This year has proved to be a pivotal year for digital finance, with stablecoins edging into mainstream use, regulations approved that govern stablecoin, and customers increasingly expecting instant settlement for payments. Mobile digital payments are now routine for millions of people.The total value of all digital payments is projected to reach more than $20tn in 2025, according to Fintech Magazine. Mobile payments comprise 79% of digital transactions.There have been many discussions, and feasibility studies, into the establishment of central bank digital currencies, but with few initiatives. The pattern emerging is that governments are preferring to regulate private providers of stablecoins.The increasing use of stablecoins was a major talking point at October’s annual IMF summit in October. Stablecoins are tokens on a blockchain used as digital cash. They differ from a cryptocurrency in that they are pegged one-to-one with a hard currency, usually the dollar. Examples include Ethereum and Tether. Their use has surged in the past two-three years. Stablecoin usage accounts for around $30bn transactions daily. This is under 1% of all transactions, but it is double the amount of 18 months ago. At current rates, stablecoin use could overtake legacy systems within a decade.Some of the wariness about a digital currency – that it is intangible and only has value if both parties trust it – has also been true of the major fiat currencies since they came off the gold standard in the early 1970s. People in advanced economies with hard currencies and a mature, well-capitalised banking system, may place more faith in established institutions, but in emerging markets many people are unbanked, and have had experience of the local currency collapsing in value due to high inflation.A major potential obstacle was that each stablecoin was proprietary to the firm that set it up, limiting their range and potential. But this limitation has been overcome through technical ‘bridges’, which enable tokens to be transferred across different blockchains.For many uses, a blockchain-based currency has advantages over the conventional banking system. Transactions, including cross-border transactions, are in real time, 24/7, typically settled in a second or two. Conversion to local currency has been made easier. There have been technical advances by fintechs, for example making digital wallets and payments by mobile phone user-friendly.For commercial transactions, the stablecoin can be embedded in a smart contract, such that settlement is instant as soon as a delivery is made. This ease of settlement can reduce costs and delays in supply chains.Stablecoin transfers are cheaper than conventional international transfers, with the fintech charging a few cents, rather than a few dollars. International money transfers through banks still go through a clearing system, which may take some days.A report by the consultancy McKinsey identified that the three main uses of stablecoins are settling cryptocurrency trading, cross-border payments especially by migrant workers and small businesses, and emerging market governments as a hedge against inflation and for peer-to-peer payments. PricewaterhouseCoopers also noted significant use by institutional investors and high net-worth individuals. The number of active wallets using stablecoins increased by 53% between February 2024 and February 2025, numbering over 30mn.Regulations governing the use of stablecoins have encouraged their adoption. The GENIUS Act, passed by the US in June this year, sets out provisions for oversight, reserves and stability of stablecoins.Regulation will help but there are risks. Stablecoins are not legal tender, and holders of stablecoins do not have a legal entitlement to the underlying asset. Stablecoins require an off-ramp – conversion to local currency – although in the future more people may choose to hold funds in stablecoins. No national government will compensate deposit holders in the case of losses due to a run on a stablecoin, as is the case with many mainstream banks where regulations safeguard citizens’ deposits, though they may be capped in some instances.There is a run risk with stablecoins: while they are primarily for transactional, not speculative, purposes, it is possible that a large number of investors could redeem their holdings simultaneously. This is not a theoretical risk: The stablecoin Terra collapsed in May 2022 following a sudden collapse in confidence by holders. Although a stablecoin is set up with a peg to an established currency, there have been instances of de-pegging, linked to concerns over reserves.Security is a risk with all financial holdings and transactions. Established stablecoin operators do have checks to prevent fraud, such as ‘know your customer’ (KYC), and anti-money laundering (AML) measures.In other ways, the digital revolution is changing payments systems. Even within the banking industry – for example, banks now partner with fintechs to send money internationally more quickly than through the clearing system of banks.Established financial firms may purchase or partner with fintechs to expand their coverage in digital finance. US giant JP Morgan has set up a JPM Coin, a stablecoin. From the opposite direction, some Web 3.0 fintechs may seek a banking licence.The broader picture is one of global money becoming digital, mobile, international, with instant settlements and lower fees.The author is a Qatari banker, with many years of experience in the banking sector in senior positions.
Friday, December 05, 2025
|
Daily Newspaper published by GPPC Doha, Qatar.
