Stablecoins were meant to be everything that bitcoin wasn’t. Of course, they would be stable in value where crypto wasn’t. They would be crypto without the fun, lacking the volatility that traders crave. They would also be dead money in the sense that there was nothing much to program except the collateralising mechanism. But the rising pitch of excitement emanating from the crypto folk about that stalest and dry of matters — stablecoins — is quite a turnaround.
Even before Mark Zuckerberg revealed Libra to the light of day, the tingle of excitement was already being felt. Admittedly Libra did not survive first contact with its illumination. It was already apparent before Facebook took an interest, that there would be more to the stablecoin world than Tether.
Earlier in the month, US Federal Reserve Governor Lael Brainard was musing on stablecoins in a speech she gave about the FedNow instant payments platform being developed. Leave to one side the fact that US financial institutions still do not have access to instant payments between themselves, the other interesting bit was on private money. “Efforts by global stablecoin networks such as Facebook’s Libra project to drive the next stage of payment innovation have raised other fundamental questions about legal and regulatory safeguards, financial stability, and the appropriate role of private money.”
Stablecoins, the central bankers fear, maybe a form of money that works better than the stuff they issue at present, at least in certain circumstances.
One of those circumstances occurs in the trade between China and Nigeria. Here, according to a fascinating story told to Coindesk, Nigerian entrepreneurs have been using bitcoin to facilitate trade. Yes, bitcoin – not a stablecoin at all. But the attractions of bitcoin in this situation would also apply to a stablecoin, depending on local jurisdiction.
Bitcoin allows Nigeria’s importers of all manner of machines and primary products to circumvent the dollar international payments system with all its rules and limits. Although not exactly frictionless because the middle person in China has to change the bitcoin into renminbi for the Chinese seller who wants “hard cash” at their end. But it does mean there is no need for an inconvenient cruise through black market haunts to try and find sufficient dollars to begin the circuit of capital. This is a common problem for importers in countries with less than optimum currencies.
The advantages that the Nigerian importer ascribed to doing business with bitcoin – its unique portability and frictionlessness even with its attendant price volatility issues – are alive with stablecoins, although some are caught in the regulatory net of being near-sovereign money as opposed to private money.
This is proven by the equally quiet – for reasons of discreteness – commercial operations on the China-Russia border. It’s a quiet part of the world anyway you might think. However, it is an emerging locus for the trade that takes place beyond the prying eyes of the dollar system and these days that also means beyond the purview of the US sanction enforcers.
A minority of Russian and Chinese businesses in the region prefer to effect their value exchanges using the first stablecoin success story Tether – a coin that some thought would have disappeared by now given persistent allegations that its 1-to-1 relationship with the US dollar isn’t fully collateralised. However, with a full audit still not in sight, Tether sails on regardless and is finding a role as a means of exchange. It is no longer merely the repository for your cash funds on a non-fiat cryptocurrency exchange.
There was a time in the US when private money was all the vogue. One of my favourites was Josiah Warner’s Cincinnati Time Store system. True to the ideas of economist David Ricardo and the ideals of Robert Owen, this non-state money was designed to allow an exchange of goods and services to take place on the basis of the time that went into the creation of a product and the judgement of the producer regarding the non-fungible nature of labour. There was also an in-store mark up for the retailer’s time and the time it took to bring the product to market.
The stores were highly successful in the locales in which they operated. The reason we don’t use them today – aside from the problem that one person’s labour-time is not the same as another, as between nurse and brain surgeon – was because of the impossibility of creating a network of such mercantile outlets. If it could have been created everywhere all at the same time (i.e. if there was an internet with a highly developed e-commerce order origination and fulfilment backend), it may have been a different story – at any rate, up until the point when the government arrives at the door to assert its claim to a monopoly over money issuance.
Today’s internet would allow such Owenite utopianism to get a firmer footing. As we know from the proliferation of digital assets that it is not the bringing into existence of a network where the adoption difficulty lies, but in proving the utility of the networked applications.
Stablecoins provide demonstrative validation of a truth that Ripple’s XRP cross-border liquidity token has known for some time: that international transfer of remittances, multi-million trade deals or a company Treasury merely repositioning funds internally, all incur costs that are only necessary because of the dominant domain of a given currency and the difficulty of converting between two different types.
This world money problem was solved with gold until relatively recently. Today it is the mighty dollar that fulfils this role.
But as the dollar’s value wanes in direct relationship with the dire progress of the pandemic in the US and the speed at which the Fed prints money, there are increasing numbers of merchants, importers, traders and countries too, that have found a useful substance in the guise of stablecoins lurking in the cracks of the financial system.
The Financial Action Task Force of the G20 countries has laid out the framework for bringing order to the world of what it calls virtual asset service providers (Vasps), but it may be looking in the wrong place for the key lever that rules them all.
A Jump Capital analyst writing at The Block said of stablecoins: “We believe U.S. dollar stablecoins, or crypto-dollars, may very well end up being the ‘killer app’ for crypto.”
Aside from the unstable nature of the dollar at this moment in time, the ‘crypto-dollar’ may show that other fiat currencies might have been a better choice for such pegs. However, the decline of the dollar was once seen as at worst a glacial matter that need not concern us in the here and now. That view might be changing with the rise of the digital yuan expected to challenge the dollar’s hegemonic position, even if control of money at home is the near-term goal of China’s central bank policymakers.
A digital yuan-backed stablecoin could be just what Nigerian importers are looking for… and their peers in Iran, Russia and elsewhere.
And when the great stablecoin detour from the promised land of permissionless blockchains completes its first circuit, it will have to give more meaningful life to purer private money such as bitcoin that stores value but, unlike a dollar-backed stablecoin can increase in value too.
According to Coin Metrics, in the past four months, the value tied up in dollar-backed stablecoins circulating supply doubled to $13 billion. Expect that rate of increase to keep rising.
The main driver of the recent increase in stablecoin circulation has been the speculation around DeFi. That mania isn’t slowing anytime soon. Add to that the real-world cases highlighted here, and we can expect to see the ice in the cracks of the global financial system widen to encompass multiple prospective tipping points that split open timeless mountains of previous financial certainty
So dead stablecoins may yet come alive as the native tokens or a decentralized app near you, where the managers of the oracle have grown wearisome of paying through the nose for the Gas they need to initiate and complete transactions on Ethereum’s congested, slow and expensive computational and storage platform. When/if that comes into view – and the stability of a fast-maturing network of real utility emerges, perhaps with the launch of Filecoin, it will beg the question, why peg at all.
And by which time Ethereum governance might have got past Eth 2.0, where co-inventor Vitalik Buterin successfully effects the transition to a proof-of-stake protocol that maintains the same level of security but coming with the scale at a reasonable price that a utility- rich decentralised applications of the near-future require.