Does the Philippines Need Its Own Stablecoin?
CRYPTODAY 135
Earlier this week, CoinsPH announced that it had received BSP approval to launch a PHP-backed stablecoin, and planned to kick off the whole project as early as June 2024. CoinsPH is calling their stable “PHPC,” and as the fourth or fifth attempt at a peso stablecoin, it’s not really a new idea. It is however the first viable attempt from an industry player who ostensibly knows what it’s doing. So for this week’s Cryptoday, let’s talk about how a stable-peso might work, because when it comes to big ideas like this, it all comes down to the execution. (To be clear, I have ZERO insider information on how CoinsPH operates or how they intend to offer this stablecoin, so this essay is speculative.)
The only stablecoin variant that the BSP would ever approve would be a *fully-backed* stablecoin, ala USDC. Regulators want full transparency, auditable reserves, and detailed monthly attestations. Circle basically established the playbook for this, which is why USDC has become the stablecoin benchmark nowadays. (I don’t think that USDT and Tether Foundation are acting in bad faith, but I do think their earlier gung-ho approach is simply too loose for regulators in 2024.)
There are of course many other variations of stables: the “pegged” stablecoin uses over-collateralized crypto deposits as its treasury (DAI). The “algorithmic” stablecoin uses spot-market-trading as its stability mechanism (UST, FRAX). And the new breed of stablecoin popularized by Ethena uses the fascinating delta-neutral derivatives-based strategy (USDe). Ultimately, I don’t think any of these variants would have met the BSP’s standards for safety … not because they don’t work, but because they’re simply too bleeding-edge. Regulators need a lot of time to get comfortable with new innovations. So we’re left with the most traditional stablecoin: every peso deposited at the issuer will mint an equivalent token, and all those pesos must be accounted for at an approved custodian bank.
Now typically the issuer makes money from its stablecoin in two specific ways. The easiest way is by using the deposited customer funds to invest in other financial instruments. Since PHPC is modeled after USDC with the blessing of our local regulators, only half of the peso deposits will likely be invested, and it would only be invested in approved instruments like Treasury bonds. Nowadays, you can buy those bonds at a 4% p.a. interest rate, so if the stablecoin issuer uses half of its reserves in this manner, then the entire pile earns 2% annually. If CoinsPH hits a 1B peso market cap with its stablecoin, it will earn about 20M pesos annually. (If 1B pesos sounds far-fetched, consider that the XSGD stablecoin out of Singapore is currently at 2.3B pesos equivalent, and they have far fewer crypto users than us.)
What’s the second way the issuer earns? Exchange fees. As the primary issuer, you can charge whatever you want for the privilege of swapping fiat pesos for crypto pesos, although you probably want to keep it as close to 1:1 as possible. So let’s assume 0.1% in fees, meaning that paying 1000 pesos will give the user back 999 PHPC. There’s no volatility risk so there’s little reason to charge more than that. In fact, you could make the argument that the conversion fee should be free, since the issuer earns from the deposits themselves. And in any case, the real money isn’t in the initial exchange.
In order for that stable peso token to be useful, you want to set up liquidity pools in every DEX and every chain that you can. You would want to start with Ronin, Tron, BSC, Solana, and Polygon, and have PHPC/USDx pools in all of them. Here, you could earn 0.3% or more, but the expectation is that liquidity pool farmers will eventually join in too. You could probably even incentivize the LPs by offering some extra points as a reward. You would then leverage all that on-chain activity to convince the big CEXs to list your token.
But the Filipino crypto investor is probably asking: what’s the point? Why can’t we just keep buying crypto directly with our normal fiat pesos? The biggest impact of a stable-peso is that it allows the Filipino public to transport all of their trading activities directly to global exchanges (CEXs or DEXs) and bypass the local businesses entirely. Yes, the most interesting outcome of a well-established peso stablecoin is that it will render the local exchange industry irrelevant. The issuer of the stablecoin would still be relatively profitable given its treasury earnings and LP fees, but having an on-chain peso eliminates the need for other local exchanges. Think about it: as a Pinoy crypto enthusiast, why wouldn’t you just swap your PHP for PHPC instead of dealing with local exchange fees? After all, once you’re holding a stable-peso, you could send it anywhere you want, or trade it for anything you want. CEXs, DEXs, regulated or not, legal or not, scam or not … they all become instantly accessible once your peso is on-chain. I estimate that the savings would be greater than 50% in most cases, so the benefit is large enough that even if you didn’t want to use it, you’d probably at least try.
How would PHPC achieve mainstream acceptance quickly? If you’re launching a new token, your biggest concern is always how to reach mass adoption, and the fastest way to achieve that would be to force it on your existing customers. When a user deposits pesos into the CoinsPH app, those pesos could automatically get converted into their stablecoin counterpart. After all, both your peso balance and your stable-peso balance are just entries in a database, so there’s no real difference from a technology standpoint, and very little difference from a customer experience standpoint. It would only be at the point of withdrawal that your funds could intelligently transform into either fiat peso or crypto peso, depending on your intended destination. (Naturally, there would need to be some substantial customer-education initiatives to make this possible.)
Of course, this all creates fascinating regulatory challenges. As of 2019, VASPs are required by law to report both the origin and destination of their customers’ crypto transfers, and putting the peso itself on-chain will make that even more critical. Suddenly, sovereign money will flow in and out of the Philippine economy without passing through the banks, at a velocity that has never been possible. If you wanted to say, donate to Hezbollah factions in Lebanon, buy abortion pills from Delhi, or send birthday money to your lola in Vancouver, you can now do it directly, without resorting to a proxy currency like BTC. Suffice to say I suspect that there will be a lot of growing pains as this gets rolled out. The worst version of this would involve some kind of clampdown, i.e., users can only transfer their PHPC to “authorized” exchanges. Hopefully they don’t go down that road though, as it would render PHPC about as useful as a testnet token.
As I read this essay back to myself, I realize that it sounds somewhat negative. I am a big believer in putting the Philippine peso on-chain, but maybe I’m also hyper-aware of how many challenges and pitfalls there are for it, because I’ve been thinking about its possible impact for so long. I believe that it’s the only way to achieve sustainable cost reductions in crypto trading fees for Filipinos. I think that that is a future we all want, and so the idea of a stable-peso is something I am very supportive of, in principle. But as I said above, it’s all about the execution.