Stablecoins & Fiat
If stablecoins are coins on a blockchain pegged to a real-world fiat currency, the first question one should ask is which currencies are actually being used, have been used, and will be used going forward?
There are several metrics to measure this by, the first of which being how much of each currency is actually outstanding in the world.
A few of the notable currencies, at current exchange rates, are:
US Dollars:$20.5T outstanding
Euros: €11.6T outstanding, $11.6T equivalent
Renminbi: ¥66T outstanding, $9.24T equivalent
British Pound: £2.45T outstanding, $2.82T equivalent
Singapore Dollar: S$285B outstanding, $202B equivalent
Obviously this list is not exhaustive, but I use this to demonstrate that one of the drivers of adoption of stablecoins is going to be underlying demand for currency.
As a reminder, there are fundamentally three purposes to money: a medium of exchange, a store of value, and a unit of account. The latter is perhaps the easiest to understand: it would be weird to say your house is worth 1,000,000 bananas but feels normal to say it’s worth $1,000,000. The other two are core drivers of demand for money, in that the easier it is to exchange money for something else and the more likely you are to retain value holding that money, the more likely something is to be used.
Historically, there have been many default currencies, but the current majority preference for global trade is the US dollar. Stablecoins have followed this trend, with over $150B of stablecoins outstanding and the largest non-US dollar stablecoin is Stasis Euro, at $134mm as of the writing of this article. There are also smaller fiat-backed attempts at British Pound and Singaporean Dollar stablecoins, but this is pretty much the list.
What Makes for a Good Fiat Currency Peg Choice?
Looking at the current market, where the US dollar dominates and other stablecoins are currently a rounding error, I would suggest there need to be several key attributes for a specific currency peg to take off:
- Global (or at least crypto market) acceptance for payments
- Available and suitable reserves
- Trust in the currency itself
- Regulation that makes stablecoins at least possible
Looking at those four factors explains clearly why US Dollar stablecoins are far and away the most common stablecoin implementation so far. There is deep demand for US Dollars globally, both for transaction purposes and as a store of value superior to many other fiat currencies (this, sadly, is a bit of winning by default in the current world). There are deep reserves available in the form of high quality, short term, very liquid assets to back a stablecoin. There are even multiple regulatory regimes possible in the United States, such as Money Transmitter Licenses (MTLs) or much more robust and complete bank-like regulatory frameworks such as those regulated by the New York Department of Financial Services (NYDFS).
No other currency currently has all four of these elements working in concert.
The Eurozone has the problem of less deep short term markets (given the fragmentation of debt among the various Euro sovereigns, and the doubtful creditworthiness of many outside of Germany), an open regulatory hostility to stablecoins, and less trust in the currency itself.
China has currency controls that make reserve holding nearly impossible in terms of redemption and very low trust in the sovereign control of the currency (witness the struggles of the CNY CBDC).
The British Pound has at least somewhat deep local markets for debt, but so far a somewhat negative stance on stablecoins, and the currency itself has been in a secular decline in terms of usage since the fall of the British Empire.
And so on…
Thus, it is not surprising that, as of yet, the US Dollar is far and away the dominant choice for a stablecoin.
What is the Impact of a Stablecoin Existing?
Perhaps the single most under-explored question among regulators, market participants, and practitioners is this: what is the impact of actually having a proper fiat-backed stablecoin for a currency?
First, some factual statements:
- Much of the demand for stablecoins currently comes from non-native users of the major currencies (USD, EUR)
- Stablecoins backed by reserves therefore are often an FX trade, decreasing demand for the currency they are escaping from and increasing demand for the currency they are escaping to
- Stablecoins, so far, have been “sticky”, which is to say the reserves, when accumulated, tend to be rolled consistently in debt instruments of the selected currency, often government debt instruments
- Stablecoins have rapidly become the default method for transacting in cryptocurrencies (and to a lesser but emerging extent, payments)
Put together, what does this mean? Stablecoins are an extension of currency dominance, increasing transaction volumes, increasing demand for both the currency and sovereign debt in that currency, and expanding geographic reach. The latter comes with complications like loss of the ability to exert complete and total control over the use of your currency for transactions, which means narrow minded bureaucrats typically hate it and would rather throw out the immense benefits in order to exert more narrow control.
However, any nation state that truly understands what is going on would look at the above and realize the choice that is likely coming: embrace a stablecoin or open access CBDC, or eventually balkanize your economy, tank your exchange rate, and greatly reduce the ability to finance your government (in the good case) or just have your currency wiped off the map and be forced to adopt another currency instead (in the bad case).
In short, as crypto creates open access globally, every currency will face a choice: become as trustworthy and stable as the best options or be consumed in the fires of consumer choice. The era of nation states locking their citizens in to exploit them in sub-par systems is likely coming to an end, or at least greatly reducing in effectiveness.
