Stablecoins, CBDCs Face Big Hurdles Before Knocking Out Fiat

Could stablecoins and central bank digital currencies (CBDCs) ever replace fiat?

Obi Emetarom, co-founder and CEO of pan-African payment infrastructure company AppZone, thinks they can. But for that to happen, issues around regulatory compliance and interoperability would have to be addressed first.

Read more: Emerging Markets See Stablecoins as Viable Alternative to Bitcoin

“The big thing fiat has, that [stablecoins] don’t have, is the ability to track who owns what [and] what has moved, and [this helps] to mitigate against money laundering, illicit financing, among others,” Emetarom told PYMNTS in an interview.

For CBDCs, it’s more of an interoperability issue, he pointed out, adding that a lot of central bank digital currencies tend to function in silos, which ultimately affects adoption.

Fixing those two hurdles, the issue of compliance when it comes to stablecoins and interoperability for CBDCs would make regulated digital currencies a “major game changer” for payments in the emerging markets, Emetarom said.

Beyond their ‘game changing’ attribute, he said, stablecoins and CBDCs will replace fiat and end up being the payment currency of the future. For instance, the fact that fiat or paper money sits in physical vaults introduces huge costs and reconciliation and settlement issues into the process of transferring money “because that physical aspect does not move as quickly and cheaply as the digital component.”

On the safety front, blockchain also has an edge over paper money because records are stored on multiple devices across the world and cannot be easily destroyed or tampered with.

“You can’t burn 1,000 servers sitting in different locations. That has brought a sort of permanence and confidence to recording value and information on this new digital medium,” he explained.

It’s also a question of transparency and the ability to see how money moves with blockchain, which in turn helps to monitor money laundering and illicit financial flows and makes regulatory initiatives like automated tax regimes much easier to implement.

“So, when you look at all this and stack them against each other, you see that [stablecoins and CBDCs are] the next phase in the evolution of money and financial services,” Emetarom said.

Power of Blockchain Technology

Today, conventional fiat transactions are processed through a centralized hub that connects fiat payments from different banks or financial institutions (FIs) across the world.

But according to Emetarom, if there’s any issues with the hub, albeit temporarily, the entire network will be affected — not to mention the huge cost factor and other operational and reconciliation issues associated with operating a central hub.

This is where AppZone is looking to make a difference, he said, by helping to decentralize the processing of fiat payment transactions so that all participating banks and FIs — the firm’s clients include leading pan-African banks like Ecobank, Fidelity, Access and UBA — can connect directly with each other and process transactions through blockchain.

See also: Blockchain Technology Could Solve Many Challenges in Africa’s Payments Space

“It means that reliability is by far superior because there’s no central hub scenario where the central hub is unavailable and affects the [entire] network. You might have one or two of the nodes on the network having issues, but the rest of the network would function very well,” he remarked.

It is also cheaper and more scalable from a cost perspective, he further said, unlike a centralized architecture that can create bottlenecks.

“No matter how many nodes you add to the network, you will never have one particular hub or node that becomes the bottleneck because the processing is shared [and] the load is balanced across the entire network,” he said.

Related: Market Crash Tests Crypto’s Survival of the Fittest

So, while AppZone continues to deliver this value for fiat, the end goal is to evolve beyond physical money to engaging and guiding regulators on the journey from a suboptimal system to a more optimal, more efficient system that combines the power of blockchain technology with the legitimacy and controls of authorities in a traditional ecosystem.

“It’s the best of both worlds, that’s essentially where we’re going,” Emetarom said.

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