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An innovative merger of the old and the new

The Evolution of Technology. Consensus Mechanisms to Global Blockchain Based payment rails

Technology and technological infrastructure has continued to develop since the dawn of time. In the context of blockchain technology and the Bitcoin protocol people often talk about the Internet representing the dawn of the ability to share data and information, an internet of data, to the Bitcoin protocol representing a new ‘internet of value’ allowing for an efficient, cross border, scarce and immutable resource that can be shared and moved digitally and which are not subject to the control of any single or central authority. 

But why don’t we also look at the history and ‘development’ of technology in this context quickly? It’s very interesting to think that ‘Consensus’ mechanisms were used by armies to arrange battles, wars, and attacks in ancient times. Cryptography played a critical role in World War 2 with the Enigma machine allowing information to be encoded, transmitted and shared  in a new and secure way. We don’t just need to think about data sharing and consensus though. In a banking context, the creation of ATM machines in the late 1960s was revolutionary, and opposed by many who thought that Bank Tellers formed critical parts of a Bank’s relationship with its clients on the basis that they should be the only way for people to deposit or withdraw money from their accounts. Online banking was also opposed by many who thought that the ability to access your bank details through a computer was ludicrous and unnecessary. 

What about the music industry? Many opposed the sharing of music files between users through at least a partly decentralised network in the 90s and early 2000s. Others embraced it and brought the unregulated Napster and Pirate Bay models into the ‘regulated’ environments of Spotify, Tidal, Amazon and Apple Music. Have other telecommunications networks remained steady? Not really. Skype brought around the ability for voice and then video communication through the internet, largely outside of legacy telecommunication channels.This has developed into many other platforms and services where we efficiently communicate through Whatsapp, Signal, Wechat, etc with people all over the world. 

So what about payment networks? Have these networks and technologies evolved at the same rapid pace? Arguably not. The Fedwire was developed in 1918, while the core bank software FIS was released in 1968. Fiserv was released in 1984 and TSYS in 1983. The SWIFT correspondent messaging was developed and launched around 1973 and you’d have to go back to around 1970 for the CHIPS large value settlement system release. Has payments technology not evolved because it’s simply already so efficient that it doesn’t need to? Or is it because of the weight of those legacy frameworks and the infrastructure that they support simply not being able to adapt?

Stablecoins and their role today

In all of this context, one of the most interesting developments of the use of blockchain technology has been in the ability to support ‘Stablecoin’ developments. These are developments that facilitate immediate, efficient, cross-border, secure and almost costless payments networks. Why would I always want to pay a 3-7% fee when I send money to someone just because they are in another country or continent, when there is simple and globally accessible technology, that would allow me to do that from my own mobile phone immediately at almost no cost (regardless of the value of the transaction)? The development of stablecoins facilitates quite a bit beyond that. They are the most relevant medium of exchange in the digital assets and markets space and in the new and developing world of decentralised finance, where direct access to banking support for largely unregulated and software based services can be impossible to achieve. This is essentially what has led to the growth in the market cap of Stablecoins in circulation from around $29 billion in 2021, by around 450%. Why? Well this goes back to the core principles of any market in the world of supply and demand for the technology, infrastructure and networks.

Of course, challenges still exist around the concepts of stablecoins which I will not go into here. Is it the issuer of the stablecoin or the actual asset which is controlled, regulated or subject to standards. How are the reserves of the backing of a stablecoin allowed to be used? Does this fall outside of any standards or requirements to the extent that it is not really known how stable the stablecoin actually is? What are the techniques for stabilisation and are algorithmic based techniques fully understood, audited, collateralised or imperfect  enough to put them in the UST risk category? 

Xapo Bank and Stablecoins

At Xapo Bank the question of security is fundamental. We went through a comprehensive analysis before beginning to offer the integrated services with the Circle USDC Stablecoin that is operational today. But why did we do this? Well, Xapo Bank was one of the original members of the Diem Association (historically known as Libra) with our Chairman Wences Casares sitting on the Board of that Association. I acted as the Diem Representative for Xapo during that extremely interesting time. Whatever views anyone has on that proposed stablecoin payment network backed originally by Meta (previously known as Facebook), it raised important questions for authorities and policy makers around the world around the technology and how it needs to be considered. It was, at least in part, an accelerator for many regulatory developments around the legal frameworks being designed to deal with stablecoins, and also for the discussions around Central Bank Issued Digital Currencies or CBDC’s. 

Stablecoins<>CBDCs. What’s the difference?

Are there any differences between CBDCs and Stablecoins and will Stablecoins come to an abrupt end on the release of CBDCs? I strongly believe that they will not. This paper by our friend Dante Disparte is excellent and highlights a few key differences between the two which are interesting to read if you have the time. Fundamentally stablecoins built on open source can operate to act as a low cost global remittance facilitator and as the key interactive tools between the fiat world (in our case Xapo Bank) and the developing blockchain ecosystem, or Web3 universe. CBDCs will with almost no doubt take advantage of the features of digital and ‘programmable money’ so factor in balance limits (how much currency can anyone hold), geographic scope (will CBDCs be locked to geographic regions, countries or territories?) and what will be the core use cases that they exist to serve? Pure inter-bank efficiencies or retail use? I’m also not particularly convinced that traditional banks will race to provide even simple digital wallet services to allow customers to own and take control of their own CBDC’s anytime soon at all. Nor will they allow for such digital currencies to fully interact with a global developing internet based ecosystem. I could be wrong of course but let’s see. 

Xapo Bank. Bringing together the old and the new

Regardless of any of this, there is no question that the world wants to develop and take advantage of the efficiency of developing technology as we have done throughout our entire history. At the same time, there is little doubt that people want to protect and conserve their savings and assets in a secure way, and hundreds of years of the development of banks and credit institutions provide that base layer of protection. So how can the two be married together and will that ever happen? Some like VISA have stated that you should be able to convert between digital tokenised dollars and traditional dollars in the same way that foreign currencies are converted and they have been talking about this since 2021. But what if this could already happen today, with your own Bank account?

Xapo Bank offers a secure, deposit guarantee scheme protected USD Bank account earning 4.6% interest, linked to your debit card. But did you know it has also developed the USDC rails into that Bank account? 

A Bank account that brings together the old layers of security of a credit institution, and the new efficiencies of stablecoins and open blockchain infrastructure. A secure account to hold your assets, but in a way that allows you an on-ramp, and an off-ramp to the developing Web3 and Virtual Asset space without many of the inefficiencies and costs of arguably old and slightly dated payment rails. Add to that the ability to gain access to BTC directly (also interest bearing) through the same application and within one of the most secure and regulated platforms in the world, and this starts to feel and sound like an absolutely unique offering in the world today!


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Bitcoin, US Dollars, and stablecoins