Accurately Understanding Stablecoins

Stablecoin is pegged to a single sovereign currency or a fixed value, and it needs to be generated by exchanging with the pegged currency or its compliant assets. It is endowed with special rights and obligations and can be used within a specific scope. In fact, stablecoin is the “token” of its pegged currency. It needs to have strict token reserves and regulatory scope, and must never be used to carry out credit business.

LianGuaiyLianGuail is about to launch a stablecoin

On the morning of August 7, 2023, local time, the US payment giant PayLianGuail (PayPal) announced that it will launch the USD stablecoin “LianGuaiyLianGuail USD” (PYUSD). PYUSD is generated using ERC20 and is supported by US dollar assets (including US dollar cash deposits, US short-term government bonds, and other high-quality US dollar assets). It is custodyed by LianGuaixos Trust Company and can be deposited and redeemed 1:1 with the US dollar as an encrypted stablecoin.

Different from the previously launched encrypted stablecoins such as USDT, USDC, and GUSD, which were issued by encryption companies such as Tether, Circle, Coinbase, and Gemini (all based on ERC20), PYUSD is the first encrypted stablecoin issued by a large non-encrypted payment company. Its special point is that LianGuaiyLianGuail has a complete traditional payment scenario and a strong user base, which can support the rapid development of PYUSD applications.

According to the description in the LianGuaiyLianGuail press release, LianGuaiyLianGuail customers who purchase PYUSD will be able to:

      Transfer PYUSD between LianGuaiyLianGuail and compatible external wallets;

      Use PYUSD for face-to-face (P2P or C2C) payments on the LianGuaiyLianGuail platform;

      Choose to use PYUSD to purchase exclusive funds at checkout;

      Exchange between any LianGuaiyLianGuail-supported cryptocurrency and PYUSD;

      Qualified LianGuaiyLianGuail users can purchase and transfer PYUSD for free.

The release of PYUSD has caused a great sensation in the cryptocurrency circle, traditional payment, and e-commerce platforms. Some people believe that this will bring a different future for the application of cryptocurrencies and the exploration of new digital payment models. Some people also believe that this will be the predecessor of the digital dollar and may greatly enhance the international influence of the US dollar.

So, how should we view LianGuaiyLianGuail’s launch of PYUSD?

The emergence of encrypted stablecoins

Since the official launch of Bitcoin in 2009, which adopts the principle of comparing to gold (the widest range and longest time in the world acting as currency or currency standard), using new technologies such as blockchain, relying on the public Internet, the total amount and phased increase are completely locked by the system, it can be peer-to-peer (P2P) payment, and all nodes participating in the system operation run and maintain it together. It is a “decentralized encrypted currency” with transparent public information on changes in stock, traceability, and difficult to tamper with. This once made many people firmly believe that it will subvert or replace the existing national sovereign credit currency that can be artificially regulated and easily over-issued, as well as the multi-link, low-efficiency, and high-cost payment clearing operation system, and will bring about a profound change in the global monetary system, providing strong support for the development of the online society and digital economy.

However, the Bitcoin system is a completely closed blockchain encryption system, highly isolated from the human real world. Its system only has the functions of currency generation, transfer and verification records among registered users. This ensures its security, but it lacks application scenarios, consumes a lot of energy, and has low efficiency. There is a “triangle dilemma” of “security, high efficiency, and low cost” that is difficult to balance, making it difficult to solve real-world problems and difficult to exchange with sovereign currencies. It is difficult to truly use and realize value, and it actually becomes a network game with limited participants. Therefore, it was not widely recognized and accepted by people in the two years after its launch. Afterwards, with the emergence of the Bitcoin blockchain transformation version “Ethereum”, especially its launch of the ERC20 protocol for issuing encrypted tokens based on the Ethereum network, it created the “Initial Coin Offering” (ICO) based on Bitcoin and Ether, accompanied by the emergence and operation of dedicated cryptocurrency exchange platforms. Bitcoin, Ether, and several encrypted tokens generated through ICO surged in price.

In the above process, some cryptocurrency trading platforms have started to develop and launch stablecoins pegged to a single sovereign currency or a fixed value in order to facilitate the exchange between various cryptocurrencies and national sovereign currencies. This has led to the emergence of more and more stablecoins such as USDT, USDC, and GUSD, and has promoted cryptocurrency trading and price increases accordingly.

Cryptocurrencies rely on the effects of cross-border, peer-to-peer payment and synchronous clearing generated by the public Internet and blockchain encryption technology, which have had an impact on traditional payment and clearing systems, especially SWIFT. They have gradually attracted the attention of central banks and traditional payment companies. Central Bank Digital Currencies (CBDCs) have been initiated and developed by central banks in many countries, and some international payment and clearing institutions have also attempted to develop cross-border joint network payment platforms (such as R3). Some e-commerce platforms and payment companies have also started to develop their own dedicated stablecoins for payment and clearing purposes. Among them, the internationally renowned Internet social media company Facebook released the “Libra” whitepaper in June 2019, claiming to form the Libra Association with hundreds of large multinational companies and register it in Switzerland to jointly manage a super-sovereign stablecoin pegged to the US dollar, euro, yen, pound, and Singapore dollar. It aims to provide low-cost and efficient payment and clearing infrastructure to billions of people worldwide, and once caused a huge sensation worldwide. However, this design that pegs to a basket of multiple sovereign currencies violates the essential requirements of a currency and is difficult to obtain strong support from the issuing countries of the pegged currencies (as it competes with the pegged currencies), and may even face severe crackdowns. It is fundamentally difficult to be implemented as a currency in operation. Similar designs can at most become special reserve assets among IMF member countries and related organizations, like the SDR. Therefore, commercial organizations are focusing on creating stablecoins pegged to a single sovereign currency (such as the US dollar) that meet the standards of the pegged currency and can be used on their own network platforms.

Regulation of Stablecoins

It needs to be clear that stablecoins, which are pegged to a single sovereign currency or have a fixed value, need to be created by exchanging the pegged currency or its compliant assets. They are given special rights and obligations and are essentially “tokens” of the pegged currency. There are no legal issues, but they require strict regulation in terms of token reserves and scope of application, and must never be used for credit activities (such as leveraging the reserves to expand token issuance).

For example, in the People’s Republic of China, the legal currency is the Renminbi, but there are also tokens used within certain limits. Some institutions and schools are allowed to use special meal tickets/cards, some markets have special shopping vouchers/cards, and some e-commerce platforms have dedicated points or tokens. However, these tokens must not exceed the permitted scope of use, freely flow or exchange with each other, and must not be expanded through credit activities, as this would undermine the management of the sovereign currency.

Therefore, it is relatively easy to launch network-based encrypted stablecoins in strict accordance with token requirements. The United States, for example, has been the first to introduce and operate stablecoins such as USDT, USDC, and GUSD for a long time. After facing severe regulatory obstacles and difficulties in launching Libra, Facebook also adjusted its target and changed it to a stablecoin pegged to the US dollar, renamed “Diem”. However, due to the lack of effective use cases, it is difficult to compete with existing stablecoins like USDT, and the development of Diem had to be terminated. Some platforms in the United States that expanded stablecoin issuance through leverage also ended up collapsing, causing huge losses to investors, and greatly enhancing the regulation of stablecoins and cryptocurrency trading platforms in the United States, which in turn restricts the application space for stablecoins.

Therefore, it is not difficult for LianGuaiyLianGuail to launch and operate PYUSD using ERC20. With its large user base, the conversion between PYUSD and cryptocurrency will also put pressure on existing stablecoins. However, PYUSD also faces increasingly strict financial regulations. At the same time, PYUSD will mainly be applicable in countries where the circulation of the US dollar is allowed. Although the LianGuaiyLianGuail network may cover many countries, its use will still be heavily restricted in countries that implement foreign exchange controls, and its launch will not necessarily further enhance the international influence of the US dollar. Therefore, the launch and operation of PYUSD by LianGuaiyLianGuail should not be overemphasized.

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