Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening, and now onto today's show.
Speaker: Welcome to the latest in our GigiTalks podcast series.
Speaker: We are featuring a variety of different topics that are currently trending in the digital world.
Speaker: For the ones that have been following our podcasts, you will remember our first podcast on stablecoins last year.
Speaker: We are now featuring a part two where we will discuss the future of stablecoins.
Speaker: Introducing the topic, it's HSBC Security Services, Senior Product Manager for Trustee and Fiduciary and Regulation, Vary Sandeman.
Speaker: Vary, over to you.
Speaker: Thanks, Gabriella.
Speaker: Now, as you said, we've previously discussed stablecoins in our Digitox podcast series, including their risks and rewards.
Speaker: And this has proved to have been very topical with a vast amount of activity in the space since then.
Speaker: including a newsworthy stablecoin failure, which prompted a cryptocurrency crash and resultant regulatory activity to protect markets and investors.
Speaker: To explore and analyze these recent developments, I am delighted to welcome back James Pomeroy, global economist at HSBC's Global Research.
Speaker: James, thanks so much for joining me again today.
Speaker: Now, could you firstly remind us, please, what a stablecoin is?
Speaker: Of course.
Speaker: Well, firstly, thank you very much for having me back on the podcast.
Speaker: And as you said, there's a lot more awareness of stablecoins since we last spoke, but essentially in the very sort of simplistic way.
Speaker: While a lot of people will have heard of cryptocurrencies such as Bitcoin or Ethereum,
Speaker: Stablecoins are generally less well known.
Speaker: And then the original idea behind something like Bitcoin was to be used as a means of payment.
Speaker: But they've really generally struggled to become a widespread means of payment because they're generally not very good at it.
Speaker: Either the transaction costs are very high or not very many transactions.
Speaker: can be processed very quickly or very importantly, the prices of these coins are very volatile.
Speaker: So if you have something that's highly volatile, it's not really likely to be widely used as a means of payment because businesses don't want to accept them and consumers are pretty reluctant to use them.
Speaker: So a stable coin solves a lot of these issues.
Speaker: They can use fast blockchain networks, but the price is stable relative to a given fiat currency.
Speaker: So that's usually the USD, but it could be another currency if you wanted it to be.
Speaker: And they're backed by assets, so typically cash or bonds in that currency.
Speaker: So essentially, it means that it's not really pegged to that dollar or pound in the same way as any other fiat currency would be.
Speaker: It's generally a separate blockchain that you pay for in your fiat currency and you can guarantee the same amount out.
Speaker: So you're talking about an asset here that's designed to make the most of the technology behind cryptocurrencies, but not suffer from the same challenges in terms of being used as a means of payment.
Speaker: Thanks for explaining that James.
Speaker: And before we talk about the specific algorithmic stablecoin failure that occurred in May 2022, could you describe what the risks are with the more standard fiat backed stablecoins, please?
Speaker: So essentially, while you think about cryptocurrencies having a volatility issue, so either very volatile and therefore people don't want to use them as a means of payment with a stable coin, you're talking about a credit risk instead.
Speaker: And so you're essentially trusting that the issue of that stable coin has the assets that they say they do to back up on the stable coin that they're issuing.
Speaker: And that may not be as regulated as tightly as it maybe should be.
Speaker: So that's fine for small transactions if you're only making a small cross-border payment.
Speaker: So the most common widespread use case of stablecoins is for things like remittances.
Speaker: So this is pretty easy to use.
Speaker: But actually, as you go sort of a bigger size of payment, these credit risk problems could become slightly more concerning.
Speaker: So as stablecoins are a form of private money, it doesn't need to be regulated.
Speaker: Commercial banking
Speaker: system as it stands is that money is anchored by central bank money and closely regulated.
Speaker: That isn't really the same case with stablecoins.
Speaker: So we really need to make sure that stablecoins are exactly that stable.
Speaker: And that partly could be from regulations tightening up.
Speaker: It could be depending on who's issuing them.
Speaker: So if you think about some of the
Speaker: larger stablecoins that are out there.
Speaker: Many of the businesses behind them aren't exactly widely known.
Speaker: And that's why stablecoins are quite interesting because we've got a means of payment here that on paper is very, very interesting.
Speaker: It could be very fast, very effective means of payment.
Speaker: But it's the trust, it's the lack of trust in those issuers, the lack of regulation,
Speaker: that makes things a little bit more challenging and a stopped adoption really taking off.
Speaker: And that could change in the coming years with a combination of regulations, new issuers, and we could see stablecoin usage pick up quite quickly.
Speaker: But at the same time, that may not be enough.
Speaker: And it may be that stablecoins continue to exist as only having sort of niche use cases within the economy.
Speaker: So, so much comes down to that evolution on the regulatory side.
Speaker: Thanks very much, James.
Speaker: Really interesting considerations there.
Speaker: And just going back now to May 2022, we had the crash of TerraUSD, the algorithmic stablecoin, and its secondary or sister token, Luna.
Speaker: This then had a hugely negative impact on the price of Bitcoin and other cryptocurrencies.
Speaker: Can you briefly explain what is different about an algorithmic stablecoin and talk us through the Terra events that occurred, please?
Speaker: Of course.
Speaker: So the main difference is that they're not backed by assets in quite the same way.
Speaker: So a collateralized stablecoin uses the assets as a stabilization mechanism.
Speaker: So all of those bonds and cash held by the issuer, whereas an algorithmic stablecoin uses data to control supply and that supply is what maintains the peg.
Speaker: The problem is the peg can fall if the data going into it are poor.
Speaker: So essentially the data that goes into that algorithm to control supply, if that data isn't perfect in terms of quality or timeliness, then the stablecoin can start to de-peg.
Speaker: So the problem with Terra, in the most simplistic way possible, was that the stablecoin UST had this sister coin, Luna.
Speaker: They were always worth one unit of another.
Speaker: So when confidence fell in Terraform Labs and the peg broke, which was arguably due to a couple of large withdrawals and the algorithm started kicking in, both Luna and UST entered a spiral where the algorithm kept printing more Luna tokens to remain that peg,
Speaker: That hurt the value of Luna and pulled down UST and so on and so on.
Speaker: So it almost started this downward spiral between the two stable coins.
Speaker: And that's where the algorithmic stable coin process really did become unstuck.
Speaker: Okay, thank you, James.
Speaker: Now, when we last spoke in early 2022, we already had emerging regulation globally around stablecoins and cryptocurrencies more broadly.
Speaker: The EU had been leading the charge with MICA, the Markets and Cryptoassets Regulation, which measures include introducing controls for stablecoin issuers and trading.
Speaker: And we're also seeing regulatory proposals around stablecoins emerging in the UK, US and in Asia, including Hong Kong and Singapore, either within existing regulatory frameworks or in bespoke regimes.
Speaker: The proposed regulatory approach in Singapore, for example, is unique in many aspects as it requires no additional licensing for regulated financial institutions in Singapore to issue their own G10 currency stablecoins.
Speaker: Of course, many of the regulatory proposals and progress have been further enhanced in response to the Terra event.
Speaker: James, are these regulatory developments likely to be sufficient to protect stablecoin investors and the wider market in the future?
Speaker: So we're going to need two big forms of regulation.
Speaker: I think firstly, it's going to be on the stable coins themselves to make sure that we're on top of how they're being used and how they're being traced.
Speaker: That's mostly so that regulators feel comfortable with them being more widely used in a lot of financial transactions.
Speaker: And then, of course, on the issuers.
Speaker: So making sure that the issuers themselves are trustworthy, that they have the assets that they say they do.
Speaker: And really, we can trust that these stable coins are, going back to that same phrase, exactly that, that they are stable.
Speaker: And if you have that and you have sort of better issuers, then you help to avoid some of the issues we've seen with stablecoins over the past year or so.
Speaker: And therefore, you could make stablecoins be something that people are much more comfortable putting their money into using for transactions.
Speaker: And we could see the role of stablecoins increasing in the global economy, despite all of the challenges that have been faced over the course of the past year.
Speaker: And I recall in our last discussion, James, you said the issuer risk for stablecoins could be reduced or resolved if the issuer was a central bank.
Speaker: So in other words, a central bank digital currency or CBDC.
Speaker: Do you still see this as a solution if regulation is not enough to ensure the stability of stablecoins?
Speaker: Yes, I think this is essentially where we're heading in terms of payments globally.
Speaker: So if you start right the way back with a cryptocurrency that has the problem of volatility, then you get a stable coin that solves the volatility problem but has a credit risk problem.
Speaker: Well, if the issue is a central bank, you remove that credit risk problem.
Speaker: So we're a big fan of central bank digital currencies and where we're likely to head.
Speaker: And more central banks are starting to think about this quite seriously.
Speaker: So either due to declining cash usage, such as somewhere like Sweden, wanting to minimize financial stability risks.
Speaker: So that's a key part of the People's Bank of China's reasoning or wanting to increase financial inclusion.
Speaker: And this is key in most of the emerging world.
Speaker: So central banks in the likes of Brazil and India really stepping up their interest from that perspective.
Speaker: But however you get there, the end result is going to be probably the best form of payment you could ever have.
Speaker: So you can have a means of payment that is costless, instantaneous.
Speaker: And that's pretty exciting and what that does to the global economy.
Speaker: You have no payment charges.
Speaker: What that does in terms of being a huge productivity gain, it could lift growth.
Speaker: It could pull billions of people into digital payments who don't have access to them today.
Speaker: And all of that is quite enhancing for the global economy.
Speaker: But we are some way off.
Speaker: Central bank digital currencies are not easy to develop, mostly because there's a huge number of questions that need to be answered by central banks when they build them.
Speaker: So we could do an entire separate podcast on those issues.
Speaker: But in the interim, there may be a role for stable coins.
Speaker: So policymakers will be paying even more attention to them in the coming years, at least while central banks are grappling with these questions about whether a central bank digital currency should be
Speaker: interest or how anonymous it should be and a lot of these questions are very hard to answer so there may well be a role for stablecoins in the global economy for quite some time.
Speaker: James, thank you so much for joining me again today to revisit the topic of stablecoins.
Speaker: It's been fascinating to explore the real market examples and the regulatory responses to these.
Speaker: Again, a subject we will continue to watch closely.
Speaker: As always, if clients have any questions, please follow up with your HSBC representative.
Speaker: Gabriella, back over to you.
Speaker: Thanks.
Speaker: Thanks so much, Varian James.
Speaker: Again, a really interesting take on stablecoins and I would say stablecoins part two, right?
Speaker: I would like to thank you for listening to this edition in our series of DigiTalks podcasts.
Speaker: We hope that you enjoyed learning more about stablecoins.
Speaker: Stay tuned for more from our podcasts as we explore more trends in the coming weeks.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
