Will stablecoins entrench or erode the power of the US dollar?‍

September 18, 2019

For close to a century, the US dollar has been the currency of choice for governments, businesses, and populations around the world. 

But such dominance cannot be taken for granted forever. And so the question is, could cryptocurrency, or specifically stablecoins, potentially chip away at the greenback’s power, or is it more likely that the US dollar will come out victorious?

The Rise of Crypto

With the rise of Bitcoin, we have seen how it’s possible for a completely new asset class to emerge and how value can come into being suddenly.

Of course, the value of crypto is not baseless. Compared to ordinary currencies, whether in the form of paper bills or bank deposits, cryptocurrency offers a range of benefits that are highly attractive. It can be transacted across borders at low cost, it’s fast and convenient; it’s publicly auditable but at the same time offers a high degree of privacy; and - perhaps most importantly - it does not require intermediation. 

At the moment, cryptocurrency is still mostly unregulated, meaning it generally falls outside the scope of government control. This may concern some regulators who worry about money laundering and capital flows into illegal markets, but for some communities, the unregulated nature of crypto has been nothing short of life-saving.

The best example of this is seen in Venezuela, where people have suffered from hyper-inflation - expected to reach 10 million percent by the end of 2019. With tight capital controls in place, it has been difficult for people to rescue their savings by escaping into other currencies, such as the US dollar. Instead, Bitcoin has been the currency of choice and, despite its volatility, has acted as a safe haven. 

At the same time, situations such as the one in Venezuela are extreme. As a medium of exchange, Bitcoin is nowhere near the US dollar in terms of usage or economic impact. Due to its volatility, it is not yet ideal for everyday payments, nor is it realistic to assume central banks would want to stack up on Bitcoin in central reserves, in place of the US dollar. 

But what about stablecoins?

Stablecoins come in many different forms, but in all cases, they are pegged to the value of another, usually highly liquid asset. Usually they are pegged to local currencies, such as the US dollar, but they can also be pegged to the value of commodities, such as gold, or - as in the case of Libra - to a so-called ‘basket of assets’. 

What’s special about stablecoins is that they come with all the benefits that conventional cryptocurrencies offer, but in addition to that they are much less volatile. 

Following the proposal of Libra, it is not surprising that regulators and governments have suddenly become very vocal and concerned. The IMF recently published a paper where it stated that conventional money stands to face tough competition from digital currency - especially by coins such as the one proposed by Facebook, which counts around 2.4 billion users signed up to the social media platform.  

Also, the People’s Bank of China - which has been working on its own domestic digital currency for some time now - is on the verge of issuing its own stablecoin. Taking into account the size of China’s population and the openness of the Chinese to digital payment systems, this coin could take serious market share away from Libra.

But perhaps most extraordinary has been the response of Bank of England’s leader, Mark Carney. 

Delivering his speech at the US Federal Reserve’s annual symposium, in late August, he said that a Libra-like currency - meaning a stablecoin backed by a diversified portfolio of assets - could potentially replace the US dollar as the world’s reserve currency. 

Such an occurrence would ‘dampen the domineering influence of the US dollar on global trade’, ‘unlock dollar funds that governments currently hoard’, and ‘reduce the volatility of capital flows to emerging market economies’, he argued

The Future of the US dollar

There is no telling what will ultimately be the fate of the US dollar, should stablecoins gain in popularity. In his recent tweets, US President Donald Trump made his position clear when he said that the US dollar is ‘the most dominant currency everywhere’ and that ‘it will always stay that way’. 

Perhaps he is biased. But the reality is that at this moment the US dollar is indeed unmatched in its dominance. Approximately 90% of all forex trades involves the US dollar, almost half of the world’s debt is denominated in USD and, according to the IMF, more than 60% of all central bank foreign exchange reserves is made up of USD.  

But that does not mean there is no room for stablecoins to grow and make their way into the everyday lives of people. What we’re seeing from our users is that people are actually very open to exploring alternative financial systems. Stablecoins are helpful in a variety of ways: to transfer money overseas, to pay for bills when banking services are unavailable, as a way to diversify portfolios, or as a bridge between local cash and crypto. 

Even if the US dollar will forever remain the dominant currency, the rise of stablecoins will at least offer people a choice.

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