The Breakdown - How Stablecoins Could Save the Dollar's Global Reserve Role

Episode Date: August 6, 2023

On this Long Reads Sunday, NLW reads: Pass the Stablecoin Bill Now - Austin Campbell Stablecoins: A Potential Counter to Dedollarization - Yiannis Giokas Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

What's going on, guys? It is Sunday, August 6th, and that means it's time for Long Read Sunday. Before we get into that, however, if you are enjoying The Breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link at the show notes or go to bit.ly. com. All right, friends, happy Sunday. Today, we are reading two pieces, both on the topic of stable coins. And more specifically, the topic of what stablecold coins mean for the U.S. and the U.S. dollars' relationship with the rest of the world. The first piece is called Stable Coins, a potential counter to de-dollarization.

The piece was written by Yianis Giochus, a senior director of product innovation at Moody's analytics. Yianis writes, as the global economy continues to absorb geopolitical tensions, we see increasing speculation that the U.S. dollar's global dominance could wane, with a steady decline in the dollar share of central bank reserves and increasing de-dollarization efforts among Bricks nations and other emerging markets. While the dollar is likely to remain the dominant reserve currency globally in the near future, domestic and foreign policies could erode its overall dominance. Amid these shifts, U.S. regulated fiat-backed stable coins may offer a novel counter-narrative

that can enhance the dollar's global power and mitigate the impacts of de-dollarization. The current global economic landscape is marked by an increased tendency among nations to diversify their reserves away from the U.S. dollar, exacerbated by the Federal Reserve's rate hikes to tackle domestic inflation. Small but growing allocations to other major currencies have reduced the U.S. dollar share of central bank holdings to 58% in the last quarter of 2022, from 71% in 2000. Concurrently, the shadow economy, a sector comprising economic activities that are not officially recorded in a country's gross domestic product due to their illicit nature or the desire to avoid taxes or regulations, continues to be a significant part of many economies. Here, the U.S. dollar often

serves as a preferred medium of exchange due to its stability and widespread acceptance. For example, in countries with high inflation like Turkey and Argentina, with rates of 38.2% and 115.6% as of June 2023, respectively, residents scramble to convert their income and savings into U.S. dollars for protection. Meanwhile, they face capital controls limiting foreign currency holdings, and a central bank set currency exchange rate that may undervalue their currency by up to 50% as witnessed with Argentina's peso. Consequently, everyday consumers have been utilizing defy seeking refuge in stablecoins, thus overcoming these economic constraints. Amid this complexity, U.S. regulated fiat-backed stable coins present a potential solution. These digital tokens are pegged to

the value of a fiat currency, typically the U.S. dollar, and are designed to maintain a stable value relative to the underlying asset. They can offer the stability of the U.S. dollar combined with the flexibility and technological advantages of cryptocurrency, providing a novel financial tool that can help solidify the dollar's position in the global economy. As the regulatory landscape around stablecoins in the U.S. evolves, it is becoming clear that these digital assets could play a critical role in mitigating the impact of de-dollarization of the global economy, which, if left unchecked, could cause inflationary and cost of borrowing pressures for the U.S. Recent inquiry from the U.S. Senate's banking committee to stablecoin issuers like Tether and Circle

highlight the growing awareness of the potential risks as well as benefits associated with these digital tokens. Jeremy Allaire, the CEO of Circle, has noted that well-regulated stablecoins can help reinforce the U.S. dollar's position in the global economy. He argues that if the Federal Reserve can gain control over non-banked stablecoin issuers, it can ensure these tokens are backed by secure assets such as dollars or treasury bills. This move could facilitate the introduction of a digital dollar into the core global economy, providing a robust counter to non-dollar trade regimes. Furthermore, U.S. regulated fiat-backed stable coins could play a significant role in countries

in which the dollar is currently widely used outside the formal economy. By replacing shadow U.S. dollars with blockchain trackable digital tokens, these stablecoins could offer a more transparent and regulated alternative for transactions, thereby reducing the risks associated with the shadow economy. That said, as private enterprises, stablecoin issuers may be subject to fewer restrictions than alternatives such as CBDCs or tokenized deposits when expanding into new markets. This provides them with greater flexibility and potential for growth

if they comply with their U.S. regulatory obligations. In conclusion, U.S. regulated Fiat-backed stablecoins offer a potential strategy to counter de-dollarization efforts. By leveraging the stability of the U.S. dollar and the flexibility of digital currencies, these tokens could provide an additional tool for maintaining the global financial influence of the U.S. dollar. Now, our second piece today is a related piece by former breakdown guest Austin Campbell. It's called Pass the Stable Coin Bill Now.

Austin writes, On July 27th, the Clarity for Payment Stable Coins Act of 2023 passed out of committee with a bipartisan vote and now heads to the floor of the House for consideration. This means the United States, after years of inaction, now faces a historic opportunity to expand the reach of the dollar and financial access both here and globally. Stable coins, which are the representation of a unit of fiat currency on a blockchain, have lacked any federal regulatory clarity in the United States to date, despite having been created almost a decade ago in 2014.

This definition also reveals something very important about fiat-backed stable coins in particular. They are old and understood financial products using new technology. After the financial crisis, there was a significant period of reform in financial markets, where we gave preference to price stability products that worked properly, such as government money market funds or stable value funds, and penalized restricted or increased capital for those which did not work properly, such as deposits at highly leveraged banks, prime money market funds, or securitizations. This means we know how to define safe stable reserves for a stable coin that are not a threat

to financial markets. And this bill does this. At the same time, despite the lack of clarity and regulatory anima, towards stablecoins in the U.S., the space has grown internationally from zero to well over $100 billion in less than a decade. Every dollar that flows into stablecoins is funding for the U.S. Treasury at a time when we desperately need it. Every dollar that flows into stablecoins is a dollar that can leave an exploitative local financial system, or a high-priced intermediary, and flow into a simple, transparent, cheap option, if structured like the payment stablecoins

in the bill. Non-U.S. jurisdictions have realized the power of this innovation and are racing to take advantage of it. Singapore's MAS has granted a payments license to Circle. Stablecoin projects are launching in Bermuda in the UAE, and First Digital has already launched a USD stablecoin in Hong Kong. Tether, perhaps the biggest beneficiary of the U.S. antipathy towards stable coins, has existed in amorphous offshore form since 2014, and now controls $80 billion in assets. It recently reported profits of Q2 of more than $1 billion. This means that the decision we face in the United States is not yes to stable coins versus no to stable coins. It is yes to stable coins versus yes to stable coins offshore. That stable coins will proceed elsewhere means this is a

critical decision for the United States from both a national security standpoint and a financial stability one. Onshore stable coins where the U.S. regulates the issuer means that we will have the ability to perform client due diligence and understand money flows on every individual and corporation, engaging in the minting or burning of the stable coins, giving us concrete knowledge of the starting point and ending point of every transaction that touches traditional dollar rails after being on a blockchain. It also means that we can ensure that. the reserves are transparent, segregated, properly managed, and put into instruments that are both stable for consumers and help fund the U.S. government and economy at a time of raising rates and

growing deficits. In a worst-case scenario, if the United States does not act, it also risks having the dollar no longer be the defining unit of account for crypto and blockchain. Perhaps it could be the euro owing to the passage of Mika, perhaps it could be the yuan owing to China reopening Hong Kong as a crypto hub and embracing the technology once more. Certainly the global share of reserves held in dollars have been falling, and the BRIC nations have been actively searching for alternatives to continued use of the dollar. A future where several decades forward, blockchain technology is the backbone of financial services, but dollars are barely used, and all of the information about the individuals or corporations transacting are in the hands of foreign governments, who may not be friendly

to the U.S. is a bleak one for both the U.S. economy and the strength of the dollar. On the flip side of the coin, if the Stable Coin bill H.R. 4766 is passed, the United States will have a regulatory framework that is likely best in class globally. will have federal recognition, with smaller projects able to be regulated at a state level, allowing for experimentation, but larger projects eventually being drawn into the federal regulatory apparatus. The payments stable coins allowed within the bill will be transparent, conservatively reserved, with prudential oversight and clear rules around redemption and consumer protection. In short, they will work exactly like they are supposed to represent, safe, secure dollars

on a blockchain. This is why it is paramount for the U.S. to act, as we cannot risk creating a future where it becomes a bit player in global markets. In that light, the arguments against advancing the stablecoin bill simply do not hold water. Stable coins are not a systemic threat, as they are financial instruments we are already familiar with, merely using different ledger technology. The only losers, if H.R. 4766 advances are entrenched incumbents like Tether, charging exorbitant fees to those of us who wish to use our financial system for payments. I will shed no tears on their behalf and would urge the House and the Senate to embrace open,

fair competition, where the U.S. is able to unleash innovation and our drive to bring better financial technology and inclusion to the world. All right, guys, back to NLW here for just a really quick wrap-up. This will surprise you exactly zero, but I find the conversation about stable coins in the United States to be so myopic and ridiculous and just patently absurd in every way. It is wild to me that there aren't more politicians who grok this notion that natural stable coin demand is a way to extend the dollar's influence for another generation. Now the good news is I think that there are some politicians who actually do, and once again, I kind of think it's more of an age gap than it is a party gap. But at least we're finally in a position where things are moving in this

dimension, and I'm hopeful that in a year's time, let's say, we won't have to be reading the same type of op-ed over and over again on LRS, and we will be on to being mad at the U.S. government for not getting something else. Anyways, I want to say thanks again to these authors for their great pieces, and thanks to you guys for listening. Until next time, be safe and take care of each other. Peace.