Cryptocurrency Exchanges Back $32 Million Stable Coin Project

August 29, 2018, 1:54 PM UTC

Crypto giant Binance and three other big exchanges are joining together to fund Terra, a new initiative to get consumers to adopt digital money by using a so-called “stable coin.”

The idea of stable coins, as the name suggests, is to provide a cryptocurrency without the notorious volatility of Bitcoin and other popular digital assets.

To pursue the idea, Terra and its Korean-American founders have raised $32 million from the exchanges and from blockchain-focused investment funds, including Polychain Capital. Binance contributed through Binance Labs, its independent investing fund.

While Terra is hardly the only stable coin project out there, it contains a twist: Terra is partnering with a number of eCommerce ventures in Asia to encourage consumers to use the currency.

One of the Terra founders, Daniel Shin, used to run an e-commerce company in Korea. In an interview with Fortune, he explained that e-commerce is more common in Asia and that well known online brands will persuade consumers to give Terra a try using popular mobile platforms like WeChat.

The e-commerce strategy will involve providing discounts and rewards for consumers who use Terra. The merchants, meanwhile, have an incentive for Terra to succeed since it would let them pay only a fraction of the transaction fees the currently fork out to Visa and other payment providers.

“Imagine going to Amazon and clicking “Terra pay” at checkout. You don’t need a wallet and so on. All you know is it’s a better deal,” said Shin, adding that Asia provides the most favorable regulatory and cultural environment to launch the project.

The biggest challenge for Terra, as with other stable coins, will be to persuade people that the currency is indeed stable, and that its value will stay reliably pegged to the dollar or another major fiat currency.

Currently, the most popular stable coin, known as Tether, has maintained a one-to-one value with the U.S. dollar, but some have questioned whether its backers actually have the dollar reserves to prop it up. If it emerged that Tether was not fully backed, its price could tumble.

Meanwhile, another popular stable coin project known as Basis, which is still in a development phase, intends to rely on an exotic series of bond sales to maintain its value.

According to Shin, Terra will initially back its tokens with fiat currency raised from its investment partners. The company, he says, plans to raise a total of $100 million and use 90% of that for the currency reserve.

Shin adds that, once Terra gets widespread traction, each transaction will generate a small payout to a second cryptocurrency that will serve as the stabilizing reserve fund, and eventually wean the project off of fiat currency.

The ultimate strategy, Shin says, is for Terra to create a “sticky” payment network by piggy-backing off current ecommerce networks, much as PayPal and Alipay did before it.

The four cyprocurrency exchanges backing the project are Binance Labs, OKEX, Huobi Capital, and Dunamu & Partners (the investment firm of Upbit operator Dunamu).

This story was updated to clarify Binance’s investment came from Binance Labs.