We all have a good laugh at the hypocrisy on display as JP Morgan Chase announced their stablecoin, JPM Coin.
While there are many aspects of JPM that make it hot garbage in the eyes of the crypto community, we cannot deny it is an extremely powerful validation of stablecoins as a concept and is a sign for what’s to come.
Commercial-bank-backed stablecoins are likely to the prototypes for central banks deciding to issue their own national stablecoin. The benefits are there for them.
On our side, we see stablecoins quickly consolidating as an important building block of the crypto-ecosystem, so let’s explore how they’ll influence the next generation of digital securities.
So, let’s make something clear. Stablecoins address one of the fundamental blocks of any securities structure: payments. In fact, I argue that they give us a new form of value transfer we haven’t seen before: stable-programmable payments.
Where is that extremely useful and needed? Security Tokens, the new capital formation vehicle of the emerging digital economy.
Currently, if you planned to do dividend distribution with your security token, you’d have to use a fiat payment system and it can get tricky. For example, if your REIT (real estate investment trust) is paying out dividends in the form of rent to the holders of the security token backing that trust, how do you do dividends to someone who holds $10 worth of equity?
Leveraging stablecoins allows us an efficient solution to this problem and many others. They’re a natural complement to security tokens and open us up to securities we’ve never seen before.
Stablecoins and Security Tokens
But, let’s make something clear: the link between stablecoins and security tokens has way more potential than just enabling the payment foundation for digital securities. Stablecoins enable new forms of security tokens which can be used to build new forms of stablecoins. For example, with real estate readily tokenized with security tokens, we can represent those properties as collateral for a stablecoin like DAI.
New forms of non-collateralized or crypto-collateralized stablecoins can emerge from security tokens, which is not something you see with fiat.
Let’s explore some of the key areas that security tokens and stablecoins will help grow.
Let’s imagine a security token that distributes dividends to token holders every hour. Or how about a collateralized position that distributes an interest payment every day?
While the programmability of smart contracts enables dividend distribution models that are impossible in traditional markets, we need a stable unit of value to encapsulate the dividend payment. Stablecoins are the natural fit because they provide a crypto-native, programmatically efficient mechanism to enable dividend distributions for security tokens.
Many large securities transactions take days to settle. Last year FINRA touted the massive leap from T+3 (Time plus settlement) to T+2, saying: Under the new T+2 settlement cycle, most securities transactions will settle in two business days of their transaction date. For example, if you sell shares of a stock on Tuesday, the transaction would settle on Thursday (a day earlier than in the past).
With security tokens, we cut that settlement to essentially instantaneous, and the payout can be essentially instantaneous as well with stablecoins.
Collateralized Debt Positions
Imagine a scenario in which an investor is allowed to borrow against his holdings in order to leverage their account.
This hypothetical is by no means new in financial markets with examples such as collateralized debt obligations(CDOs) that resemble this dynamic.
The crypto space has its own version of the CDO known as collateralized debt positions(CDP) pioneered by protocols like MakerDAO. Conceptually, a CDP allows a crypto investor to lock a pool of crypto assets and receive a loan in return. In the case of MakerDAO, the platform leverages the DAI stablecoin.
Concepts like CDP seem like a natural fit for security tokens but they require a stablecoin. In a CDP model using security tokens, an investor will register a group of security tokens as collateral and receive a stablecoin in return. If investors are interested on withdrawing their security tokens, they can simply send the stablecoin payment back to the CDP smart contract and the assets are released.
This is a basis of a having a truly effective series of loans, debt, and other hallmarks of a modern economy. With the blockchain as the centerpiece behind security tokens and stablecoins, we’ll have an economy that is vastly more secure, transparent, and trustless.
DS Backed Stablecoins
Today, most stablecoins are pegged to fiat vehicles such as the USD.
But, that will soon change as we come up with other stablecoin models
One such example is a stablecoin collateralized by US Treasury Bonds. The stablecoin leverages an underlying asset stable enough that can be used as unit of account while also have the benefits of stable dividend distribution. Granted, that model doesn’t quite fit the definition of a stablecoin but the concept is very intriguing nonetheless.
Among the different decentralized exchange (DEX) mechanisms, atomic swaps between stablecoins and security tokens is one that has interesting potential.
An investor will be able to exchange a security token by directly “swapping it” for a position on a stablecoin held by another investor. This exchange will take place without any intermediary or broker. Given that compliance rules will be expressed at the token level, the potential for decentralized atomic swaps seems very feasible.
This also has large regulatory implications as agencies that enforce compliance, such as the SEC, usually do so through exchanges.
These are just some of the fascinating crypto vehicles that can be enabled by the relationship between stablecoins and security tokens. Stablecoins unlock the payment capabilities of digital securities providing the foundation, while the evolution of security tokens can indirectly contribute to new forms of stablecoins that fall outside the traditional fiat pegged model.