Source: Staitisa.com

The impact of inflation is not confined to the $. Since its launch, the Euro has fallen in value by almost 33%. Hence the need to ensure that you have your investments in the long term, protected from the ravages of inflation in real assets. Yet despite this, many of us keep money in a bank?

Fall in the purchasing power of the Euro

Source: in2013dollars.com

Notwithstanding the impact of inflation, would it not be more accurate to refer to a fiat-backed digital currency as a pegged coin (as opposed to a stablecoin) since surely stability is a relative and not an absolute description? Digital currencies, backed by a fiat currency, arguably fall into two categories - Central Bank Digital Currencies (CBDC) or stablecoins (typically issued by non-government organisations). Regardless of what you call a digital currency, backed by $, £, €, CHF or Yen etc, there are a number of advantages and disadvantages surely worthy of consideration for digital currencies. Stablecoins were once dismissed as a way to store ‘ill-gotten gains’ when ‘crypto whales’ wanted to reduce their exposure to crypto currencies, and neither could access $ in a bank account nor wanted to deal with a traditional financial institution. Ironically, going forward we could see regulators being supportive of digital currencies and possibly insisting that issuers of income producing assets (such as equites and bonds) change the frequency of income payments. A stablecoin would enable customers to be treated ‘more fairly’ since stablecoins could facilitate digital equities and digital bonds to make income payments more frequently, e.g., weekly. The income due to an investor could be calculated based on the number of days a security has been held, as opposed to waiting for monthly coupons from bonds or six-monthly dividend payments. 

Another advantage of a digital currency is that it reduces the costs and time taken to remit money, as well as reducing the cost of money spent by tourists when overseas. This is likely to impact many of our readers who travel overseas or indeed run their own businesses, especially if they are trading with overseas suppliers and/or customers.

Size of retail cross boarder payments

Source: Bank of International Settlements

Challenges to be addressed:

• infrastructure - this is the technology behind digital currencies which is able to handle the volume of transactions

• potential environmental impact of some Blockchain technologies

• privacy of users

• interoperability - how will digital currencies be able to interact with cash?

• decentralised vs centralised technology - in a truly decentralised environment, if there is a problem, who is held to account: ‘Mr and Mrs Bitcoin’?

• those who prefer, or are only able to use cash - according the Bank of England, “Today, there are currently 1.2 million unbanked people in the UK, who by and large rely on cash and cannot access digital payments or can access them only at disproportionate cost”

• loss making - given current interest rates, stablecoins cost, not make, money.

Central Bank Digital Currency status

Source: CDBC Tracker

For an update on what different countries and their central banks are doing, please click here for a website which is regularly amended and which details the progress of various CBDCs.  

Possible use cases for stablecoins:

• payment of income - dividends, coupons, rent, income on structured products

• corporates - purely in-house to improve efficiency for corporate treasury departments

• collection and payment of insurance claims and premiums

• debt instruments - HSBC claims it is up to 90% cheaper to issue digital bonds using Blockchain technology; as more bonds are issued this way, how long before coupons are paid digitally? - €100m EIB bond, the World Bank Bondi Bond (two issues totalling AU$160m) 

• digital equities - Bitterex is offering exposure to Apple, Tesla; the Swiss are enabling the issue of digital equities, as opposed to paper-issued stocks (and thus the need for digital payments)

• new asset classes creating the need for digital settlement - DeFi, crypto, NFTs

• microfinance - a market expected to reach $313 billion by 2025, much of which will be via mobile devices 

• online market - $4.3 trillion, growing at 11.8% in the US 

• 1.7 billion unbanked - the World Economic Forum believes digital currencies can help the global unbanked; many of the 1.7 billion have no bank account but they do have a mobile phone

• Euro stablecoin - with monthly attestations by PwC for the French supermarket, Casino, as part of its customer loyalty plans

• Visa clients have spent $1billion of crypto in the first half of 2021

• Mastercard is to offer crypto payments using USDC

• in April 2019, Société Générale (via its subsidiary, FORGE) issued a digital bond of €100 million on a blockchain. Maybe we can get its London office to start issuing Sterling-based debt instruments, and the coupons’ income could be payable using a Sterling stablecoin

• Société Générale has also issued a digital structured product internally using a blockchain, and it intends to begin selling such products externally to wealth managers/IFAs in 2022. Many structured products are designed to pay an income so, again, there could be a need for a sterling version. As an aside, Bloomberg claims the total structured product market accounted for over $7 trillion in invested assets.

• HSBC claims it is 10 times more efficient to issue digital debt using blockchains, so why would it not then pay coupons digitally, via a stablecoin?

• DeFi sector offers access to EURt (Tether Euro stablecoin) for lending and borrowing but it can also be done by using Tether’s USDT. This is possible by using the DeFi app from Cream Finance. 

Number crypto currency holders globally

Source: Crypto.com

Therefore, the number of people holding Digital Assets could be far higher, and this ignores the daily raft of Non-Fungible Tokens (NFTs) being issued. For example, Reuters has reported that Open Seas (one of the most popular NFT exchanges) has seen the volume of NFTs traded on its exchange exceed $2billion in the first half of 2021. In June 2021 alone, Open Seas handled over $18 billion NFT trades valued at over $1billion. The types of assets being ‘wrapped’ in NFTs is very varied, as the chart below shows. 

of NFTs sold in various categories Jan -June 2021, on the Ethereum Blockchain 

Source: Non Fungible.com

We have highlighted this issue before, but could liquidity in the crypto markets prove to be too irresistible for institutions? Small and medium sized companies (small caps) which are quoted on stock markets around the world have typically been shunned by institutions and been mainly traded by specialist fund managers. Many larger institutions and wealth managers tend not to buy small cap shares directly but gain exposure to this asset class through specialist small cap funds. The reason often cited is the lack of liquidity of small caps therefore making it difficult to invest large sums into a small cap or, worse, not being able to sell small cap shares without substantially moving the price of the underlying shares.

However, there is growing evidence that even cryptocurrencies, which have a relatively small capitalisation, enjoy deep levels of liquidity. For example, it was reported last week that one of the world’s most famous footballers, Lionel Messi, is transferring from Barcelona to Paris St Germain and, as part of his renumeration, Messi is to be paid in PSG Fan Tokens. At the time Messi joined the French football club PSG Fan Tokens were valued at $24.37 with a market cap of $44,815,247. Following the official announcement of Messi’s transfer, the PSG Fan Tokens price climbed to a high of $61.23 increasing the tokens capitalisation to $56million, and the number of tokens traded exploded to almost $630million. Even in the last 24 hours, PSG Fan Tokens are trading at $32.87 and the volume of tokens traded in the last 24 hrs was $49million. With these levels of trading activity, it ought to provide sufficient liquidity for most institutions to buy and sell without adversely affecting the price. A word of caution though, as one needs to be careful about crypto trading volume data since those exchanges which report volumes are not regulated, and occasionally crypto trading can look higher than it really is due to wash trading. But more on this another time….

Another statistic worth keeping an eye on is the value of funds which are held in various Digital Asset Exchange traded products and mutual funds, as these are more accessible to private investors. Coinshares claims that such products now have almost $50 billion of assets undermanagement.

Digital Assets Exchange traded Products and Mutual funds net new assets ($million)

Source Coinshares.com