Stablecoins And CBDCs Are The Future Of Digital Finance

There is simply no denying the fact that crypto has transformed from this once niche’ tech domain to a fully-fledged economy. It boasts a number of high-profile investors and also an army of elite developers working day and night on a host of excellent projects. To put into context how big this sector has become one only need take a look at the total market capitalization of this space which has ballooned fivefold from $270 billion to $1.35+ trillion over the last 12 months alone.

Tech Innovations and the Future

This expansive growth has helped birth a number of truly remarkable tech innovations, some of which include stablecoins, central bank-backed digital currencies (CBDC), non-fungible tokens (NFT), and others.

Stablecoins

Stablecoins, in particular, are an interesting class of assets that have helped lure in many investors from the traditional landscape, primarily because they have their values pegged to local fiat assets (such as the US Dollar, the Euro, etc) on a 1:1 redeemable ratio.

As a consequence, they are able to afford their owners the ability to not only facilitate regular fiat-driven transactions but also access a range of crypto products and services in a totally seamless manner. Not only that, but they also help mitigate many of the functional/operational issues — such as high transaction costs, excessive reliance on paper and so on — that are associated with fiat.

In fact, since the beginning of 2020, the valuation of the stablecoin market has blossomed from just around $6 billion to well over $100 billion, thereby showcasing the monetary potential of these novel financial instruments. At the same time, the CBDC engine has also continued to gain an increasing amount of mainstream traction, with countries like Sweden, Japan and, most importantly, China having already concluded several successful trials of their state backed currencies.

The Payments Market is Evolving Fast

With each passing year — especially since the onset of the COVID-19 pandemic — the list of tech firms pushing for the complete digitization of the global payment ecosystem has been growing at a rapid rate. In this regard, stablecoins and CBDCs possess several characteristics that can address many of the bottlenecks (such as high cross-border transaction fees, unnecessary processing charges, etc) that currently plague the fiat market.

The advantages of the aforementioned digital assets are so significant that over the last few months payment giants such as Mastercard and Visa have made their way into the space, even taking mammoth steps towards incorporating crypto into their existing economic frameworks. For example, Visa now allows its massive network of users to complete their payments using a US dollar-backed stablecoin called USDC. On the other hand, Mastercard has chosen to team up with 50+ central banks to help facilitate the creation of a novel fiat-backed token that can enable seamless transactions on a global level.

The future May be a Merge of the Traditional and New

As per a recent article, PayPal, a firm that recently started allowing its 360+ million strong customer base to start buying/selling/storing crypto, may be secretly working in creating its very own stablecoin, an activity which suggests that the firm has realized the importance of creating a tool that allows it to maintain solid liquidity at any given time.

Similarly, even Facebook’s much hyped digital offering — the ‘Diem’ — is basically a stablecoin pegged cryptocurrency that is designed to take advantage of the unique tech benefits afforded by blockchain-based decentralized ledgers. However, it bears mentioning that by design, Diem is extremely centralized, so much so that all of the currency’s validator nodes are basically the 27 members that make up the Diem Association (a list which includes high-profile financial entities like Lyft, Uber, Shopify, amongst many others).

Lastly, it stands to reason that as more mainstream payment rails start to accept cryptos (such as stablecoins, CBDCs) more nations may turn towards the use of these assets since they are able to help meet the daily financial needs of millions of people — all while minimizing a number of major overhead costs associated with the existing fiat system.

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