Does cryptocurrency have a future role in e-commerce?
Despite all the hype around cryptocurrencies, blockchain bids are not used by ordinary consumers. Problems such as price volatility and the need to comply with the current regulatory framework have prevented the adoption of this currency.
US Federal Reserve and digital currency
A few years ago, if you heard that the US government might mint its own digital currency, you might have taken it as a joke.
Digital currencies, like bitcoin, were the prerogative of speculators and programmers, not the lackluster central banks.
But this winter, the US Federal Reserve announced that it was investigating the possibility of issuing its own digital currency.
Speaking at Stanford, Federal Reserve Governor Lyle Brainard noted that the potential for digitization to deliver greater value and convenience at lower cost has intrigued the traditional risk-averse institution.
For now, the Fed’s interest in a digital currency may be more prominent as evidence of how the world is changing and where the winds are blowing.
Because just like Paypal and eBay (or Alipay and Taobao, if you prefer) have revolutionized the way people shop online.
Just as Amazon changed the way people shop, digital payment services – powered by blockchain technology – could be the next big event in the growth of global commerce.
For this to happen, there are four conditions that need to be met:
- appropriate technology
- Consumer demand
- corporate promotion
- Favorable regulatory environment.
The question is how?
For all the hype around blockchain — the open-source digital that many have argued will do everything
from obsolete cash to reshape the global economy — it can sometimes seem like a solution in search of a problem.
Although it has found a place in areas such as supply chains and digital identifiers,
issues such as price volatility and the need to comply with the current regulatory framework have prevented the currency from being adopted in commerce.
But now, one promising class of cryptocurrency known as “stablecoins” appears poised to succeed where its predecessors failed.
What are stablecoins?
Stablecoins are uniquely positioned to serve as a medium of exchange in e-commerce, enhancing the efficiency and accessibility of e-commerce.
As its name suggests, stablecoins differentiate themselves from their more popular but highly volatile siblings, such as Bitcoin, in their focus on price stability.
In pursuit of stability from the start, the stablecoin is hoping to avoid situations like the one that Laszlo Hanjic faced in 2010.
Hanyecz was a software programmer in the US who agreed to pay someone 10,000 bitcoins for two Domino’s pizzas (a fair price at the time when bitcoin was worth a fraction of a penny).
Today, this deal will be worth about $100 million!!
It was the first time that a commodity was purchased with cryptocurrency but now the legendary story
has also become a symbol of the risks of using a notoriously volatile bid for daily purchases.
Stablecoins have adopted a variety of methods to solve the price volatility problem.
The most famous attempt to date – and the most controversial – was the new, as-yet-unreleased cryptocurrency project, Libra
which was supposed to be linked to a basket of short-term government securities and bank deposits such as US dollars and euros.
Opposition from regulators and traditional financial institutions has prompted Facebook to move away
from its project for a global currency that competes with monetary authorities.
Although there is still a lot of uncertainty surrounding the project, it may sound more like Venmo, with people sending dollars through Facebook.
It is a new stablecoin that has been adopted by many online merchants across Southeast Asia.
It’s less well known in the US, but it’s an example of how stablecoins actually work in the wild – a blockchain currency with trusted value that ordinary people already use.
They use some form of automated monetary policy to keep their price stable, shrinking supply when prices are too low and expanding it when prices are too high.
This is achieved using a second cryptocurrency, Luna
which acts as a monetary policy tool and earns transaction fees as a form of bonus.
While criticism has mainly focused on how its governance mechanism is controlled by a few large
companies – the Switzerland-based Libra Association – Terra’s policy is encrypted directly on its own blockchain, and therefore transparent and not amenable to human intervention.
Terra’s stability and transparency is important because it harnesses the potential of the blockchain in a form beneficial to ordinary people. This, in turn, prepares it to challenge the existing currencies due to its stability
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