WEF Proposes Interoperable Stablecoins as Building Blocks for a Sustainable Global EconomyBy Nov 27, 2019 3 Min Read
Stablecoins and the technology underlying them will be the building blocks of a more sustainable, inclusive and resilient global financial system according to the World Economic Forum (WEF).
In an article published on Nov. 26, the WEF highlighted the true value that digital currencies such as stablecoins could have on creating a fairer and more inclusive financial system for the world. They however stressed the requirement for these digital currencies to function interoperability across blockchains, as well as interoperability between fiat cash and digital currencies, and between centralized and decentralized systems.
Stablecoins VS Cryptocurrency
Like a typical cryptocurrency, a stablecoin is a cryptographically signed digital asset recorded on a blockchain. The key difference is that stablecoins are pegged to ‘real-world’ assets such as fiat currency or a commodity such as precious metals like gold. This creates a far more stable token, that is shielded against price volatility, but able to perform the same functions of a regular cryptocurrency.
US Dollar Dominance
As outlined in the article, stablecoins could contribute towards a more resilient global economy by tempering some of the potential threats posed by the US dollar’s (USD) domination of global foreign currency reserves.
Foreign currency reserves are assets of central banks held in different currencies, primarily used to support their liabilities. Central banks also use reserves to help stabilize their respective national currencies. According to statistics from the IMF, the US dollar accounted for 62% of all foreign reserves held by central banks in the first quarter of 2019, while US GDP accounted for 15% of global GDP.
Source: Image taken from IMF data http://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4
A critical issue with USD reserves is that they are usually held by central banks in the form of US government bonds, and are effectively removed from circulation. Mass conversion of USD into US government bonds has kept US interest rates artificially lower for longer and pushed the United States further and further into debt. Consequently, a global scarcity of USD creates further major headwinds for US exporters, widening the trade deficit and pressuring economic growth.
Image via Shutterstock