The Future of Stablecoins in E-Commerce

However, after facing criticism from traditional financial institutions, Facebook pulled back from its original vision. The currency could soon look like Venmo, a popular mobile payment application. This initial setback, although major, does not say much by itself about the prospects of stablecoins - especially in terms of acceptability or longevity.   

How Cryptocurrency Will Change E-Commerce

E-marketer projects Global e-commerce sales to reach $5.545 trillion worldwide in 2022. Also, according to a recent Forbes report, online retail has grown nine times faster than overall economic growth. With retailers continuing to focus their efforts on growing markets like India and China, cross-border payments and global e-commerce become increasingly important.

One way to overcome some of these challenges may be stable coins—cryptocurrencies designed to maintain a fixed value relative to another asset or currency. Two ways they could change e-commerce forever are listed below.

Stablecoins could be a tool for eCom transactions

Stablecoins are a cryptocurrency with a high potential for adoption in e-commerce. They could replace credit cards in a wide range of transactions. Companies such as Paxos and Circle could set up payment networks that act like roads for the Fed’s digital dollars. Businesses could automate recurring donations or monthly subscriptions.

However, while stablecoins have many potential uses, they could also pose regulatory headaches. The Federal Reserve, which manages the underlying infrastructure for traditional payments, is wary of their widespread use, concerned that it could fragment the payment system and raise costs for households. Despite this, more 'progressive' groups have backed Lael Brainard, governor of the US Federal Reserve and crypto-firm CEO.

Stablecoins are efficient in handling payments

The rising popularity of digital currencies, such as Bitcoin, creates new payment options for businesses and consumers. The Underlying assets or a centralized institution backs Stablecoins. 

In addition, stablecoins have an important added advantage over traditional currencies, such as U.S. dollars. For example, a book purchase in Bitcoin would cost 0.000048 BTC. The cryptocurrency’s efficiency means it is effective for online transactions and could ultimately enter the financial mainstream.

However, the emergence of stablecoins poses a unique set of challenges to regulators. They represent various crypto instruments that vary in technical, functional, and legal terms. 

As a result, regulators must develop a regulatory framework for the industry to ensure its effectiveness and protect consumers from overregulation. The FSB has proposed principles for regulating stablecoins. These principles call for a regulatory framework proportionate to risk and promote responsible innovation.

Stablecoins’ Risk Of Illicit Activity

Mr. Benoit Coeure, chair of the European Central Bank’s Committee on Payments and Market Infrastructures, recently highlighted the potential risks of global stablecoin projects.  The most significant include the risk of money laundering, cyber resilience, and consumer protection. Other areas of concern include tax compliance, monetary policy transmission, and financial stability. 

In addition, he predicted that Stablecoins could also affect access to payment services in some regions, compromising financial stability. Despite this, Coeure emphasized the positive effects of new technologies, such as the ability of the global market to handle payments faster and more securely.

The obvious reality is that stablecoin regulation poses unique challenges, and regulators must balance innovation and financial stability. More recently, regulatory responses have changed from dismissiveness to serious concern. 

Another potential problem is the risk of “runs,” or the widespread withdrawal of customers’ funds. Such a run could negatively affect consumers and spread to other stablecoin issuers, causing an economic shock and threatening the entire financial system. Stablecoins can be vulnerable to fraudulent activities, such as fire sales and market manipulation. 

Clearly, Stablecoin risk assessment and management are crucial. However, while addressing the risks, economies must also aim to embrace the benefits of stablecoins. In this regard, regulators should avoid preventing innovation and supporting a thriving ecosystem of stablecoins that will thrive under competition and regulation.

Stablecoins’ Ability To Engage With Smart Contracts

With the rise of cryptocurrencies, a price-stable currency is crucial to smart-contract-based commerce. Unfortunately, the only price-stable currency available for these purposes is stablecoins. 

While major economies such as the EU and the U.S. are still years away from launching their own CBDCs, stablecoins are likely to have plenty of time to establish their role in commerce. However, for the time being, fiat will only serve as a peg to keep stablecoins “price-appreciating.”

The rapid development of crypto-assets creates risks for both users and regulators. The risks of wide-scale adoption of crypto assets as a new unit of account and store of value are different from those that arise from their widespread use as a medium of exchange in the context of E-Commerce. Furthermore, risks related to financial integrity arise from crypto assets operating anonymously. Stablecoins address these risks.

In addition to their E-Commerce capabilities, stablecoins also help businesses with compliance. Organizations can issue gold-backed tokens to their users only after submitting the gold to a custodian, and they add these tokens to their holdings. Furthermore, a third-party AML/KYC API will help businesses onboard reliable users. Further, stablecoins’ ability to engage with smart contracts in E-Commerce requires a back-end infrastructure and front-end components.

Stablecoins’ Lack Of Global Standards For Stablecoin Providers

Many risks are associated with stablecoin arrangements, including acute risks to financial stability, market integrity, and operational resilience. These risks are further exacerbated by the current absence of global standards and best practices. 

To ensure stability, regulators must consider establishing global standards for stablecoin providers. These standards should address operational and cyber resilience and consumer protection, among very important issues. 

Importantly, also, regulators must ensure that stablecoins meet the same standards as other payment systems and currencies. To make stablecoins safe, they must promise full interoperability with existing forms of money. Furthermore, this promise must be credible and must remain consistent over time. Stablecoins must also be regulated to ensure the protection of the assets backing them. Moreover, Stablecoins must also be fully redeemable or exchangeable for other forms of money. 

In this regard, the exchange rate must remain stable despite fluctuations. Furthermore, the availability of par redemption is also essential for users to maintain trust in the currency.

While the FSOC may have a role in protecting consumer information and ensuring interoperability, it has not yet designated a company or activity generally. It may also include representatives of state banking and securities regulators. These regulators may help determine the appropriate balance between state and federal regulations. If no global standards are developed for stablecoins, these regulators will hamper the emergence of the stablecoin industry.