• TokenSoft

Stablecoins: Creating the Next Frontier in Global Settlement

Updated: Mar 28, 2019

As crypto currency volatility continues, stablecoins are witnessing a meteoric rise in interest particularly among banking institutions. A stablecoin is a digital asset pegged to currency, most often structured 1:1 with a fiat currency such as US dollars. Stablecoins differentiate from other digital assets, like bitcoin, where the price is driven by the market (supply and demand), not the value of a corresponding asset.

Another unique characteristic is transfer and settlement. Instead of using SWIFT or FedWire networks for money transfer, they use private or public blockchains to manage transfer and settlement. Today, there are more than 50 stablecoins available to the marketplace, and a few well-known names among them.

Gemini dollar (GUSD), launched in September 2018, combines the creditworthiness and price stability of the US dollar with blockchain technology and the oversight of US regulators. There is a 1:1 relationship between Gemini dollars and US dollars. Similarly, the USD Coin (USDC) from Coinbase is also 1:1, giving it the backing of US dollars and stable value.

These stablecoins allow dollars to move globally from a digital wallet to other exchanges, business and people. In fact, anyone in the world can hold a US dollar-backed asset by using only a mobile phone.

Stablecoins are built in such a way that global participation and near real-time transfer are possible; however, we need to remember these assets are likely to require adherence to compliance requirements in the applicable jurisdictions. So, the promise is there but the compliance infrastructure has yet to catch up.

There are two places in the life cycle of a digital security where the power of real-time settlement can be harnessed: at primary issuance and secondary trade. In traditional finance, we think more about settlement.

Let’s compare the promise of asset transfer speed with stablecoins to settlement in the context of traditional finance. In traditional finance, when you buy or sell or stock, bonds or other financial instruments, there’s a transaction date and a settlement date. The settlement date is typically one to five days after the trade date, depending on the transaction type. These are often communicated as T+1, T+2, T+3, etc. Shorter settlement times have become the goal as it reduces counter-party risk and the effects of potential mistakes. In the equity markets, for example, which used to follow a T+3 settlement cycle, new stock issuances often settle on a T+2 basis, and T+2 is required for secondary trades on securities exchanges.

At primary issuance, token transactions have been settling with near immediacy, and in compliance with securities laws, for some time. Secondary trading has residual uncertainty because, when the token is a security, the marketplace itself (not just the offer and sale by the seller) is subject to securities regulations. But there are many marketplaces seeking to comply with these regulations and harness the power of real-time settlement for secondary trades.

At TokenSoft, we are able to provide stablecoin issuers with several attractive benefits, in addition to the underlying benefit for the potential for stability in price, including:

  • Using ERC-1404, an open token standard, we have the ability for near instantaneous settlement with low settlement risk

  • Institutional-grade custody through Coinbase Custody, a referral partner of our affiliate broker-dealer TokenSoft Global Markets.

  • Post-issuance compliance support.