Do stablecoins consolidate U.S. dollar hegemony?

No one can ignore the cryptocurrency market some time ago: with the entry of a large amount of funds, cryptocurrencies have set new highs one after another. One of the representatives, Bitcoin, once stood at $64,000 per coin, setting a record high.

Behind the hot market, as a tool to help crypto users reduce asset risks, stablecoins have also experienced explosive growth.

According to the “2021 Digital Asset Semi-Annual Report” of Oukeyun Chain, as of July 1, the total amount of stablecoins in circulation on Ethereum reached 77.6 billion U.S. dollars, of which USDT, USDC, BUSD, DAI and TUSD are the top five in circulation. Stable coins have a circulation of more than 1 billion U.S. dollars, occupying a total of 95.5% of the market share.

Behind the expansion of liquidity, many stablecoin issuing entities are no longer satisfied with protecting profits and funds only for traders. They have expanded their ambitions to payment and remittance, and serve as the entrance and exit of banks and other financial institutions. In a sense, stablecoins play an important role in connecting traditional financial markets and digital value ecology. As their issuers, some technology companies have even begun to challenge financial institutions at the currency level.

The International Monetary Fund (IMF) pointed out in its paper “The Rise of Digital Currency”: “The two most common forms of currency today will face fierce competition and may even be surpassed. Cash and bank deposits will compete with electronic money. , Electronic currency is priced and linked to common accounting units such as Euro, U.S. Dollar, Renminbi or a basket of currencies. Nowadays, an increasingly popular form of electronic currency is stable currency.”

The current cryptocurrency market is calming down, but with the rise of stablecoins, stakeholders around the world have to re-examine this new type of digital currency.

“Killer app”

Although the public generally regards Bitcoin as a hot spot for speculators, as the first-generation pioneer of the encrypted digital currency world, the birth of Bitcoin has also opened up a wave of innovation in other encrypted digital currencies, and stable currency is one of them.

Since Bitcoin does not anchor any assets, nor does it have the endorsement of legal credit and commercial credit, the skyrocketing and falling prices have become the norm. In order to help traders protect profits and capital during huge fluctuations, stablecoins with anchoring properties should be introduced. Born.

Stable coins are generally divided into three categories. The legal currency mortgage type is the largest category. Representatives include USDT, USDC, TUSD, etc. The above stable currencies are anchored to the US dollar; the encrypted asset mortgage type is represented by DAI, etc., this type of stable currency The original assets on the blockchain, such as cryptocurrency, are used as collateral, and most of them are still anchored to the dollar, which is more decentralized than the previous one; in addition, there are non-collateral (algorithmic) types, which are controlled by an algorithm. It has a flexible supply, but due to the complicated design of the boot phase, most attempts to create unsecured stablecoins either fail or stay in theory.

In addition, Facebook’s new cryptocurrency “Diem” (previously known as “Libra”) also appeared in the form of stable coins after the name change.

Stablecoins retain the characteristics of Bitcoin encrypted transactions and blockchain accounting, and are linked to a certain type of currency or financial assets (the benchmark is usually provided by legal tender, and sometimes by a basket of currencies, gold and other commodities or even another encrypted asset) , Through the contract or transaction mechanism setting, strive to maintain the same value with it, in order to achieve currency stability.

With the help of stablecoins, traders can safely withdraw from volatile cryptocurrencies (such as Bitcoin and Ethereum). At the same time, compared with the use of fiat currencies in the traditional banking system, to achieve arbitrage between encrypted assets, stablecoins are faster and more cost-effective (can avoid regulatory restrictions and reduce unnecessary costs, etc.). This makes it an important tool in the encryption world.

Nowadays, the hot decentralized finance (DeFi) is regarded as an important catalyst for the growth of stablecoins, and the development of stablecoins provides more room for imagination. According to DeBank data, on May 11, 2021, the total lock-up volume of all DeFi was around US$131.4 billion, reaching the highest peak. Compared with the total lock-up volume of US$940 million on June 1, 2020, the increase was close to within one year. 140 times. Among them, stablecoins play an important role in lending and non-custodial transactions.

“The prosperity and development of DeFi shows us where the future growth potential of the stablecoin market lies. Specifically, a stable digital value store promotes activities in the decentralized financial ecosystem, which in itself is a killer application.” Encryption Anastasia Melachrinos of data provider Kaiko pointed out.

Stable coins and U.S. dollar hegemony

At the same time as the rise of stablecoins, the risks behind them have also attracted attention.

A report released by The Block believes that the biggest challenge to the widespread use of stablecoins lies in currency sovereignty risks. At the same time, the development of stablecoins must also face anti-money laundering/fighting terrorist financing, compliance, regulatory uncertainty, Blockchain guarantees and customer protection issues.

Federal Reserve Chairman Jerome Powell said in recent days that stablecoins should be subject to stricter supervision similar to money market funds or bank deposits.

In addition, according to the news released by the U.S. Treasury Department on July 19, U.S. Treasury Secretary Janet Yelon urged the President’s Financial Markets Working Group (PWG) to take action on stablecoin regulation, and plans to issue a report on stablecoin regulation in the next few months. Suggest. According to the announcement, Yellen “emphasized the need to act quickly to ensure that a proper U.S. regulatory framework is in place.”

However, on the other side of the above-mentioned regulatory signals, the recent speech by Randal Quarles, the Fed’s vice chairman in charge of regulatory affairs, hinted at another ambiguous attitude towards US regulation.

In his view, there is no need to worry about stablecoins. Some worries about stablecoins can be resolved. The United States can benefit from stablecoins. Stablecoins anchored to the US dollar may further consolidate the US’s position in the world economy.

“The global dollar stablecoin network can encourage the use of U.S. dollars by making cross-border payments faster and cheaper, and compared with CBDC, its deployment speed may be faster with fewer disadvantages. Considering that our existing system involves -It actually depends on-private companies are creating currency every day, so it is puzzling to worry that stablecoins represent unprecedented private currency creation and thus challenge our monetary sovereignty.” Randall Quarles Pointed out.

Hong Hao, managing director and head of the research department of Bank of Communications International, analyzed: “It seems that the Fed’s attitude towards cryptocurrency is not to regard it as illegal, nor does it think it can challenge the U.S. dollar, and will gradually develop a digital U.S. dollar.”

“Through cryptocurrency, the US dollar stable currency has super penetrability. One function of cryptocurrency may be to act as a liquidity amplifier for a country’s legal currency, especially when the Defi technology matures.” An industry insider pointed out.

It needs to be pointed out that the status of stablecoins has been recognized by the U.S. regulatory authorities, and stablecoins such as USDT are managed by the Office of the Comptroller of Currency under the U.S. Department of the Treasury. In January, the U.S. Department of the Treasury’s Office of the Comptroller of the Currency (OCC) announced on its official website that it would allow U.S. banks to use USD stablecoins for payment and settlement. The document stated that banks may use stablecoins to facilitate customers’ payment transactions on the independent node verification network, including the ability to issue stablecoins and exchange the stablecoins for legal tender.

Challenges from the private sector

Industry insiders pointed out that Facebook’s Diem may become a private currency encouraged by the United States to innovate.

On May 13, the Diem Association issued a tweet stating that it is simplifying the issuance plan of the Diem USD stablecoin, transferring its main business to the United States, bringing it into the scope of U.S. supervision, and running its blockchain-based payment system in the United States.

In this regard, Diem chief economist Christian Catalini (Christian Catalini) said that the DiemUSD stablecoin project is an alternative to the digital dollar or a transitional product before the issuance of the digital dollar.

Libra uses a basket of low-volatility assets such as the US dollar and the euro as collateral, and the currency design is similar to the Special Drawing Rights (SDR) of the International Monetary Fund. According to its initial white paper, Libra is eager to create a global digital currency on the new payment infrastructure designed by the Facebook consortium, but this proposal is strongly opposed by global currency and regulatory agencies.

Perhaps in order to comply with regulatory requirements, in the white paper updated in April 2020, Libra is trying to incorporate blockchain technology into the established regulatory framework. The newly added “Compliance and Prevention of Illegal Activities” section is seven pages long. Emphasize compliance with existing global financial regulations.

More importantly, in addition to the previous mortgage based on a basket of legal currency, the updated Libra will also provide a stable currency based on a single legal currency mortgage. According to Diem’s ​​official statement, this adjustment was made because “a key issue that everyone is concerned about is that if the network reaches a considerable scale and a large number of domestic payments, multi-currency Diem Coin (DBR) may interfere with monetary sovereignty and monetary policy. Therefore, in addition to DBR, we are also enhancing the Diem network by including a single currency stablecoin, initially starting with some currencies in the proposed DBR basket.”

This adjustment will undoubtedly expand the overall target market. Industry analyst Michael Rauchs pointed out on his blog that “opportunistic measures that were originally intended to alleviate the central bank’s concerns may eventually become the main catalyst for adoption. Because it greatly improves the attractiveness and usefulness of the platform to end users.

According to the report “Investigating the Impact of Global Stablecoins” released by the “G7 Stablecoin Working Group” in 2019, in the face of the challenges of cross-border retail payments and remittances, crypto assets can be seen as potential solutions. However, given the volatile nature of this speculative asset class and other restrictions, stablecoins have become a more viable alternative.

G7 found that stablecoins have many characteristics of encrypted assets, but try to stabilize prices by linking their value with the value of the asset pool. Therefore, stablecoins may be more capable as a means of payment and a store of value, and they may help develop global payment arrangements that are faster, cheaper, and more inclusive than existing arrangements.

“It needs attention, Facebook-led Diem may develop rapidly.” A senior cryptocurrency researcher told Caijing reporter, “Some small countries have unstable currencies and are not recognized internationally. They can choose something else. Currency, such as Diem.”

The above-mentioned personnel also pointed out that if Diem succeeds, as a private sector, Facebook will also play the role of the central bank. “The United States may intend to let a private sector like Facebook try to do something that is not convenient for the central bank.”

Regulations in various countries are on the way

It is worth noting that although it is linked to a certain type of asset, the value of stablecoins is not “stable”. Taking USDT as an example, its management company Tether claims to strictly abide by the 1:1 reserve guarantee, and all operations involving legal currency require users to complete KYC certification. But in the final analysis, USDT’s credit is based on Tether’s integrity, and the risks are self-evident. 

Many institutions, including the European Central Bank, believe that the term “stable” is confusing and even misleading. The Financial Action Task Force (FATF) pointed out that “stable currency” is mainly a marketing term used by the promoters of this type of currency.

The consultation document issued by the Financial Stability Board (FSB) in April 2020 matched the vulnerabilities of stablecoins with corresponding regulatory agencies and international standards, and examined potential financial stability risks.

The document states, “Although such financial stability risks are currently limited by the relatively small scale of these arrangements, they may change in the future… However, if they are widely adopted, stablecoins may be in one or more jurisdictions. And become systemically important across one or more jurisdictions, including as a payment infrastructure. Therefore, it will be very important to ensure that appropriate regulatory approaches are adopted within the jurisdiction and internationally.”

At present, FSB has been entrusted by the G20 of the G20 to formulate a roadmap for improving cross-border payment cooperation and information sharing in the next few years. It is expected that by December 2021, there will be an international standard-setting framework for cross-border payment instruments including stablecoins.

In China, stablecoins also cause regulatory concerns. On July 8, Fan Yifei, the deputy governor of the central bank, mentioned the risks of stablecoins. He pointed out that Bitcoin and various so-called “stable coins” have become a speculative tool that poses potential risks that threaten financial security and social stability.

“The so-called’stable coins’ of some commercial organizations, especially the global’stable coins’, may bring risks and challenges to the international monetary system, payment and settlement system, etc. We are still quite worried about this issue, so we Some measures have been taken.” Fan Yifei emphasized at the same time.

Japanese regulators have also expressed concern about the large-scale growth of the cryptocurrency market. Reuters recently reported that three Japanese officials said that Tokyo is willing to cooperate with global financial regulators to establish stricter rules for private digital currencies, and to comply with legal regulations. Currency-linked stablecoins are subject to stricter supervision.

According to Fan Wenzhong, chairman of Beijing Financial Holdings and former deputy director of the International Department of the China Banking Regulatory Commission, it is not realistic to establish a global digital currency at present. “From the actual effect, these stablecoins have not played the true value of promoting the exchange of social commodities and the improvement of welfare effects, and it is still difficult to become a universal payment tool in the commodity society.” Fan Wenzhong pointed out.

The United States Federal Reserve (Fed) and Yale University jointly published a paper “Taming Wildcat Stablecoins” (Taming Wildcat Stablecoins) on July 17 and expressed the same view.

This paper by Jefferey Zhang, an economist at the Federal Reserve Council and Gary B. Gorton, a professor at the Yale School of Management, argues that privately-made currencies such as stablecoins Tether (USDt) and Facebook’s Diem are not effective mediums of exchange because they are not It is not always accepted, and runs may occur. Drawing lessons from history, in the era of free banking before the introduction of the National Banking Act in 1863, the United States experienced too many panics, and various private currencies were also difficult to use due to price fluctuations.

The paper pointed out that based on historical lessons, the government has two options. One is to require stablecoins to be issued through the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) insured banks or to provide one-time support for stablecoins, thereby converting stablecoins into An equivalent public currency with national debt or reserves in the central bank. The second is to introduce the central bank’s digital currency and levy taxes on private stablecoins.


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