Amidst the growing adoption of cryptocurrencies across the world and the recent restriction imposed by the Central Bank of Nigeria (CBN), stablecoins have been proposed to serve as the bridge between traditional currencies and cryptocurrencies.
This prediction comes as leading economies globally, including the United States and China, introduce digital versions of their traditional fiat currencies while key stakeholders in the worldwide financial ecosystem are adopting digital currencies into formal payments and settlement systems.
Mujib Ishola, our Head of Payments Technology and Infrastructure, took this position recently while speaking at the Techpoint Digital Currency Summit, tagged “Building the money of the future”, which held virtually and physically in Lagos.
While noting that stablecoins could be backed by fiat currencies, cryptocurrencies or be algorithmically regulated, he said stablecoins have the capacity to minimise the risks associated with the instability of cryptocurrencies, while helping digital currencies gain more general acceptance especially for everyday transactions.
“The uncertainties that come with price fluctuations of cryptos like Bitcoin and Ethereum could be disturbing,” said Ishola, enterprise solutions architect and expert on blockchain and cryptocurrencies. He asked attendees to, for instance, imagine their income being paid with a cryptocurrency with all its known fluctuations.
“Stablecoins however minimise the volatility associated with cryptocurrencies by leveraging rules centred on demand and supply to fix exchange rates and ensure stability,” he added
Ishola also noted that by introducing state-issued stablecoins, the government would inadvertently be regulating cryptocurrencies while not stifling the innovative potentials it represents.
Stablecoin refers to a range of cryptocurrencies that derive its market value from some external reference. It essentially means that unlike traditional (fiat) money, they are backed by a reserve asset.
While cryptocurrencies are increasingly popular, they are mostly issued by unregulated and unlicensed entities and as such, they are not legal tender. This may have informed the decision of the Central Bank of Nigeria to prohibit cryptocurrencies transactions in the country’s banking sector.
According to Ishola, the major advantage of a stablecoin is that it combines the strong points of cryptocurrencies such as transparency, privacy, faster transactions and low fees, with the guarantees of trust and stability of fiat currencies.
Meanwhile, the use of stablecoins globally continues to grow alongside the adoption of cryptocurrencies such as Bitcoin and Ethereum. In 2020, transaction volume grew by a whopping 316 percent, from $248 billion to more than $1 trillion. Some of the trends driving the growth of stablecoins include fewer regulatory issues, stability of fiat currencies, ability to trade unstable crypto for stable coins at lower risks, need to power everyday transactions and quicker movement of funds between crypto exchanges and fiat currencies.
The tech expert also predicted that state-issued stablecoins will be prevalent in the future and could replace their fiat counterparts eventually. He also predicted the introduction of the digital Naira some time in future.
Ishola at the event was joined by an array of speakers who are experts in digital currency, including Buchi Okoro, CEO, Quidax; Tosin Olaseinde, founder of money Africa; Chris Ani, CEO DABA; Senator Ihenyen, President, Stakeholders in Blockchain Technology Association of Nigeria; Ina Arome, Head of fintech practice, Aluko and Oyebode LLP; and Kunle Taiwo, Digital Forensics Detective, Nigeria Police Force.