Are Stablecoins a Government Target?
Posted July 20, 2021
If you read this article top to bottom, you will know more about stablecoins than the heads of the Fed, the Treasury, the Securities and Exchange Commission, and the Commodity Futures Trading Commission.
And yet, somehow these people are charged with understanding and regulating this gigantic innovation in finance, even though they come nowhere near understanding the market much less being able to control it internationally. Instead of wisdom and understanding, they are once against resorting to brute force to keep us stuck in the past.
This week, they met as part of the Working Group on Financial Markets, a wholly political arm of the White house. They are warning that somehow stablecoins might represent a threat to the American financial system – opining on this without the slightest bit of knowledge or experience with the industry.
“Bringing together regulators will enable us to assess the potential benefits of stablecoins while mitigating risks they could pose to users, markets, or the financial system.” Janet Yellen said in advance of the meeting. No question that they are plotting something – it’s not about improving the sector – and they are doing it entirely in the interests of the central bank and the monetary/financial regulators who always and everywhere operate as defenders of the old status quo.
What is a Stablecoin?
Let’s look at fundamentals. The big problem with crypto assets from the very beginning was the on-ramps and off-ramps. Regulators cannot control the crypto ecosystem as such – which causes daily vexation on their part for a decade – so they lean in on the entries and exits from the dollar/fiat currency system. This is the wedge to truncate and throttle financial innovation that could threaten incumbent systems. And this is why the first major crypto regulations targeted the exchanges with high compliance burdens.
Stablecoins were a relatively late development in the rise of the crypto-asset industry. The problem they sought to solve was precisely the issue of toggling between cryptos and fiats. Central to the functioning is the clearing of payments. If you are trying to move fiats from place to place, you face an arcane and heavily throttled system of wire transfers, bank regulators, and ACH numbers that can be impossibly fussy.
With a stablecoin, you can move dollars or some other fiat with the same level of efficiency, cost, and speed as you can with Bitcoin or some other crypto asset. It is the tokenization of fiat, thereby providing a bridge between the world of crypto and government systems. It was born out of necessity: first with the company Tether, but now moving out to dozens if not hundreds of others.
Stablecoins require that the company offering the token possess 100% of the assets backing the token, whether that be fiat or cryptocurrencies, or else confidence in the system would undergo a market challenge. Doing so, therefore, requires heavily capitalized companies that can hold large amounts of financial assets in order to support the exchange using blockchain technology that forces fiat to behave like any ledger-based market token.
Better than Central Banks
Necessarily – unless some other innovation comes along – these will necessarily be proprietary companies who are charged with maintaining the system. In this sense, they are completely different from a technology that Bitcoin deploys, relying on a decentralized network of clearing that no one, in particular, owns and is managed entirely by a fixed protocol.
When I was first examining stablecoins, they were very much under fire. People and regulators could not understand what they were or what function they were fulfilling. They hectored and bullied, but the market would not be stopped.
The trouble in those days – and this does still remain a factor – is that large companies in this space were having a hard time making progress on clearing systems. By necessity, they reinvented the one function of central banking that was actually rooted in market-based systems: settling payments. Central banks undertake this job, but with so many rules and regulations that innovation becomes by permission only.
The crypto sector would not wait it out. So they tokenized their stored assets as a backing for a pure exchange of ownership rights, denominated not in the highly volatile crypto sector but in a fiat currency. For this reason, the value of stablecoins reflects exactly its name: there is generally a 1-to-1 trading ratio between the token and the assets that back it up. It entirely evades the speculative nature of the market and therefore allows rational accounting.
Let’s look at the market capitalization of the biggest stablecoins as of this writing:
- Tether: $62,027,075,872
- Binance Coin: $46,493,809,308
- USD Coin: $26,638,953,639
- Binance USD: $11,203,561,795
- DAI: $5,504,824,074
- Terra USD: $2,012,404,106
- TrueUSD: $1,327,572,618
- GUSD: $310,892,411
These are incredible numbers, multiplying 10X in the last year.
A major factor in their growth concerns international remittances. Try getting dollars from Korea to the US using old-fashioned wires and you will spend the afternoon dealing with a wickedly cumbersome system that is tied to individual accounts, while waiting days for the transaction to settle. Doing the same with a stablecoin takes only seconds with a public key, just as with cryptos.
The downside of the system, if you want to call it that, is that these are necessarily proprietary technologies, owned and managed by private companies with a central point of failure. On the other hand, in accomplishing the task at hand – the moving of fiat across borders – they are absolutely brilliant. Both parties must subscribe to the services offered by the company and the tokens do not typically trade across platforms.
On the other hand, these stablecoin tokens are fungible with any other crypto on trading platforms, while enabling the option of either trading in the token or downloading it into fiat at the bank.
Now we have Janet Yellen raising doubts about this glorious industry on grounds that it somehow threatens financial instability, which is absolutely not the case. What they do is massively improve on a dilapidated and deprecated clearing system that creates, rather than mitigation counterparty risk.
The Fed pretends that it is a modern and intelligent institution that masterfully manages the monetary and financial system. The truth is the opposite. As a pure technology, the dollar itself has not undergone any innovation in 100 years. The only innovations in this sector trace to payment systems that began to be developed after the Second World War. Even now, payment systems in the US are struggling to keep up, given that they are thoroughly incumbent by an often-vicious regulatory thicket.
Crypto came along and introduced a new world in which the monetary assets and the payment system were united in a single decentralized and uncensorable network. Incredible. Since that time, the rest of state-managed systems have struggled to keep up.
So why are they targeting stablecoins? Because they have dramatically improved on the one function that central banking systems do provide, namely settlement services. Stablecoins do this very thing without bureaucracy, time, and risk, which is to say that they have become a genuine challenge to the future of central banking – not yet, but everyone can see where this trajectory is headed.
Therefore it was only a matter of time until the likes of Janet Yellen would take notice. My own assessment is that the new threat is too little and too late, and that this is a good thing. This enormous market is driving forward innovation of which the Fed and Treasury are nowhere near capable. This is the real reason they are targeting stablecoins.
It’s a tremendously bad sign for the regulators that they can look at a hugely popular technology that improves so much over the systems of the past, and yet, see nothing but a threat. In a sense, it is a threat. Just as much as any progress is a threat to the past.