The techno-anarchist cryptocurrency pioneers believed they were creating a new form of decentralized, unregulated money. They couldn’t have been more wrong. While Bitcoin and Ethereum have succeeded in creating a highly speculative alternative asset class that enjoys wider use and popularity, the innovation that is truly poised to challenge fiat money is stablecoin: the hallway. less turbulent whereby investors reach volatile digital tokens.
Far from being an alternative to government-issued money, securities like Tether and USD Coin are tied to government-backed legal tender like the dollar. These tokens allow investors to enter and exit their cryptocurrency assets without having to interact every time with a bank that is wary of unintentionally allowing money laundering, terrorist financing, child pornography or hacking. by extortion. This is because blockchain-based national currency clones started to gain popularity when crypto exchanges took off in late 2017; many of them were unlicensed to accept fiat currency.
But with payment networks like Visa Inc allowing customers to settle their claims using USD coins, stablecoins have started to gain general appeal, recording $ 3 trillion in transactions in the first half of 2021. , according to McKinsey & Co. Although this is a fraction of the money flowing through state-blessed banking channels – annual cross-border payments alone amounted to $ 130 trillion before the pandemic – actors in the private sector now have an advantage over governments, according to the consulting firm.
In China, the monetary authority pilot has at least made humble beginnings, handing out the equivalent of $ 40 million in digital yuan by lottery ahead of a scheduled start around the Beijing Winter Olympics in 2022. The Most of the other major central banks fall far short of offering their own official digital currency for widespread public use.
How much more ground will the authorities give up before offering competing products or introducing regulations to cut the wings to the private sector? The answer has broad implications both for the payments industry and beyond. Funds parked with Tether have grown 230% this year, according to Fitch Ratings, which believes that based on current trends, stablecoins could become a larger holder of U.S. commercial paper in the short term than money market mutual funds. in two or three years. While Diem, the next Facebook-backed stablecoin, has stated that it will invest primarily in government securities, alternative allocation strategies are possible and, “depending on its scale, the operator can become a significant participant. in other short-term markets, âFitch said.
The stakes are high for overall financial stability, especially if a large number of people decide to simultaneously cash in on a popular stablecoin amid skepticism about its true exchange value. Tether, which has claimed for years that its digital tokens are fully backed by fiat currencies, will pay $ 41 million to settle claims that they are not. From June to September 2017, there was never more than $ 61.5 million in support for Tether, even though around 442 million coins were in circulation at any given time.
Money is only of value when those who have it and those who want it in exchange for something else are not in doubt. According to Yale School of Management finance professor Gary Gorton and Federal Reserve attorney Jeffery Zhang, this “no questions asked” ownership of sovereign currencies may not be valid for unregulated stablecoins. Researchers recently drew a parallel with the pre-Civil War savage banking era, when banknotes from a Tennessee lender were reduced by up to 20% in Philadelphia.
Unsurprisingly, regulatory control is now directly directed to stable coins. Within its own borders, each country can decide how it wants to regulate these strange creatures, who settle claims even if it is neither commercial bank money nor an IOU. sovereign. Consultations are underway on a set of international rules to govern any stablecoins agreement that is “or likely to become systemic”.
Stablecoins are here to stay. As they provide liquidity and a perceived ‘safe haven’ to investors during times of heightened crypto volatility, McKinsey expects their recent growth spurt to continue, at least as long as the global digital token market continues to hold. developed. Central banks’ own paperless liquidity can and should therefore learn to coexist with private money.
This will inevitably cause friction. The state playing the second fiddle in monetary affairs may be anathema to Beijing, which is at least in part why China’s central bank is more determined than its peers to launch a digital yuan. Other countries still seem largely satisfied with their ability to domesticate feral cats. We hope they are not already too late.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services
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