Since the birth of bitcoin, many have sought to unlock the underlying technology innovation - blockchain - to streamline currency transactions. With global payments annual revenues estimated at $1.9T according to McKinsey, the potential prize for those who can do so is massive.
Many of the earliest efforts to apply blockchain to improve payments focused on using cryptocurrencies to circumvent established payment rails. Though attractive for those who want to stay anonymous, this approach soon revealed an inability to comply with regulations. Because of that the concept of a stablecoin was born.
To understand stablecoins, it helps to understand how a cryptocurrency transaction typically works. First, a customer buys coins through an exchange which manages the clients account (often) for an issuer. The customer has a claim through the exchange to the issuer, who promises to keep the value of the coin as exactly the equivalent value of the original currency used to buy the coin.
Behind the scenes, converting funds into and out of stablecoins requires additional liquidity. The price of a coin is pegged to a fixed price by varying the underlying liquidity levels to adjust to any external changes. In addition, third party costs for the entity managing the coins (like operations, technology, compliance, etc.) must be covered.
Many still believe that a stablecoin currency is no different than a normal one, but this is simply not true. Unlike traditional currency cash, stablecoins are classified as a traded security. They have a bid-ask spread, must be issued by a private company and someone must bear the cost of the exchange in addition to a private party holding reserves to maintain price stability. Ideally, stablecoin assets would be ring fenced and stable as well. However their historic valuation and market performance has been quite volatile.
None of this helps businesses to solve the real challenge they face - to follow payment regulations for immutable transactions. Therefore it is more elegant and practical to design blockchain solutions from the ground up to fully comply with existing regulations.
Distributed Digital Cash (DDC) transactions do just that. DDC is issued by regulated institutions, yet, like conventional cash, it is still a bearer’s instrument. It does not require a separate, third party exchange (just DLT bank accounts so users can manage their funds). The diagram below highlights the architecture of DDC.
Digitized cash is not a “traded security”. It retains a one-to-one relationship to its native currency, requring no additional liquidity. The encrypted dollar (or any other currency for that matter is simply a digital form of the dollar issued within a permissioned network by a commercial bank. The bank does ring-fence the corresponding unencrypted funds in an undesignated client monies account. Before, during, and after a transaction, the value of the digitized cash is the same.
Billon took exactly that approach, redesigining blockchain to satisfy payment regulations in a high performance architecture. We are able to mint (digitize) almost any national currency to provide cost-effective modular solutions for high-volume payments with near real-time processing. In Billon blockchain solutions both money and data travel over the same rail directly and in near-real time irrespective of the currency, amount or time-zone.
Billon national currency solution does not require any third party participants to process payments between any participants. Users' funds are secured instead by national regulations and are subject to the supervision of national institutions.
As digital transformation accelerates in the post-coronavirus era, both consumers and their financial institutions can benefit from the security and speed that blockchain offers. While cryptocurrencies can provide value in certain use cases, digitized currency is the blockchain technology that addresses the most critical needs for privacy, feasibility and regulatory compliance.
Do you want to learn more about Billon and our enterprise DLT system? Get in touch!