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IBM is exploring whether a cryptocurrency anchored to the US dollar may be a better option to make payments than other digital currencies, which tend to be volatile.
The information giant is already a pioneer in blockchain business applications, using digital ledger technology that supports Bitcoin to help companies monitor their supply chains and make international payments more efficient.
For such payments, IBM currently uses a cryptocurrency known as Stellar Lumens as a conduit. Now, IBM will also start testing a so-called stablecoin, or "crypto dollar", which runs on the stellar blockchain network. The stablecoin is called Stronghold USD, after the startup Stronghold fintech which is behind the project.
"There's a huge opportunity to make blockchain payments feasible, especially cross-border payments," says Bridget van Kralingen, IBM's senior vice president of global industries, platforms and blockchain. "What is nice about this is that they are in practice digital currency in digital currency".
This could help reduce exchange costs associated with cross-border blockchain payments, which have so far required conversion from a government-issued currency or legal currency, such as the US dollar, to the Stellar Lumens cryptocurrency, and again in another fiat currency, like the Mexican pesos. The use of a stablecoin as a proxy for the fiat currency could reduce the risk of getting a worse exchange rate when money is converted into fiat currency, says van Kralingen, as the prices of digital currencies such as Stellar Lumens and Bitcoin can often swing wildly.
"We believe this experimentation with stablecoins can play a very important role in improving costs," he adds. Although IBM is currently collaborating with the Stronghold USD stable, it is interested in potentially using similar digital versions of the legal currency of other countries. "I think if it can be done with the US dollar, it can be done with almost any currency," says van Kralingen.
Stablecoins have become one of the biggest trends in cryptocurrency. Tether, the currency with the most used dollar, now represents more volume of Bitcoin exchanges than the US dollar. A large number of other companies are also developing their own versions of a $ 1 coin, including Circle, TrustToken and Basis.
While most of the other stablecoins are built on the blockchain systems of Bitcoin and Ethereum, Stronghold USD, which is federally insured by the Prime Trust bank, is one of the two new stablecoins with the US dollar to run on the Stellar network. This should allow Stronghold USD to process hundreds of transactions per second, much more than the other blockchains can handle, with Bitcoin limited to an estimated average of just seven transactions per second, says van Kralingen.
Already, he adds, central banks show interest in the use of digital versions of government currencies; the stablecoins could potentially pave the way for a "Fed currency", as well as greater use of cryptocurrency by banks in general. "I think you'll see more in the future," says van Kralingen. "The way you would establish the FX today with Citi – I think you could do it with a stablecoin in the future."
IBM also announced that it is investing in a new academic partnership with Columbia University to accelerate startups and innovation in the blockchain technology field. The Columbia-IBM Center for blockchain and data transparency represents the first time that the university has adopted the name of a private sector company for one of its institutions.
This article was updated to clarify that Stronghold USD is one of two US-dollar stablecoins that runs on the stellar blockchain.
