Complement or Competitor? Stablecoins and CBDCs in the Digital Asset Universe

Stablecoins and CBDCs

Stablecoins and CBDCs

Despite a prolonged crypto market cooldown since April’s all-time highs, the crypto market remains in the spotlight. The widespread potential of blockchain technology’s immutable public ledger has become increasingly apparent through blossoming crypto sectors like DeFi, NFTs, and metaverses. Accordingly, conversations appear to be moving away from if blockchain will have a role to play in society—rather, it seems the question has become how, in light of ongoing regulatory uncertainty. Specifically, disclarity surrounding stablecoins, another booming crypto sector, lies at the heart of this question.

Stablecoins are essential to the robust crypto economies we have today. Designed to maintain a 1:1 “peg” to the value of fiat currencies, stablecoins allow users to trade between utility tokens like Ethereum into familiar units of account such as the U.S. dollar. These fiat tokens enable users to exit positions correlated with the notoriously volatile crypto market without exiting on-chain economies. Without stablecoins, crypto users would depend on fiat on-ramps like Coinbase, which are expensive and time consuming bottlenecks when considering the costs and constraints of bank transfers. Moreover, stablecoins are compatible with smart contracts, meaning they can be used to compose automatically executing agreements such as derivative contracts, loans, and parametric insurance policies. Stablecoins are also becoming increasingly popular for making remittance payments.

Stablecoins are minted in a variety of ways. Tether (USDT) and USD Coin (USDC), the two largest stablecoins by market cap, are issued by Tether Limited and Circle, respectively. Both of these centralized institutions (allegedly) backs each of these tokens 1:1 with reserve assets, making the blockchain-based USDT & USDC tokens fully redeemable for the fiat currencies they represent. More novelly, Dai (DAI) is a stablecoin pegged to the U.S. dollar issued by Maker’s decentralized autonomous organization, MakerDAO. Dai’s 1:1 price peg is achieved via over-collateralization, meaning that for every Dai issued MakerDAO’s Maker Vault locks more than $1 worth of crypto asset collateral. Though Dai’s Ethereum-based issuance is inherently less prone to corruption, it is less capital efficient than USDT & USDC. 

Experimentally, algorithmic stablecoins seek to achieve both greater transparency and capital efficiency than centralized 1:1 collateralized stablecoins and decentralized overcollateralized stablecoins by maintaining price peg via algorithms and game theory. Often regarded as the “Holy Grail” of stablecoins, a successful design remains elusive as infamous attempts such as Iron Finance have burned speculative investors like Mark Cuban as they experimented in the space. For now, algorithmic stablecoins are an alluring but unproven concept.

As of July 18th 2021, the combined market capitalization of the top 7 stablecoins is $110,132,502,543 according to CoinGecko. The supply of outstanding stablecoins has surged since the “DeFi Summer” of 2020, a period of explosive growth in the emerging decentralized finance ecosystem reflected in the CoinGecko chart below:

Historically, governments have mostly ignored the crypto industry due to its size and complexity. However, that is changing. As investors continue to learn about Bitcoin and increase aggregate demand for a decentralized monetary system, central banks are facing a reality wherein their ability to implement capital controls and track money in circulation is dwindling. How, then, can central banks respond? The answer may lie in central bank digital currencies, or CBDCs. Jerome Powell, Chair of the U.S. Federal Reserve, has already announced an upcoming Fed report on CBDCs that will outline benefits and risks. The report is expected to be completed by early September.

CBDCs are simple in concept. As opposed to a private entity like Tether or Circle issuing tokenized representations of fiat money, a CBDC is issued directly by a government’s monetary authority—in the US, this would hypothetically be The Federal Reserve. CBDCs may pose less risk to users by virtue of being issued by the governing authority, rather than a private centralized entity which is vulnerable to corruption, fraud, or undercollateralization.

From a government’s perspective, CBDCs present several opportunities. For one, the blockchain makes tracking capital movement easily traceable. This could enable governments to identify and intercept illicit activities through financial oversight, albeit potentially at the expense of individuals’ privacy. In many jurisdictions, fiat on-ramps like Coinbase have KYC and AML requirements, short for “Know Your Customer” and “Anti-Money Laundering”. These institutions could be compelled by governing authorities to provide customer identities tied to specific blockchain wallet addresses. Once an individual is identified as the owner of a wallet address, investigators can easily trace their capital movements through blockchain explorers like Etherscan. Though many early crypto adopters lauded blockchain for granting pseudo-anonymity to its users, the immutable public ledger may ironically become the best government surveillance tool ever created. 

Another opportunity presented by CBDCs is the disintermediation of commercial banking activities. According to an April 2021 report by Citi, PwC’s Global Crypto Leader Henri Arslanian stated, “A good use-case is cross-border payments. Today, the average fee for cross-border payments is around 7%. We have nearly 250 million people across the world sending over $500 billion in cross-border remittances annually, and the fees are extremely high. It is embarrassing that we have not solved this issue so far.” Echoing Arslanian, Sarson Funds has frequently researched and invested in crypto projects utilizing blockchain to disrupt financial intermediaries

Chairman Powell appears to have strong beliefs about the prospects for CBDCs. In response to Rep. Stephen Lynch’s question if a “swift action” on the Fed’s digital currency could “calm” the markets and make the blockchain economy’s thousands of crypto assets obsolete, Powell stated, “I think that may be the case. I think that’s one of the arguments that are offered in favor of digital currency…” Continuing, Powell said “…In particular, you wouldn’t need stablecoins, you wouldn’t need cryptocurrencies if you had a digital U.S. currency. I think that’s one of the stronger arguments in its favor.” While it reasons that fiat tokens issued and backed by central banks may obsolesce existing stablecoins, concluding that all crypto assets could be replaced by CBDCs reveals fundamental ignorance of the value offered by other crypto asset sectors.

Even as governments catch on to the virtues of CBDCs over existing forms of fiat, many will be reluctant to accept the decentralized store of value belief system that has historically fueled the crypto asset ecosystem’s growth. After all, money printers are crucial tools for governments to impose policy—especially in the US, whose dollar is the global reserve currency and can easily be weaponized. However, rejecting the core crypto ethos for decentralizing the monetary supply may work against skeptical governments in the end. As authoritarian China simultaneously advances their native CBDC while banning bitcoin mining operations, western, pro-innovation jurisdictions may be wise to embrace the decentralized wave.

Congressman Tom Emmer made a compelling argument in favor of embracing decentralization via CBDCs on Tuesday during a hearing titled, “The Promises and Perils of Central Bank Digital Currencies“, hosted by National Security, International Development, and Monetary Policy Subcommittee Chairman Himes and Ranking Member Barr. Rep. Emmer warned against mirroring China’s CBDC design, stating, “…We must not forget that the benefit of having a digital dollar would only come to fruition if it were open, permissionless, and private. Any attempt to craft a central bank digital currency that enables the Fed to provide retail bank accounts and mobilizes the CBDC rails into a surveillance tool able to collect all sorts of information on Americans would do nothing other than put the United States on par with China’s digital authoritarianism.” Later in his remarks, Emmer challenged Powell’s stance that CBDCs could replace other crypto assets. “It’s my belief that decentralized technology like cryptocurrencies and the blockchain technology that they sit on maintain a fundamental American principle: that is individual privacy, a free marketplace, and competition with innovation. Why should the Fed focus on uplifting private crypto markets and blockchain innovation rather than crafting a CBDC that wipes out this great industry or has the potential according to Chair Powell to wipe out the industry?” 

If the U.S. regulatory environment remains friendly to decentralized assets and blockchain innovators, then the issuance of a digital dollar CBDC would likely accelerate crypto economy adoption. Formally integrating fiat into the cryptoverse would allow more users to save through decentralized assets like Bitcoin while having easy access to familiar units of account such as dollars. We look forward to The Federal Reserve System’s upcoming CBDC report, and remain optimistic about the long-term outlook for digital assets being recognized fundamentally as forces for freedom. As Sarson Funds’ CMO & Cofounder Jahon Jamali put it, “Bitcoin is as American as apple pie. There’s nothing that’s more American than financial freedom, and we have an opportunity here to take the lead if we really want to grab it.”

Dollars Gone Digital: Visa Leads Fintech Integration with Crypto.com

Visa allows crypto payments for Crypto.com

Visa allows crypto payments for Crypto.com

Major news outlets started this week off with headlines reporting Visa’s new pilot program with Crypto.com. According to Yahoo Finance, Crypto.com has traditionally sold crypto assets to settle its obligations with Visa. Instead, the 10m+ user exchange will now be able to pay directly with USDC. In yet another milestone bridging the old world of finance with blockchain protocols, Visa told Reuters that it “plans to offer the option to more partners later this year.”

Known as a “stablecoin”, USDC (USD Coin) is redeemable at a 1:1 rate for US dollars. Built on standards governed by Centre, a “membership-based consortium that sets technical, policy and financial standards for stablecoins,” USDC is fully backed by reserve assets and is issued by a variety of regulated financial institutions. By digitizing the dollar through blockchain technology, USDC offers greater transactability and smart contract functionality than its cash predecessor.

Meanwhile, China, Japan, and numerous other countries are piloting their own “stablecoins,” called central bank digital currencies, or CBDCs. According to Josiah Hernandez, head of the CBDC Group, “What has spurred interest in CBDC issuance is the realization that it offers a holistic solution for updating financial infrastructure and enables instantly settled payments at no cost to customers.” With fintech giants and central banks alike working toward greater blockchain adoption, we are excited to see what’s next.

By Nathan Frankovitz

Crypto Regulatory Update: OCC Guidance Indicates Crypto is Here to Stay

Sarson Funds Crypto Regulatory Update

Sarson Funds Crypto Regulatory Update

Cryptocurrencies are here to stay in 2021. As the ecosystem reaches a $1 trillion total market capitalization, Bitcoin tests new all-time highs, and Wall Street institutions get involved, one thing is clear: crypto isn’t going anywhere. In fact, crypto’s lure over the investment community and financial institutions is forcing regulators to discern proper means of integration as the universal benefits are now unavoidable. As the ecosystem grows, we expect an influx of positive regulatory guidance to surface throughout 2021, making way for yet another decade of crypto domination.

Our hopes for an insurgence of positive crypto regulation derives mostly from the work of former Acting Comptroller of the Currency at the OCC, Brian Brooks, and his efforts to spur nationwide acceptance of crypto assets during his time in office. Formerly the Chief Legal Officer of Coinbase, Brooks focused significant efforts as Acting Comptroller of the Currency to clear a path for widespread crypto adoption.

“Nobody’s going to ban Bitcoin,” Brooks said in a statement on CNBC’s Squawk Box,” later saying, “We’re very focused on getting this right. We’re very focused on not killing this… And it’s equally important that we develop the networks behind bitcoin and other cryptos as it is that we prevent money laundering and terrorism financing.” Brooks concluded by saying to expect more regulatory clarity in the first few months of 2021.

Brooks’ acknowledgement of the need to develop the use cases for blockchain technology gives us hope that financial regulation will soon shape around cryptocurrencies to prevent fraudulent activities on the blockchain, making for a straighter pathway for universal adoption. 

Brooks has been one of the most influential inside advocates for cryptocurrency adoption over the past year. In an interview at October’s DC Fintech Week, Brooks claimed that decentralized finance will soon replace traditional banking services, adding, “decentralization is very likely an unstoppable force out there. Decentralized networks, by definition, are cheaper, faster, and more resilient than any kind of centralized structure.” As internal recognition of the potential of decentralized finance occurs, we expect greater regulatory clarity for decentralized financial services as banks and large scale financial institutions establish their positions in the space.

Finally, in one of Brooks’ most recent statements, he gave permission for federally chartered banks and financial institutions to build, issue, and use stablecoins for payment activities as well as participate as transaction validators on the blockchain. Brooks’ guidance opens up an entire new horizon for banking capabilities through stablecoins and gives us great hope that further guidelines for large scale crypto use will follow.

While Brooks’ stay in the Office of the Comptroller of the Currency was a short one, much of his work gave the crypto community an inside look on what is to come for crypto regulations in near future, giving us hopes of yet another decade of crypto dominance as an asset class.

By Liam McDonald

Crypto Investing 2021: Financial Advisor Education

Financial Advisor Crypto Education 2021

Financial Advisor Crypto Education 2021

Wall Street is embracing crypto. As the digital asset ecosystem grows past a $1 trillion market capitalization, the crypto ecosystem is garnering more recognition, validation, and investment than ever before. The world is realizing the true value behind digital finance as both an asset class and a means of transaction, and as this revelation occurs, it is imperative for financial advisors to be educated and well-versed about this technology to support their clients’ ever-growing investing needs. 

As this global financial shift develops, financial advisors must prepare to embrace the exponential pace of innovation that the fintech industry is experiencing, especially as blockchain technology and cryptocurrencies are shaping up to be the best solution for the needs of individuals, banks, and institutions in an increasingly digital post-pandemic world. Not only do cryptocurrencies offer a solution for an increasingly digital marketplace, they also enable the world to transact instantly, cutting out the risk of third-party interference and empowering a new age of globalization.

Sarson Funds exists to bridge the gap between traditional finance and crypto. We are a cryptocurrency education and investment firm focused on bringing Wall Street standards for research, risk management and transparency to digital asset investing. Thus, we aim to make the crypto ecosystem more digestible and welcoming to the traditional financial community, from financial advisors to institutional investors. 

To help you and your clients along in your digital asset discovery, we have compiled a series of introductory educational content to provide financial advisors an easier path toward the future of finance. Below, discover the five questions you need to know to best serve the crypto investment needs of your clients, a comprehensive guide on how to buy Bitcoin, and our very own Cryptocurrency 101 guide. With these, we hope to be your trusted source for crypto education and investing needs. For more educational content, please visit sarsonfunds.com and our youtube page, here.

Investing in Crypto: Five Questions to Ask Your Financial Advisor

Crypto Basics: How to Buy Bitcoin

Cryptocurrency 101 Guide

By Liam McDonald

Investment Update: Crown Sterling Raises Token Price 33%

Sarson Funds: Crown Sterling Token Price Increase - Cryptocurrency Financial Advisor

Sarson Funds: Crown Sterling Token Price Increase - Cryptocurrency Financial Advisor

Investment Update: Crown Sterling Raises Token Price 33%

Crypto Investment Update: As we continue to provide our community with education regarding the incoming capabilities of quantum computing, we would like to inform our followers about the best solutions for achieving quantum-resistance. Following up on our release of Crown Sterling as the providers of the world’s first quantum-proof digital asset, the Crown Sterling Token recently underwent a 33% price increase, with a value raise from $30 to $40. We believe that while this price appreciation is significant, this asset remains well worth the investment before it hits cryptocurrency exchanges and the crypto ecosystem realizes the true value behind quantum-resistant digital assets.

For more information on the Crown Sterling token, please visit Crown Sterling’s website and investor portal, here: https://www.crownsterling.io

By Liam McDonald

Investing in Crypto: 5 Questions to Ask Your Financial Advisor

Crypto Questions to Ask Your Financial Advisor

Crypto Questions to Ask Your Financial Advisor

As Bitcoin and the digital asset ecosystem break past a total market cap of $1 Trillion USD, we want to be your resource for all things crypto. Thus, to help you along your digital asset discovery, we have compiled what we believe to be the five questions you should be asking your financial advisor about crypto.

  1. How can I invest in digital assets?
  2. What digital assets should I invest in?
  3. Should I invest with a digital asset manager or an exchange?
  4. What are the best educational resources to learn more about crypto?
  5. What strategies are driving the best returns?

As crypto emerges as the most lucrative new asset class in finance, it is crucial for your financial advisors to know how to best serve your digital asset needs. We are a crypto education, investment, and marketing firm that manages some of the highest-returning digital asset investment strategies in the industry. It is our duty to provide Wall Street-grade educational, investment, and marketing services to our community. If you have questions about how you to get involved in this exciting new space, please reach out to us – we are here to help.

By Liam McDonald

Market Update: Crypto Market Cap Breaks Past $1 Trillion

Crypto Market Cap Reaches 1 Trillion

Crypto Market Cap Reaches 1 Trillion

BREAKING: Last night, the entire crypto market cap broke past USD $1 Trillion. This escalation is indicative of the global pace of crypto adoption as Bitcoin, Ethereum, and crypto tokens around the ecosystem break past all time highs as the world is awakened to the true utility of digital assets. Fueled by the economic uncertainty posed by the COVID-19 pandemic and the macroeconomic response of countries worldwide, we expect this momentum to continue as regulation strengthens, Wall Street and global institutions validate the utility of crypto, and the world leans more and more on digital commerce. 

As global sentiment shifts to embrace crypto, we are here to educate the world on the power of the blockchain ecosystem and enable true financial sovereignty. Please reach out to us for educational inquiries and our recommendations on how to get involved in the next great shift in global finance.

By Liam McDonald

Cryptocurrencies and Quantum Computing: A Future of Coexistence

Sarson Funds - The Future of Crypto - Cryptocurrency Financial Advisor

Sarson Funds - The Future of Crypto - Cryptocurrency Financial Advisor

Recent developments in both quantum computing and the crypto ecosystem indicate that neither are going anywhere. As both continue to grow, it is crucial for the crypto community to understand that quantum computing poses both an existential threat and lucrative opportunity towards crafting the future of the ecosystem. As we have expressed in previous segments, quantum computers will soon be fully capable of cracking into crypto wallets only through knowledge of wallet addresses, as they are able to use these addresses as the foundation to further derive the public and then the private keys. As this quantum functionality arises, the future of crypto depends on quantum-resistant encryption solutions.

The bottom line is that crypto and quantum computing must coexist. At Sarson Funds, we believe that an upside to quantum computing risk is that it will push blockchain to become truly unbreakable, pushing cryptocurrencies to be the indisputable medium for future commerce. Thus, quantum computing should not be viewed as an existential risk, but rather a tool to drive crypto towards a future of quantum-resistance and assured value protection. The future-proof security that will emerge from the next wave of crypto advancements will provide a pathway of irrefutability for crypto as a means of consensus for our future financial system.

The next wave of crypto advancements will likely see an emergence of two key avenues towards quantum-resistance: quantum-proof blockchains and digital assets wrapped with quantum resistant encryption algorithms. While we are only beginning to understand what the future of crypto will look like with the recent release of the Crown Sterling token, we know that the crypto community will respect the pace of innovation and understand that even the most underlying mechanisms that we’ve trusted for so long are at risk.

By Liam McDonald

Protecting Your Bitcoin From Quantum Computing Risk: Cold Storage with the Ledger Nano X

Guaranteeing Bitcoin Safety with Quantum Computing Advancements

Guaranteeing Bitcoin Safety with Quantum Computing Advancements

As discussed in the first part of our quantum computing risk advisory, taking your Bitcoin off of centralized exchanges and keeping them safe in cold storage (off exchanges) is a sure way to guarantee the protection of your digital assets. Our recommendation for the best hardware to store your assets on is the Ledger Nano X, which enables users to control their coins through the personal storage of their private keys. The Ledger Nano X is the first and only certified hardware wallet on the market.

When users activate their Ledger Nano X, private key ownership is restored to the rightful owner of the coins, taking control away from centralized exchanges that typically hold and control wallet addresses, public and private keys of their holders. When all three of these, especially private key ownership, is returned to users, users become the true owners of the coins as private key storage is removed from the centralized cloud. When wallets and keys are taken off exchanges, quantum computers have no way of beginning to find them, as referenced in part one, and no complicated tactics are needed to continue safety assurance.

With the Ledger Nano X, users have access to millions of private key passwords for their wallets, so they can engage in as many transactions as they want and have automatic wallet and key regeneration to completely sidestep risk of quantum hacking. The encyclopedia of randomly-generated private passwords is accessible through a recovery phrase, which must be kept private by the user, or else they risk hackers gaining access to all of their private key combinations.

We have no paid partnership with the Ledger team, we are simply recommending our best practices as the future of the crypto ecosystem evolves alongside quantum computing. You can purchase the Ledger Nano X, here.

For more information on quantum computing, the risks and opportunities associated with it, be sure to explore our Cryptography Lite Paper and Digital Asset Investor Guide to Cryptography.

By Liam McDonald

Protecting Your Bitcoin from Quantum Computing Risk: Part 1

Protecting Bitcoin from Quantum Computing Risk

Protecting Bitcoin from Quantum Computing Risk

The pace of the past few weeks have revealed several updates to the data security world. From Chinese researchers announcing quantum supremacy as their quantum computer, named Jiuzhang, completed a computation that would have taken the world’s best supercomputers 2.5 billion years to complete, to Crown Sterling and IBM releasing quantum-resistant encryption solutions, the true reality of computational power is only just emerging. Of course, in the midst of the threat of future quantum-powered data breaches, our concerns revert to the value protection and control of Bitcoin. As these progressions in quantum computing take place, we can’t help but ask: are my Bitcoin safe?

The surface level answer, as doomsday preppers might lean toward, is no. So, we’re here to tell you that there are precautionary steps that you can take to ensure the value protection of your coins and continue transacting without existential data protection concerns.

Per a release from Deloitte, around 25% of the world’s mined Bitcoin are at risk of attack: the risk that a quantum computer will guess a wallet’s private key password. This risk exists because when a Bitcoin holder engages in a transaction, quantum computing makes their public key identifiable through its knowledge of the users’ wallet address. Once the public key is discovered, quantum computers will be able to derive a user’s private key from the public key and take control of their Bitcoin. Therefore, preventing quantum attack requires the frequent moving of users’ Bitcoin to unused wallet addresses to keep these coins unidentifiable and impenetrable. If a user’s wallet has not been used to transact on Bitcoin’s blockchain, quantum computers will not have a starting point to begin deriving from.

So, how can you change your wallet address? This happens naturally on crypto blockchains when transactions take place that do not equal their original transfer of value (i.e. when you first receive $20 in Bitcoin, unless you transact with the exact change of $20 that you first received, your Bitcoin will be delivered back to you from the blockchain with a new address, meaning that any transaction below what the original payment was will deliver a new wallet address in return). This is because when users interact with Bitcoin, the whole amount of the original input needs to be transacted with when a payment takes place, meaning that whatever Bitcoin is left over (if the transaction is not exactly $20) will be delivered back to you with a new wallet address. So, our advice? If you’re looking to protect your coins, do not transact with centralized crypto exchanges that only offer one universal wallet address, public and private key for ever user, take your crypto off exchanges and interact with the blockchain yourself, keeping your coins safe on cold storage hardware like the Ledger Nano X.

To learn more on the security that Ledger Nano X offers, read part two of our quantum-proof security advice, coming soon.

By Liam McDonald