Let’s look at banking as it exists today (here I mean both banking and FinTech). Banking is a deeply centralized sector. All currency is controlled via the central banks of each country. At the same time, the world reserve currency, the dollar, is controlled via the US Federal Reserve. The deep centralization means that banking is a sphere that is deeply averse to any significant changes, since if you control the money supply and flow, there is virtually no incentive to upgrade or change.

Further, if one looks at the FED and does research, it becomes clear that the Federal Reserve is not a full agency within the US government, but as has been widely written, is an independent structure, owned by members of individual banks, who own a percentage of the stock of the Federal Reserve. The world’s reserve currency, the US Dollar, is created by a union of private banking enterprise (i.e. The FED), and the US Treasury. It’s, in essence, the marriage between the public and private interests. The FED then works through the Federal Reserve System (FDS) to give loans to banks. These banks control multiple facets in the current financial system. Some of the major aspects of our daily lives the banks control are: the transfer of money, where we can safely store our wealth or value, as well as how this wealth is multiplied. This is done through international transfers, checking accounts, and high yield accounts, as well as liquidity for lending.

As discussed in my previous blog (https://tinyurl.com/FinTech-Blog) while FinTech was an improvement of user experience, it did not fundamentally alter the deeply centralized nature of banking and the rails through which money travels. While FinTech attempted to make this more frictionless by creating a better user experience for account set-up, updating mobile banking, increasing the speed of account set-up, and setting-up accounts in many countries and with many regional banks, therefore decreasing the amount of time it takes for delivery of funds, the funds still travel through the same banking system, just in the regional level. Because of this, everything is deeply centralized.

Let’s look at the current realities of banking. In order to send money from Thailand to the UK, funds have to be deposited into an already opened checking account in Thailand. This account, for it to be active, needs to have funds deposited and it needs to be up-kept. In many banks this means there is a monthly fee just to have the funds in their accounts. The more high-end the bank is, the higher the amounts that need to be held in the accounts are. I have personally encountered private banks that asked for up to 100,000 USD to be locked in their checking accounts for those accounts to be functional.

Having said all of this, provided that the checking account is unkempt and functional, the person needs to set-up a transfer in their mobile app, at which point the money travels through (in most cases) three intermediate banks in order to arrive at its destination. The intermediary banks may work through a record on the computer of the worker of a particular bank. What this means is that there is a high-level of potential for error. The transaction is largely untrackable. If the money gets lost (as it often does), the only recourse is to call your bank, call the receiver’s bank, and talk to customer support ad nauseum to understand what went wrong. I have personally had transactions sent from a FinTech app (supported by a major MENA bank) that did not go through to the recipient and wasn’t tracked down. To add to this, you have to account for service and FX fees. The total percentage of fees is usually around 3% from the transaction, and so with major amounts, this becomes a fairly sizable amount. Finally, let’s also take into account the length of time. For any international transfer, the business can wait up to seven days or more to receive the funds.

Stablecoins fundamentally alter this reality. A stablecoin is a token which runs on the rails of (at least up until now) public blockchains, backed by either a currency of the same value as the stablecoin, or by a treasury note, which are securities which mature for a pre-set number of years (maximum 10 years), and pay a set amount of interest. In other words, it’s a store of value. Because one can store value in the stablecoins, it immediately undercuts the necessity of a checking account controlled by a bank. Why should any independently-minded person rely on multiple middlemen to store their value if this value can be stored in stablecoins. The stablecoins themselves can be stored on either hardware or software wallets. Hardware wallets provide more protection for the consumer since the stablecoins and crypto stored there can be stored offline. Software wallets are in many ways more operationally easy to work with since they are apps on your phone or computer, which allow for frictionless access. Oftentimes in crypto, we use the software wallets for quick operational funds storage and the major value holdings of a company are held in the cold wallet and offline.

The public nature of the digital ledger-rails on which all stablecoins travel and work, allows for transparency and so all transactions are easily trackable. The technology also provides for immutability (to a large extent, although it’s not completely fool proof). Once a transaction is completed, it stays on the ledger forever, and can be tracked at any point in the future. This aspect makes blockchain an excellent tool for law enforcement and undercuts any allegations of money laundering, since money laundering is actually harder to do via blockchain-based, crypto or stablecoin transactions.

Let’s look at the flow of an international transfer done via stablecoins. The user has a software wallet on their phone. Or, the user connects their cold wallet to their computer (or phone), and so through these applications the person gains instant access to their holdings. The person inputs the receiver’s address (cut and paste or even better, through a QR code) in the send function of the application. The user doublechecks that all information is complete. The user sends funds. The user goes to an open-source application which tracks all transactions on the blockchain. The user sees that the transaction to send 100,000 USD from themselves in Thailand to their business partner in the UK took exactly 1 to 3 minutes. The user sees that the total fees incurred were between 3 to 5 US dollars or less.

In this transaction, notice that there were no intermediaries, the transaction was nearly instant, the transaction was easily trackable, and the transaction cost next to nothing. Instead of using a cumbersome, 1970’s-made system, we used established technology of the 21st century. Furthermore, we see that the end-user in this scenario, has total independence and self-reliance. The user’s net-worth is stored in a place where he or she has instant access to it. There are no fees for upkeep of accounts, there is just the piece of mind of knowing where your money is and being able to access it at any time. A bit of knowledge allows him or her flexibility of when to send, how to send, and to have confidence in being able to actually track the transaction.

Stablecoins are a welcome addition to the current system because all real business was founded on entrepreneurship and optimising performance. Stablecoins are the ultimate performance optimisers in that they take a decrepit and unreliable system, and teleport it into the current world where speed and self-reliance are the qualities that most interest the younger generations. In other words, stablecoins are at the centre of what the younger generations need and want.