Does the cryptocurrency world need another stablecoin?

IBM Corp., a company which has been struggling to convince the stock market of its future growth prospects, seems to think so. The Armonk, NY – based company has partnered with Stronghold, a startup, to launch a stablecoin (or coins that are backed by fiat currencies) insured by banks certified by the FDIC. The stablecoin is called USD Anchor and uses Stellar’s blockchain to achieve consensus in its network. Stronghold is an “anchor” on Stellar’s network. As explained on Stronghold’s website, an anchor is a bridge between existing currencies and the stellar network. “All money transactions in the Stellar network occur in the form of credit issued by anchors like Stronghold.”

Tokens for USD Anchor will be backed by Nevada-based Prime Trust, which will hold cash at multiple banks insured by FDIC. “Asset-backed tokens can provide seamless access to all currencies improving the global movement of money,” Stronghold CTO Sean Bennett said. IBM plans to make USD Anchor available to institutional clients and its first use case will be to enable cross-border payments in the form of remittances and small foreign exchange transactions, according to online publication Coindesk, which first reported the transaction.

Jesse Lund, IBM’s head of blockchain services for financial institutions, said the purpose is to enable transactions using multiple digital currencies. Thus, the plan is to have transactions involving other fiat currencies, such as digital pounds and Euros, on Stellar’s blockchain. “This would radically change the whole foreign exchange market because you wouldn’t have to do FX in large blocks like they do now,” said Lund. “FX could be a real-time transaction thing.” He said the eventual goal is to utilize Anchor for  use cases that interface the physical world with the digital. Thus, Anchor could be used for food tracking or a global trade and supply chain.

Will It Work?

It might be wise to remember here that the FDIC was created in response to bank failures in the US economy during the 1920s. The current situation in cryptocurrency markets is similar. A series of scandals and hacks this year have undermined the confidence of cryptocurrency investors.

Tether, another stablecoin that is pegged to the US dollar, has been mired in controversy. Critics claim that it is being used to artificially prop up bitcoin prices even though it does not have sufficient capital in its bank accounts. Tether denies the charges but has not provided sufficient and audited evidence as proof. For its part, Prime Trust, which also provides AML and KYC-related services, claims to be fully audited and cites its relationship with FDIC-insured banking institutions as added guarantees.

The other interesting thing about this announcement is the strategy employed by Stellar, a blockchain that shares its technology with Ripple but is focused on developing economies instead of banks. Instead of using its network to prop up a token (as Ripple is attempting to do with XRP), Stellar’s network wants to facilitate cross-border transfers using digital versions of fiat currencies. The applications of such an approach are massive and could outstrip the market for Ripple’s technology.