Financial inclusion has become a global challenge. In a recent International Monetary Fund (IMF) report, about 1.7 billion adults around the world remain unbanked which simply means that they are still without an account in a financial institution. China has the greatest number of these unbanked individuals, followed by India and then Pakistan.
The Bangko Sentral ng Pilipinas (BSP) estimates 77% of Filipinos are unbanked, which puts into perspective the challenge of expanding access to the advantages and opportunities of financial services to these millions of productive citizens. But the fact that almost all Filipinos have mobile phones, has prompted the BSP and banks to look to technology as a solution.
So many cryptocurrencies are jockeying to be next global currency. Among them is “stablecoin,” a term most of us are not familiar but has gotten the serious attention of the IMF which created a G7 working group to explore the implications and repercussions of stablecoins on economies around the world.
In its recently released report, it said, “Cross-border payments, however, remain slow, expensive and opaque, especially for retail payments such as remittances… Recent stablecoin initiatives have highlighted these shortcomings and emphasized the importance of improving the access to financial services and cross-border retail payments.”
Stablecoins and digital currencies which are built on Blockchain Systems are technological advancements which aim to revolutionize the financial sector but, more importantly, are created to solve the inefficiencies of the current system which resulted in billions of unbanked individuals for quite some time now.
Central to all these is the fact that the technology will allow the unbanked to have equal access to financial services. Digital currencies allow for instantaneous transactions or “borderless” transfer of ownership. Stablecoins were designed to provide that stability and minimize the volatility of the price experienced with other digital currencies, while Blockchain remains to be the incorruptible list of records or digital ledger containing transactions for digital currencies.
Funds transferred among banks and other institutions to discharge payment obligations arising from financial transactions across the entire economy brings efficiency and security while reducing cost is achieved in the Blockchain System.
The G7 stablecoin working group, led by Benoit Coure (a European Central Bank board member), released policy recommendations for stablecoin projects. Accordingly, a viable framework for these new technologies can exist with multi-stakeholder and cross-border cooperation.
The report said, “Linking stablecoin value to a pool of assets (such as fiat currency) might be more capable of serving as a means of payment and store of value, and they could potentially contribute to the development of global payment arrangements that are faster, cheaper and more inclusive than present arrangements but, being an emerging technology are still largely untested.”
This becomes relevant to the volume of personal remittances from Filipinos abroad which continues to be a dominant driver of the Philippine economy. The BSP has reported a 4.1% increase in the first five months of 2019 reaching $13.7 billion. This big market clicking on to mobile apps for remittance transactions becomes a real potential that needs to be assessed with caution.
The G7 Working Group further recommends that finance ministries, central banks, international organizations, standard setters, and other public authorities maintain the high level of international coordination and collaboration needed for cross-border policies and regulatory regimes that apply to stablecoins.
Digital currencies must provide a very high level of confidence in order to be “accepted” in everyday financial transactions. Security, efficiency, data protection, data privacy, financial stability, and adherence to monetary policy must be strictly observed. Like new innovations, there are risks. The IMF paper Fintech Notes, says that stablecoins can be seen as a threat to financial stability and integrity, monetary policy effectiveness, as well as competition standards. Banks may lose their position as financial intermediaries in the event that they lose deposits to stablecoin providers. Stablecoins may also be used for illegal activities like money laundering and terrorist financing.
It’s clear that stablecoin still has to weather legal, regulatory, supervisory, and operational challenges. Add to this the fact that they need to overcome the legacy of existing payment systems.
To address these concerns, the G7 report outlines a workable process guide to for government regulatory authorities and stakeholders to ensure that adoption of these new technologies are secure and will not be destructive to existing financial systems. The dominant stablecoin projects, including Libra, are supportive of this process.
At the recent ICT Innovation summit hosted by Stratbase, underlined in the discussions of participating government and industry thought leaders was the need for government and regulators to keep up with the pace of the new opportunities presented by innovative industries.
I believe that to promote innovation, we should nurture an institutional framework that attracts business and fosters growth. The government, for its part, needs to provide good governance and correct levels of protection and incentives.
As mobile technologies and more efficient connectivity become more accessible, stablecoin and other cryptocurrencies may become an alternative for the unbanked population. Regulators and financial institutions will be challenged to craft an enabling policy regime that protects the people from the risks and ensure the safe adoption of digital currencies.
Prof. Victor Andres “Dindo” C. Manhit is the founder and managing director of the Stratbase group and president of its policy think tank, the Albert del Rosario Institute for Strategic and International Studies (ADRi).