Stable Coin evolution and market trends Key observations PwC’s market analysis | October 2018 www.pwc.com.au 2 Stable Coin Evolution and Market Trends Stable Coin Evolution and Market Trends 3 Key observations in 5 9 Presently there are at least 75 projects Stablecoins should not be equated with the Stable Coin Evolution that could be considered “stable coin” asset they are backed by in terms of safety projects. With the deluge of projects and and stability. The legitimacy and long term the amount of capital they have raised, the viability of some stablecoins will be at the The stable coin evolution and trends discussed in this paper are the interpretation of information cryptocurrency space could enter into its whim of investor expectations. Understanding gathered via market research and questionnaires sent to 50+ stable coin projects. They are own form of quantitative easing. This may be what these coins truly represent and their therefore interpretation of this data from the authors at the time this paper was drafted. driven by fiat or asset backed funds entering functionalities is a must for anyone who is the ecosystem that could find it’s way into looking to deploy capital into this market. George Samman investing into many of the cryptocurrency Co-Authors: John(3rd party Shipman expert) (PwC) George Samman projects trading on exchanges. [email protected] (3rd party expert) [email protected] https://www.linkedin.com/ in/georgesamman/ 10 6 Fiat-backed stablecoins can never be100% Executive Summary censorship resistant, permission-less and Exchanges are hedging themselves against trust-less. However they do have substantial the risk of only having one asset backed benefits versus fiat currencies due to their stable coin and adding new fiat-backed (USD ability to be programmable (both for money mainly) stablecoins onto their exchanges and compliance) and easily transferable. 1 3 at great pace. Projects to note in this regard are Okex and Huobi who appear Fiat-backed stablecoins need to establish An associated set of ancillary services to have added a number of stablecoins traditional banking relationships in order to will also need to evolve around the recently to hedge in this manner. hold the currency that the stablecoin is backed validation, certification and reconciliation 11 to. There are still several inhibitors for large of these reserves to digital assets. multinational banks to take on this role and Accountancies will need to evolve to Many of the projects are not simply offer this service, due to reputational, regulatory offer digital asset to physical asset audit looking to see their stable coins utilized uncertainty and therefore compliance risks. services for stablecoins (whether this is 7 for trading in the cryptocurrency Therefore, in many cases this role falls on the a currency, virtual or a physical asset ecosystem but to compete with fiat shoulders of regional banks, trust companies such as gold or iron ore or wheat). Gemini USD and Paxos Stablecoins, currencies on a global scale. or boutique financial institutions. With some of could be seen as the most regulated of these fiat-backed stablecoins being backed all the fiat-backed/asset backed tokens. to hundreds of millions of dollars this poses They are subject to the terms contained substantial solvency and credit risks. Uptake of 4 In the source code which include the right stable coin use is therefore in part reliant on of forfeiture or seizure and other reasons 12 traditional banking services. A whole new industry is beginning to form unrelated to the holding of the stablecoins. around stablecoins-ancillary plays like Corion We anticipate that the key innovations will X and Standard.one also known as Cement come from crypto-backed and algorithmic Dao (Cement DAO creates a decentralized backed/seigniorage based stablecoins. 2 ecosystem of stablecoin rating agents). The community of BUILD token holders vote to 8 As part of our research, many of the whitelist the “best” stablecoins, allowing survey respondents’ stable coin projects are them to be added to a diversified basket. One of the key focus areas for some 1:1 backed to digital assets (100% reserves) stablecoins achieving their stated as well as real life assets like USD or gold. stability goals will be to create As the markets take confidence in the baskets of uncorrelated assets. liquidity and safety of these new stable digital currency markets, the ability to move to fractional reserves will likely become a reality. (Fractional reserves - where only a % of the digital or physical asset backs the token) 4 Stable Coin Evolution and Market Trends Stable Coin Evolution and Market Trends 5 1. General Observations Price volatility is one of the most significant Only then will can it be considered a legitimate obstacles in the adoption of cryptocurrencies medium of exchange and store of value by for a number of reasons. Firstly, it keeps day-to-day users, merchants and savers. It the currency attractive mainly for traders is also difficult for merchants or even simple 5 7 and speculators, not ordinary day-to-day peer-to-peer transactors to conduct business if users interested in using it as a medium there is no consistent measure of value for the General Observations Launch & Marketing of exchange. Price fluctuations also cause cryptocurrency they would like to use. Volatility enormous currency risk, as cryptocurrencies is therefore a significant contributor to keeping can depreciate or appreciate dramatically cryptocurrencies as a niche digital asset favoured relative to fiat currencies, generating a loss by speculators. As opposed to its targeted for users who are holding cryptocurrencies. direction as a revolutionary technology that The loss can either be direct or indirect. allows a decentralised and secure flow of money. a. Direct in that the cryptocurrencies Most Stable Coin projects we have observed 8 9 depreciate heavily against fiat. are currently built on top of the public Ethereum network. Most appear willing to change if Indirect when cryptocurrencies appreciate, Economics Technology b. issues around scalability and sharding aren’t in that a merchant’s products are too fixed relatively soon. Some are building on expensive, making them uncompetitive. other blockchains (EOS3, Hashgraph4, Dash5, Or, employee salaries and supply chain trialled Ripple6 and Stellar7 NXT8, etc) and others costs increase, reducing their margins. have started by building their own blockchains (Bitbay and Algorand and Kowala and Topl). Thus, there needs to be stability within a range of currency values for both upside and The majority of the respondents are fiat backed in downside protection. This in turn will support in a 1:1 capacity followed by cryptocurrencies such 11 12 protecting incomes, savings, business margins as Ether or commodities such as gold. Others and to allow for more reasonable business are backed by a basket of different currencies Regulation Testing planning and forecasting when transacting (fiat and/or crypto) where they are using different or saving in this medium. Something akin metrics and standards to decide the weightings. 1 to a buy wall of a generic currency peg, Others such as Boreal, are backed from which prevents the price of the currency from revenues on a decentralised exchange IDEX. dropping and a sell wall2, which prevents a large upward spike, is necessary to maintain a stable value of a cryptocurrency such 14 that is comparable to fiat price stability. Appendix A: Questionnaire 1 A buy wall happens when the amount/size of buy orders for 4 Carbon. a particular coin are much higher than the number of sell 5 Xank. orders. Traders want to buy more than they want to sell. 6 SendGolD. 2 A sell wall is the opposite of a buy wall where there are many 7 more sell orders than buy orders. This is price negative. Stronghold, The White Company. 8 3 Havven & SendGold. RYOcoin. 6 Stable Coin Evolution and Market Trends Stable Coin Evolution and Market Trends 7 Stablecoins are in the early development phase Revenue models17 used by respondents at this point in time and the design paradigms are (in no particular order): 2. Launch & Marketing still forming for what may be the future of money. a. Not for profit. Most of these coins are stable and being tokenized versus the USD.9 Based on the b. Revenue/dividends or investing part responses the USD should be the most tokenized of the asset in a low risk products like Bootstrapping18 is vital as all of these projects The following methods are being liquid asset in the cryptocurrency space over goverment bonds or money market funds. require liquidity in the coin. This can be done used to increase viability: the next 12-24 months. The other categories Network transaction fees which through incentivizing miners as in the case of c. Dual token models are being used so one are 1) other fiat currencies, 2) a basket of include workflow execution fees. Kowala. The ability to convert between deposits a. currencies, 3) commodities 4) cryptocurrencies in banks accounts and stablecoins are important can have capital appreciation of one of and 5) indexes like the consumer price d. Withdrawal fees. as is being able to trade on exchanges. Financial the tokens while the other token is pegged index (CPI) or a UN FAO Food Index.10 transparency is essential in order to prove out the to an underlying asset in the project. e. Vaulting fees in the case of Hellogold reserve, view transactions and other information for the physical gold (this will probably Dual token models are being used in some via smart contracts or be able to check on gold b. The models that are using baskets are trying become more common for other cases.