the payments industry loves acronyms) offer other useful features, such as instant tracking by all parties involved, an immutable audit trail, programmable payments (so that Treasury official doesn’t need to be in the office Sunday afternoon), invoicing on the same platform, and multiple other features. You can get all of those things already, but you can’t get them on the same platform using just a few lines of smart contract code. PWLS also provide guaranteed delivery, because that’s what decentralized networks do.

Banks, particularly ones who specialize in payments, should be on the forefront of the PWLS movement. Unlike certain payment oriented Fintechs, many of which rely on the fee-based model stablecoins eschew, banks use payments as a source of cheap deposits. Not only does that model not change with stablecoins, it’s improved by it. If you are a supplier getting paid with a stablecoin, the fastest way for you to cash out is by having an account at the bank that custodies the cash backing it. Banks offering PWLS can gain entire ecosystems as customers, and that in turn will empower them to offer additional features — including stablecoin-based credit.

The critic will hear this argument and say “but wait a minute, can’t a big enough bank offer that already? If a company and its supplier are both customers of the same bank, can’t they already make instant payments day and night?” The answer, like most things inside financial services, is yes, but only in theory. Most of the systems inside most banks were either built, or at least architected, long before the internet was a thing. They can only be pushed so far, particularly inside the most regulated industry on earth.

Stablecoins represent a leapfrog opportunity. Big Stablecoins are the ultimate manifestation of that opportunity, but they’ll take time to roll out. PWLS are the happy medium. They are best thought of as a cost-effective outsourcing of internal infrastructure, sort of like cloud computing. The fact that banks can either issue their private coin on a public network like Ethereum or Stellar, or deploy their own permissioned one using free open-source protocols, makes the idea even more appealing.

Back in 2018, I made several predictions that stablecoins would soon be a big deal in payments, and challenge the likes of PayPal. I was both right and wrong. Last year saw a ton of new announcements, but nothing is in production, which means no actual disruption is taking place yet. Having learned a lot more about the payments universe in the interim, I am altering that belief to accommodate the fact that long before Big Stablecoins have any noticeable impact, PWLS will start to be used all over, and in certain cases actually enhance the position of legacy payment providers.

(until Dai changes everything)

The opinions expressed here are strictly my own and not that of any client, employer or associate. I once had a wire transfer lost for over a week and am still sore about it. Nothing is ever lost on the blockchain.

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