Stablecoin Interview with Globcoin
For this week’s podcast, we have the pleasure of interviewing the Founder and CEO of Globcoin, Hélie d’Hautefort, and CFO Linda S. Leaney. Globcoin, based in the crypto-valley of Zug, issues a centralized ERC-20 Stablecoin backed by the top 15 global currencies plus gold, the GLX.
SR: So I have to start with this question: What got you into crypto, and what inspired you to create a stablecoin?
HD: That goes back to the history of the index that is linked to our Stablecoin, Global Reserve Currency Index (GRCI), an index that we created in 2010. Back then we were involved in the fiat-currency management business, with $23bn of assets under management. Some clients were asking us about stable currencies, so we designed a basket of currencies representing 85% of the world economy and managed portfolios against this basket as a benchmark. We have been doing this for many years. The big benefit we found with cryptocurrencies is that, whereas in traditional markets you have to manage at least $10mn because the structure of the markets makes it too expensive to manage such a basket, if not impossible, thanks to blockchain we can now tokenize this basket and offer it to the man on the street for $100. We began thinking about this in 2014 to create a multi-currency card in partnership with MasterCard for mass payments, this product is running since 2016. Unfortunately, credit card schemes are a little bit reluctant to GLX — which came after and we are now in crypto with this index. So, what brought us to the space? The fact that we could not offer our product on an every day basis without it.
LL: I’ve been in investment banking for a long time and known Hélie for 20 years. What got me into crypto is more a question of who got me into crypto? And that is Hélie because I know his product, and when he said we could do something funky with it and digitalize it I was all ears.
SR: How is the % of the collateral defined and what is the research that went into it?
HD: The objective was to take the 15 largest currencies from the world’s largest economies, and also a bit of gold, because back in 2010 people were very concerned with central banks’ behavior after the 2008 crisis. The idea was to mitigate the risk by not relying in one central bank, the weight was supposed to represent 80%-90% of the world economy, including emerging market currencies. Today the basket is 5% gold, and the weight of the 15 currencies is determined by their weight in global GDP and rebased by the purchasing power parity (PPP), as published by the IMF. This takes into account some currencies which may be under-valued by real PPP terms, such as India’s rupee. The weights are re-balanced every quarter, and it has been quite stable, with very small re-balancing needed.
SR: This re-balancing is done through an Oracle, I suppose?
HD: Exactly, taking the data from the IMF.
SR: Your marketing copy says this basket makes GLX more stable than the Swiss franc. What happens if one of the underlying currencies collapses?
HD: The data shows that GLX is more than twice as stable than the Swiss Franc, based on the studies we have run against major currencies for volatility. In case one of the components of the basket crashes — and we have seen that happen with the Rubble a few years ago, its weight in the index would fall. In terms of performance it was really stable even with this situation because it is very diversified. If the dollar or euro were to plunge, we would have more volatility, but take into account we have 16 allocations, so the effect would be subdued. We have been following this index for over 8 years and back-testing it since 1998, so we know how it works and I think we have seen almost everything that is possible, even black swans — maybe we will have other black swans but we are confident that the diversification effect will play its role.
SR: Is it backed one-by-one or is it over-collateralized in the case of a black swan or loss of confidence?
HD: One-by-one, there is no leverage. Every time we issue a GLX, we buy on the other side the equivalent of those 15 currencies plus gold on a one-by-one basis.
SR: How will Globcoin generate revenue, can you share what the incentives of the GCP utility token holders are?
HD: The business model of the GLX stablecoin is two-fold: Issuance fees and trading fees. The fees we will charge will be very low because we believe in high volume. We think stablecoins are a perfect instrument to hedge risk, and we know the amount of risk to be hedged is huge, so we prefer to have “no” fees and be considered a good and cheap hedging tool. The business model of the GCP utility token is a kind-of VIP access to the stablecoin, so GCP holders get direct access to our trading desk if they want to convert their crypto holdings to GLX without fees.
SR: Will the collateral be held in multiple banks to reduce risk?
LL: Yes, we are working with several banks because we need to diversify the risk by holding the money in different entities, whether the banks want to make themselves public or not will be their decision, because each has different public statements at the moment regarding cryptocurrencies. We will be as transparent as possible in everything we do, from banking partners to audits and everything else required to make sure that people understand exactly what goes into our stablecoin,.
SR: What’s your answer to people that criticize fiat-backed stablecoins because it keeps us dependent on central bank issued currencies?
LL: I think that a Stablecoin needs to be tied to something. It can be tied to something that everyone knows, like fiat money, or tied to something which is more difficult to source or less well know, where the transparency of price may not be so good. The advantage of fiat is that everyone knows it, everyone has some and everyone understands the problems of their own currency. Also, it is very trade-able and has high price transparency, with anyone being able to look at the price EUR/USD or any other currency, and that’s what we think is important for people too.
HD: And we are not depending on one central bank, we are depending on 15 central banks plus gold which by definition is decentralized.
SR: Do you foresee a future without central-bank issued fiat?
HD: I think both systems can coexist with different functions. I think the role of cryptocurrencies and stablecoins will grow tremendously in the future, but the role of central banks is different, I’m sure that we will have a lot of interaction with them once all the issues of KYC/AML and everything related to compliance is solved. I think that in the coming years the two systems will collaborate, with some central banks even issuing their own ones.
LL: Central Bank digital currency is already developed. There are several central banks who have publicly stated that they are exploring launching their own digital currency…and I’m pretty sure there are more who are looking into it behind closed doors. I’m confident that there will be digital currencies from central banks very soon. There’s some very very eager people in the central banks to stay with the current, not necessarily ahead of it, but I think they will stay with the curve.
SR: What are your thoughts on crypto-collateralised models and algorithmic or seigniorage share models?
LL: I think crypto-collateralised will be good once everyone is in crypto and there is liquidity and price transparency. Likewise, algorithmic will always have a place, but a model is a model — and we need more than a model to make something work. I think there is a lot of room in stablecoins and lots of different types can coexist, just like you have different choices to buy a phone, and I think that is healthy.
HD: I’ve seen some interesting [algorthmic] models, intellectually speaking. In our former company we had a team of six AI specialists for exchanges, so we love these models, although we will not apply them in our stablecoin.
SR: How do you see the Stablecoin ecosystem evolving?
LL: I think that the number of projects can slim down, and I would personally expect to see around 20 projects in ~ 2 years, whether that means some of them will merge or pivot, I can’t see a need for so many stablecoins. If there is no need for so many trade-able real currencies, is there a need for so many stablecoins?
SR: That’s a very good point. I am curious, what are your main use cases for go-to-market, are you also interested in reaching people in developing nations?
HD: Our first use case is to be a payment token in many countries, including developing nations. Almost 50% of our basket is composed of developing countries’ currencies, so we are completely convinced that the growth and the action will be in developing nations, just look at what is going on in Asia and Africa in terms of payment innovation. For us, as a stablecoin and payment token, that is where most of the action will be.
SR: In theory, if I’m from any of the countries whose currency is part of GLX’s underlying collateral, I would not have to convert into another currency to buy GLX, but simply onramp directly with the local fiat, correct?
HD: Yes but even if you are not from one of these countries, probably the volatility of your county’s currency against the GLX would be very low — much lower than even the US dollar. If developed countries like Australia have volatility, with the AUS trading for USD$.48 to $1.10 and now $1.36…imagine how volatile it is in emerging markets. That is the benefit of the basket approach, it provides hedging and something stable against your nation’s currency.
LL: For example, in Latin America we have Brazil’s and Mexico’s currency in the GLX, but if you live anywhere else in the region, your economy is probably quite affected or influenced by these two countries, so even having a neighboring country’s currency in the basket will affect you.
SR: Could you share a bit about the developments and goals of the Globcoin platform? I’m also curious about the brick and mortar locations for exchanges you have on the roadmap.
LL: The globcoin crypto platform does not need a physical location, but the reason we want to expand to other locations around the world is to tie in and expand our partnerships because, as Hélie said, one of the main use cases is to be used as a payment mechanism. Also, GLX is our first Stablecoin but in the future we want to be able to produce a suite of stablecoins that are geo-specific, group-specific or asset-specific.
If you are interested in learning more about this project, check out their website “www.globcoin.io” or follow them on twitter at @globcoin_io