The Breakdown - Are Stablecoins the Path to Continued Dollar Dominance?

Episode Date: November 21, 2021

This episode is sponsored by NYDIG. In today’s Long Reads Sunday, NLW goes back to read excerpts from two Nic Carter pieces that seem particularly prescient today, as the U.S. weighs the opportunities and risks of stablecoins.  Policymakers Shouldn't Fear Digital Money: So Far It's Maintaining the Dollar's Status The Crypto-Dollar Surge and the American Opportunity NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Michele Musso & Adrian Blust, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: Thom Lang/The Image Bank, modified by CoinDesk.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The Breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, November 21st, and for the first time in breakdown history, I accidentally deleted an episode that I had recorded. Now, this is infuriating. I threw 16 computers through a wall, but I would, wasn't going to let my stupid error stand in the way of you getting your Long Read Sunday content. So here we are again, round two, at least for me, of this episode of Long Read Sunday.

And for this, we are going back into the archives. Now, one of the things that I've talked about this week is how the demystifying crypto hearing showed perhaps a changing attitude towards stablecoins. Alongside all of the regulatory conversations, there seems to be an emerging sense that, hey, the stickiness, the product market fit, the clear market resonance of these US dollar-based stable coins may be an asset that the US dollar establishment should think about. And so given that context, I wanted to go back and share excerpts from a couple pieces written by the man himself, Nick Carter. Nick has long been on this wavelength of suggesting to the powers that be

and anyone who will listen, that the rise of stable coins actually potentially portend another generation of U.S. dollar dominance if the U.S. is smart enough to let them develop. So for our first excerpt, let's go back to February 19th, 2020, even before we were facing COVID-19 shutdowns in the U.S. Nick published a piece on CoinDest called Policymakers Shouldn't Fear Digital Money. So far, it's maintaining the dollar status. He writes, On May 9, 2019, Representative Brad Sherman, member of the House Financial Services Committee, made an impassioned speech about cryptocurrency. In his speech, the mask typically worn by policymakers slipped.

His words betrayed the threat cryptocurrencies posed to the state. Sherman said, An awful lot of our international power comes from the fact that the dollar is the standard unit of international finance and transactions. Clearing through the New York Fed is critical for major oil and other transactions, and it is the announced purpose of the supporters of cryptocurrency to take that power away from us, to put us in a position where the most significant sanctions we have on Iran,

for example, would become irrelevant. But does cryptocurrency really pose a threat to America's monetary dominance? I'd like to propose an alternative. NIDIG sponsors this podcast, and they are the go-to Bitcoin Company for banks and credit unions as well as corporate treasuries, fintechs, and hedge funds. Learn more at nidig.com slash nLW. That's nydig.g.com slash NLW.

Far from compromising the dollar's mighty advantage internationally, cryptocurrency and the infrastructure built to support it may well entrench its position. To assess this possibility, one must understand cases where the dollar has already infiltrated foreign countries. This is commonly called dollarization. Now, Nick went on to describe dollarization events that had happened around the world and why stable coins could be a new vector of that process. And keep in mind, there were only about 4.5 billion tethers floating around at that time. This was, in other words, a pretty early point for that discussion.

Now, however, let's fast forward to six months later to September 3rd of 2020, 14 months ago. Nick wrote another piece called the crypto dollar surge and the American opportunity. The U.S. has much to gain from being the steward of a politically neutral payments technology, even if it means giving up power over the financial system. He writes, stable coins are a hot commodity. Over 16 billion of them circulate in the wild today, up from about 4.4%. point eight billion to start the year. Mostly these are issued outside of the U.S. and so are largely

unaccountable to financial regulators. They keep growing. U.S. policymakers, and particular those in the state of New York, will have to stomach the loss of their dominance over dollar clearing. But because stable coins represent a powerful, neutral financial infrastructure, the U.S. should welcome their ascendance regardless. It's no secret that banking is highly politicized, often in informal or hard to apprehend ways. The overt politicization of the New York-based correspondent banking system represents a tax on all users. Embedded in each transaction is a slight risk of censorship. Dependence on the system means submitting oneself to an American aegis. The harder it is to extract yourself, the more you are subject to the demands of the administrator. Banks and payment

processors have also become more politicized, as they have begun to de-risk, re-de-platform, individuals and industry sectors with whom they disagree politically, or where they consider implied compliance costs too significant to be worth the hassle. In February, I wrote that U.S. regulators should embrace the potential of stable coins as continued instruments of dollar dominance. I stress the potential welfare benefits of allowing savers in countries with inflationary regimes to engage with currency substitution without relying on the bank sector. Since February, the outstanding supply of stable coins has grown from around 5.5 billion to 16 billion, and their daily settled value has grown from about 1 billion daily to 4 billion daily. The phenomenon is no longer localized to the crypto

industry. It has begun to cause geopolitical reverberations. First, stable coins make for an excellent tool to avoid capital controls and oppressive monetary regimes. Chainalysis has reported that Tether is extremely popular in China, even recently exceeding Bitcoin's usage in the region. It's important to understand that the popularity of stable coins or crypto dollars is not solely due to their digital nature, but because of the transactional freedom that they offer to users. China's financial system is highly digitized already.

Crypto dollars like Tether offer a fundamentally different value proposition from Alipay or the state digital currency DSEP, because they are bearer assets not subject to the same, level of surveillance or transactional restrictions. Their digital nature isn't what sets them apart. It's the fact that you can permissionlessly accept or send any quantity of crypto dollars with nothing more than a smartphone and traded on a vast network of exchanges and brokers worldwide. Today, crypto-dollarization is in full swing in places like Venezuela. Recently, Venezuelan president in exile Juan Guaido has been promoting the usage of AirTM, a crypto-focused remittance

company to send U.S. dollars seized from the Maduro regime by the U.S. Treasury to health care workers in Venezuela. Startups like Value are offering users digital access to the U.S. dollar thanks to establish crypto-financial infrastructure like local Bitcoins. Cryptodollars make sense because U.S. banks do not service Venezuelan users, even if regular Venezuelans are not formally sanctioned. Cryptodularization works because stable coins are, for the most part, unencumbered by the shackles of the U.S. banking system. The largest issuer tether relies on a network of offshore banks and remains frustratingly outside the purview of the New York regulator, the Department of Financial Services, despite a long campaign to bring tether to

heal. Stablecoin issuers treat the IOUs as bearer instruments and generally do not seek to police user behavior when a transaction does not involve the issuer. Users only need a relationship with the issuer if they are redeeming or creating stablecoins with bank dollars. By granting a measure of transactional privacy and not embedding political conditions into transactions, stable coins are the closest thing to digital cash we have today. Notably, it is the private sector, not the state, that has delivered on this promise of digitally native cash. Now, U.S. policymakers reading this might feel a profound sense of unease. New York is the center of the dollar universe. Swift, which the U.S. effectively controls, is unambiguously an instrument of power projection abroad, and the Federal

Deposit Insurance Corporation and the Department of Justice have a habit of expressing political prescriptions through informal bank guidance and veiled threats. Touch a dollar anywhere, even a transaction in which neither counterparty is American, and you're obliged to Uncle Sam. But these tools are wearing blunt with overuse. The more the U.S. threatens sanctions, the greater the incentive for its peers allies included to seek out alternatives. The more risk-averse and puritanical banks become, the stronger the tailwinds for non-bank alternatives. The more dissidents or de-platform from U.S. payment processors, the better neutral alternatives start to look. Perhaps catalyzed by the growth of stable coins, or more likely by the announcement of Facebook's Libre or China's DeSep,

various branches of the Federal Reserve are now industriously pursuing a digital dollar. But would such a project, regardless of its final form, grant transactors the autonomy that they deserve? Would a digital cash system produced by the Fed consists of an instant-settling private-bearer asset, as is the case with physical cash? Would an American central bank digital currency be able to credibly guarantee that its rich database wouldn't be plundered

in real-time by Homeland Security, immigration and customs enforcement, or the Federal Bureau of Investigation, as Larry White has wondered? Today, the U.S. is still the center of gravity as far as Bitcoin and the crypto-dollar ecosystem are concerned. This is a significant advantage that should not be squandered. policymakers should be thanking their lucky stars that a punitive successor to the U.S. financial infrastructure

is a largely American phenomenon. The U.S. can continue to muddle down an increasingly exclusionary path and punish subscribers to its financial infrastructure by burdening them with political dictates, or it can embrace a neutral alternative. Self-disruption would be a significant bullet to bite, but it suits the U.S. values like Liberty, Privacy, Free Enterprise, and Personal Autonomy, that are embedded into our Constitution and Social fabric. One can hardly think of a better nation to underwrite a shift to a truly neutral payments and settlement infrastructure. While dollar infrastructure is likely to remain dominant far longer than some critics allege, it's undeniable that banking and messaging have been deputized into carrying out the political

objectives of their administrators. As relationships with U.S. ally sour and China grows its sphere of influence in Asia, viable alternatives will be created. And if the DSEP is any guide, these alternatives will not encode strong privacy protections for end users. The U.S. is clearly suited to be the steward of a politically neutral payments technology if our leaders can rise to the challenge. If the U.S. chooses to marginalize crypto dollars and punish their issuers, not only will they suppress a burgeoning American industry, they will also push users into even less accountable alternatives. While most stable coins are backed by dollars in bank accounts and are hence somewhat subject to governance, a subset are issued natively against crypto collateral like ether. These projects

are more automated and lack the vectors of control and the linkages to the banking systems that characterize convertible stable coins. While still small, crypto-backed stable coins like Die, current supply $455 million, take a more crypto-anarchist approach and are harder to surveil or influence. More draconian regulation of crypto dollars would not eliminate the category. Instead, it would push users into these slipperier alternatives. The architects of these public digital dollar solutions should take a leaf from the private sector's book.

Users simply crave the qualities of cash, this time in a digital context. Far from being a dangerous techno-utopian fantasy, a genuine cash standard on the internet is simply a restoration of what was once ubiquitous and normal, transactional privacy and autonomy. These qualities are not for criminals but for everyone, and if policymakers dig in their heels, the private sector will only push back harder by providing the service that users demand. But this time, outside policymaker's sphere of influence. Now, Nick is actually presenting two kind of different ways to look at it and come to the same conclusion. On the one hand, he's talking about the values of the U.S. and why is it? And why is it?

it makes sense for this privacy-preserving money coming from the private sector to grow up and be enshrined here. This is an argument that others, like former CFTC Chairman Christian Carlo, have also made. He's the chairman of a project called the Digital Dollar Project that's trying to push the U.S. into digital dollars for this exact reason. However, there's also another real politics side to Nick's argument. As he writes, today the U.S. is still the center of gravity as far as Bitcoin and the crypto dollar ecosystem are concerned. This is a significant advantage that should not be squandered.

One of the things that has changed since Nick wrote this piece is that China has explicitly squandered whatever claim they had to this same supremacy. We've talked before about how much of the hash rate now resides in the U.S. and what a boost it got from that shift, and it makes the discussion around stablecoins in the industry as a whole that much more pertinent from a geopolitical perspective. I'm encouraged to see more people in Congress and the Senate pick up on the relevance of this discourse, but I think we still have a really long way to go. Who knows? Maybe some of them will read Nick's piece or hear it through this podcast. And if you do and you have questions, hit me up. I've got a whole crew of people who would love to help. Until tomorrow, guys, be safe and

take care of each other. Peace.