The Holy Grail: Stablecoins and its Pros and Cons
The Holy Grail: Stablecoins and its Pros and Cons

The Holy Grail: Stablecoins and its Pros and Cons

SINGAPORE – Succeeding as a business in today’s commercial world is no small feat, as entrepreneurs need to overcome significant obstacles at the initial stage such as crafting a feasible business model, building a capable team, outperforming competitors, and generating sustainable revenue. While there is no one-size-fits-all recipe for success, having a lucid roadmap is crucial to achieve what has been recognised as the three attributes of a successful business – efficiency, stability and growth. As we transcend rapidly into an avant-garde technological era, financial technology (FinTech) which initially began as a differentiating advantage has become a strategic priority and something that is expected from every business. Cryptocurrency, a virtual or digital money which assumes the form of  tokens or “coins” [pwc], dominates the FinTech realm.

Cryptocurrency is designed in a way that allows large fund transfers to be more efficient and relatively cost-friendly as it is independent of any type of controlling authority. Being freed from  intermediaries also translates to eliminating high bank interest charges and more fluidity in payment transactions [americanexpress]. Other than effortless payment processes, there are a slew of benefits that cryptocurrency can offer due to its virtual and decentralised nature. For instance, it protects the identities of the parties involved as the digital wallet ID is only revealed to the vendor. In today’s society where data is the belle of the hacker’s ball, the high encryption feature of cryptocurrency is imperative especially for businesses. Yet, due to the uncertainties imposed by many cryptocurrencies, it is unable to achieve widespread adoption. Bitcoin being one of the most prominent digital currency in the market faces such disadvantage as it is being exposed to high market volatilities which causes price fluctuations[forbes]. This makes investors extremely vulnerable because they are at a higher risk of losing the value of their capital and funds that were liquidated into Bitcoin.

At a Glance: Stablecoins for Foreign Business Transactions

In an attempt to address the concerns over price volatility and bridge the gap for users’ adoption, stablecoins are developed to harness the best of both currencies – the stability of traditional currencies and the convenience of cryptocurrencies. As a new entrant to cryptocurrency, stablecoin is a digital currency that is backed by fiat currencies such as the US Dollar, Chinese Yuan, Japanese Yen, or pegged to another stable asset such as gold [Investopedia].  Stablecoins offer a favorable solution for business owners to efficiently transfer large funds to an offshore market without losing its value or incurring exorbitant fees commonly encountered in a bank regulated foreign exchange transfer. For tech entrepreneurs who hire foreign talents offshore, stablecoins are the answer to efficiently move funds and improve the flow of capital [businesstimes]. This new class of digital currency is recognised as a game-changer in the way foreign businesses conduct their transactions.


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Payments via stablecoins are more than the mere act of transferring money. It provides a social connection and a promise that transacting is as easy as using social media. Stablecoins offer the potential of a social integration into customers’ digital lives with apt user-centric design to complete a unified customer experience.

As such, with its hybrid structure, stablecoins are an ideal tool for entrepreneurs to use for foreign business transactions. Listed below are some of its advantages:

Efficiency
In terms of cross-border transfers, using a distributed ledger technology, stablecoins deliver greater user convenience through lower transaction fees and shorter transfer times.

Stability
Even in the face of inflation, the digital currency provides foreign company owners with confidence in managing their capital and investments offshore. A testimonial of its credibility can be seen with the adoption of stablecoins as monetary option in the city of Elorza, near Venezuela’s border with Colombia to combat hyperinflation cash crisis [reuters].

Growth
Being a virtual currency, stablecoins make it easier to reallocate funds internationally allowing investors to efficiently fund start-ups and, vice-versa, transfer funds back to investors. This allows businesses to explore capital acquisition internationally, providing more potential for growth.

Even if technological businesses venture offshore, stablecoins can also be used for efficient and secured fund and capital management. Stablecoins have different schemes that companies can explore to better cater to their business needs in fund management. Going in depth with the strengths and weaknesses of three commonly known stablecoin options according to the report of MakerDao and DGems Coin:

New Currency for the Digital Age: Stablecoin

Innovations using blockchain technology disrupted how companies and markets conduct business. Digital currencies are on the rise, particularly stablecoins, due to its convenience and opportunities it offers to businesses. Although it has several benefits especially if used in global investments and offshore company setup, it is still in its nascent stage for volatility against challenges in the market.

Utilising stablecoins for foreign company formation can be challenging without consulting professionals. At DesFran, our experts can provide advisory solutions for entrepreneurs. Contact us now to learn more.

References

Making sense of bitcoin, cryptocurrency and blockchain, pwc.com

Benefits and Risks of Cryptocurrencies for International Payments, americanexpress.com

Cryptocurrency: What Does It Mean For Your Small Business?, forbes.com

Fiat Money Definition, investopedia.com

Singapore Budget 2018: Cost, talent crunch forcing firms to outsource abroad, businesstimes.com.sg

Venezuela city issues own currency to combat national cash crisis, reuters.com

Underlying assets for stablecoins: pros and cons, Medium.com

Stablecoins: Strengths & Weaknesses, Blog.makerdao.com

Decentralized Market, Investopedia.com

About the Author

Joey Tan is Strategic Communications and Research Manager at DesFran. Joey has a flair for creatives and is always keen on improving and upgrading herself within the realm of the financial services industry. She manages the strategic communications and marketing initiatives in DesFran and has a keen interest in financial licensing and regulations. Joey is a sociology graduate from the University of Buffalo.


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