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Will IBM's USD Anchor Be Weighed Down By Stablecoin Limitations?



De Silva

IBM is using the Stellar blockchain to explore stablecoins. Banking and insurance complications remain.

On Tuesday, Jesse Lund, IBM's vice president of global blockchain market development, wrote a post on the company's website about stablecoins. "As the name suggests, a stable coin is a digital token that has low price volatility because it is pegged to an underlying fiat currency," he wrote. "Thus, it would work well for practical applications involving payments on a blockchain network as a store of value, a medium of exchange and unit of accounting for routine and everyday transactions of both large and small values."

Proponents claim that stablecoins might be more robust against fraudulent activity and enable faster settlements than current monetary infrastructure. Unfortunately, for now, much of this is fiercely philosophical. By most accounts, we have yet to see a functional stablecoin (sorry, Tether).

In fact, some believe that a real stablecoin will never exist. This is because the value of money isn't just a function of adoption and socialization. A currency's "value" relies on widespread trust as well as the intricacies of monetary policy (e.g., interest rates) and fiscal policy (e.g., taxes). The magnificent challenge of creating a stablecoin could be compared to the pursuit of conversational artificial intelligence – it remains a holy grail for developers.

However, it's not clear that stablecoins are all that useful. Even if they enable price certainty, why would a consumer/business prefer a stablecoin transaction over a fiat transaction? Even if a stablecoin augments speed and transparency on the financial side of a transaction, where's the certainty about the good or service that's provided? It might be smarter to make a purchase using a normal credit card, just in case the counterparty doesn't deliver and you need to reverse the charges.

Indeed, stablecoins might create more problems than they solve. They raise questions about issuance oversight, reserve ratios, censorship, and insurance among others. The global economy might be better off with its existing financial infrastructure, which has decades of compliance controls and reliability built into it.

Still, doubters be damned. IBM is pushing ahead. Today, Lund revealed that the company is experimenting with a stablecoin called Stronghold USD, which is backed by US dollar deposits and operates on the Stellar blockchain. "Solution developers, businesses and consumers who wish to hold or exchange the stable coins would be required to comply with terms and conditions set forth by the issuer and its regulatory authorities, including requirements for identity validation and verification, KYC and AML requirements," Lund explained.

"We envision startups and financial institutions will provide token issuance and custody services for this new type of financial instrument," he added. "Banks could even begin extending credit to real time transactional networks through the issuance of stable coins. This would give them access to new markets and allow them to participate in financing activities like Open Account trade transactions where they currently have little or no participation."

Curiously, Signature bank, which was initially meant to provide service for the US dollar deposits, abandoned the project at the last moment, according to Forbes. Even more strangely, a Signature representative claimed that the bank "was never part of a plan to custody the funds." Regardless, for banking services, IBM and Stronghold turned to Prime Trust, a company based in Las Vegas, Nevada.

In another post today, Stronghold founder Tammy Camp explained that the Stronghold USD (which it seems is also referred to as the USD anchor) is not currently available to retail customers. However, she invited institutional investors to apply for the Stronghold USD beta program.

Finally, other media outlets seem to have applauded Prime Trust's FDIC insurance. Yet, as explained on the Prime Trust FAQ page, "Cash in your account is 100% FDIC insured. Investments and non-cash assets in your trust are not FDIC insured and as such may gain in value or may lose some or all of its value."

So, sure, if you have cash holdings (good, old-fashioned dollars) with Prime Trust, you're golden – at least, up to the FDIC limits (typically, $250,000 per account). If you have stablecoins, I suggest you don't test your luck.

Matthew De Silva

Matthew has a passion for law and technology. He graduated from Georgetown University, where he studied international economics and music. Matthew enjoys biking and listening to tech podcasts. He lives in Los Angeles.

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