VYSYN Ventures Weekly Insight #85: Fed researchers debate stablecoins for payments as Zuckerberg’s Diem ends
Stablecoins are currently one of the biggest topics in the cryptocurrency space and regulators are making serious plans to regulate them. Unlike other volatile cryptocurrencies, stablecoins maintain a fairly stable price tied to a fiat currency, which explains regulators’ interest in them. While some stablecoin projects have fared well in recent times, others did not have the same outcome.
In this week’s edition of the VYSYN Release, we will analyze how Mark Zuckerberg’s stablecoin project Diem officially came to an end after more than two years of intense effort to launch and Jack Dorsey’s take on the failed project. Additionally, with Fed researchers arguing about the potential of stablecoins and how to regulate them, we will consider whether stablecoins can become the future of digital payments.
Mark Zuckerberg’s stablecoin dream officially over
Diem, one of the most ambitious digital asset projects that attempted to introduce a global stablecoin, officially shut down earlier last week. Backed by Mark Zuckerberg’s Meta, the stablecoin project struggled getting regulators on its side.
Formerly known as Libra, Diem appeared doomed from the beginning. Global regulators cited countless regulatory concerns posed by the project and urged early backers like Visa and PayPal to withdraw. Add the controversial Zuckerberg and his equally controversial social media platform, Facebook, and regulators strongly refused to grant permission for Diem’s launch.
While most stablecoins, including USDT and USDC, are used to facilitate payments within the crypto ecosystem, Diem sought to leverage Facebook’s 2.9 billion monthly active users to drive global use of its stablecoin. Such an ambitious project did not sit well with regulators as it could quickly impact the broader payments system.
Therefore, after countless failed attempts to woo regulators, including changing the project’s name and adjusting its objective, the Diem Association decided to finally throw in the towel. Diem subsequently sold every intellectual property and asset associated with the stablecoin project to the crypto-focused bank, Silvergate, for $182 million. The bank intends to leverage the assets acquired from Diem to issue its stablecoin.
Diem’s shutdown was met with varying sentiments from the crypto community. Weighing in on the matter, Jack Dorsey slammed Meta and called its stablecoin project a massive waste of time and effort. The ex-CEO of Twitter noted that the company could have devoted resources used on Diem to promote open-source projects like Bitcoin. Diem’s co-founder, David Marcus also acknowledged the censorship-resistant nature of Bitcoin and predicted that it would still retain its position as top crypto for the next 20 years.
US Fed Researchers offer conflicting opinions on stablecoins
After witnessing the impressive growth of the stablecoin market in recent times, regulators have become eager to establish frameworks for regulating stablecoins. A group of researchers at the Federal Reserve Bank of New York published a study that dubbed stablecoins “safe haven” assets. They opined that this form of digital assets can bring some sort of stability similar to traditional safe-haven assets.
While the crypto industry was still trying to digest the first positive analysis of stablecoins, a separate NY Fed research group hit back with criticisms of the stablecoin market. The researchers noted that stablecoins are not the future of payments as they have liquidity issues, among other things. They also suggested that tokenized deposits are much better than stablecoins.
The NY Fed’s argument hinged on differentiating between the money being transferred and the asset the money secures. While noting that DLT platforms offered great solutions, the NY chapter of the Fed opined that stablecoins were perhaps not the best solution at the moment. Thanks to tying up liquidity and lacking proper regulatory oversight, stablecoins used to facilitate payments might introduce more issues than solve them. As the payments debate rages, it’s worthwhile considering whether stablecoins offer any benefits to our world when used as payment facilitators.
Are Stablecoins the future of digital payments?
Due to the rapidly growing popularity of the stablecoin space, several fiat-pegged token projects have been launched. The growth of the stablecoins market has been nothing short of phenomenal, having gone from under $1 billion four years ago to a whopping $178 billion market. Out of this figure, more than two-thirds make up the top two stablecoins, Tether (USDT) and USD Coin (USDC), with $77.97 billion and $51.57 market caps respectively. Stablecoins have their perks as they are less volatile, backed by fixed assets, and promote cross-border payments.
However, in recent times, top stablecoin issuers have been subject to regulatory scrutiny, with Tether under investigation for lack of transparency surrounding its reserves. The opacity of Tether’s operations had further exacerbated the rising speculations about the credibility of USDT’s reserves. Vocal critics argued that the company issues unbacked USDT tokens to drive up the prices of cryptocurrencies during bull runs. Since USDT is a key piece of plumbing for the over $1.7 trillion crypto market, analysts are worried that it could pose a systemic risk to the entire industry.
The company was even mandated to pay a hefty sum of $41 million for making misleading claims on its fiat reserves. This lack of transparency can be worrisome. However, many believe that ample regulation and oversight can make stablecoins a great option for cross-border payments while posing no risk to the overall marketplace.
Traditional payment networks involve middlemen taking a hefty cut for their services. Typically, these payments take multiple days to arrive and cannot be reversed if there’s an error. In contrast, stablecoins do not require hefty fees and are close to instantaneous. These attributes have led banks to trial them for cross-border payments.
With traditional cryptocurrencies far too volatile to act as stable modes of payment, it appears that a combination of regulation and stablecoins offer the best solution to cross-border payments. It remains to be seen how this space will evolve, and how authorities create greater transparency around fiat reserves. Undoubtedly, we’re witnessing yet another way in which blockchain and DLT-focused solutions are revolutionizing traditional finance.
About VYSYN Ventures
VYSYN Ventures is a longstanding venture capital company that specializes in funding and supporting disruptive startups in the blockchain and cryptocurrency industry. We have provided early-stage support to several projects that have grown USD market capitalizations of hundreds of millions and even billions. Our incubation program focuses on providing capital allocation, versatile marketing support, and tech assistance.