As Facebook takes a step forward into making its own cryptocurrency, the small Icelandic startup Monerium is taking a giant leap in modernising fiat currencies.
Monerium has become the first company to win an e-money licence that operates on the blockchain, which means that it can create e-money (effectively digitised fiat currency) which can also be traded cross-border without a financial intermediary.
Having received the Financial Supervisory Authority of Iceland’s blessing to provide fiat payment services on a blockchain across the European Economic Area, it could create an explosion on the use of e-money across the continent.
We realized that in practical terms, governments will continue to issue money and cryptocurrency is not going to displace fiat money anytime soon.
The European regulation allows e-money to be a much bigger part of the financial system, as it can now be used in automated financial transactions for payments, trade finance and securities settlement.
Using blockchain as a way of modernising the use of existing fiat currencies is in sharp contrast to other blockchain and crypto enthusiasts who want to replace traditional money.
“We realized that in practical terms, governments will continue to issue money and cryptocurrency is not going to displace fiat money anytime soon,” Sveinn Valfells, chief executive of Monerium tells Sifted.
“Most people will want to continue using dollar, euro or krona for most transactions, so how can we use the blockchain technology to improve this system? Because we're all fully aware of how inefficient and risky it is. I was in London in 2008 when the pound was about to go topsy turvy, in Iceland it happened.”
How can we use the blockchain technology to improve this system? Because we're all fully aware of how inefficient and risky it is.
Also, by allowing new institutions to create, in this case, e-money, it will change the power balance in the banking sector.
The banks are usually the ones responsible for issuing money and by introducing other actors, a portion of that power will be moved away from the big banks. The idea is that by doing that, the banks and institutions that in the past have been “too big to fail” will weaken, which will, in turn, make today’s financial system stronger.
It is not clear whether Monerium can come up with a more attractive solution than Facebook’s GlobalCoin, or Libra coin. Facebook is expected to release a white paper outlining the technical details of its plans today — with a full launch to come next year.
But Monerium's plans could be a European answer to Silicon Valley’s attempt to hijack the digitalisation of money.
How does it work?
Unlike cryptocurrency, e-money is a digital way of storing traditional currency on prepaid cards — like the top-up on public transport cards — and in digital wallets such as PayPal. More specifically, e-money is a digital representation of cash.
Monerium’s e-money will fall under the same laws and regulation as normal currencies and will not be able to fluctuate in value apart from when the fiat money it is based on does.
By comparison, the fluctuation in the price of most cryptocurrencies has been massive. The value of a bitcoin has been on a roller coaster for the last couple of years and in the last six months has increased from $3800 in December to $9300 in June.
From a legal and financial point of view, e-money is a tried and tested model for issuing digital cash.
Not even stablecoins, which are cryptocurrencies that have a value pegged to that of fiat currencies, are truly stable, according to Valfells.
“Stablecoin is a general term that is used for a collection of various user agreements that private companies have come up with in trying to represent the value using cryptocurrency, but they have never really been tested, for example, in court,” Valfells says.
“E-money, however, is a proven legal framework, which has been in place in Europe since 2000. From a legal and financial point of view, it is a tried and tested model for issuing digital cash.”
Facebook's threat to cryptocurrencies and banks
Facebook has stolen the media show the last couple of weeks with its plans for creating its own stablecoin, “Globalcoin”.
The tech giant has won backing for the coin from companies such as Mastercard, Visa, Paypal, Coinbase and Uber as well as other more surprising actors such as Spotify and investment firm Andreessen Horowitz. The companies that have bought a place around the table make up a consortium created to govern the coin.
According to the blockchain consultant Michael K. Spencer on Medium, Project Libra, as the Facebook consortium is called, “could hijack crypto and decentralisation as we once knew them” … “making Silicon Valley the dominant force of how blockchain transactions evolve in the real world.”
There's nothing really truly comparable to e-money in the United States.
Facebook’s Globalcoin is an obvious rival to Monerium and other cryptocurrency startups.
“The American way is that private companies try to do their own thing and then one of the wins and the rest of them follow. The American system is set up in a way in which is different than the European system, there's nothing really truly comparable to e-money in the United States,” Valfells says.
For Monerium, it took more than a year to get its licence from the Financial Supervisory Authority. And if it wasn’t for the experience of the team behind the company and its backers, such as Crowberry Capital, it may never have received it.
Jón Helgi Egilsson is one of the cofounders and was an outspoken critic of the Icelandic financial system leading up to the crash in 2008. In 2011 he was asked to join the board of the Central bank of Iceland where he acted both as chairman and vice chairman until 2017.
This weekend he was visiting Stockholm to discuss the news at a digital currency conference.
With the licence ready, and with the greatest potential benefits in cross-border trade, Monerium will start off by offering its services to a few companies to test it out but will before year-end be able to open up its services more widely. Although the company will start with the Icelandic krona (ISK), more currencies will follow shortly.
The market for different kinds of stablecoins is perhaps getting pretty crowded now, in the space where e-money exist on blockchains, Monerium is still pretty lonely.