The politician Benjamin Disraeli once said, “Money is power, and rare are the heads that can withstand the possession of great power.” Understanding that powerful nations have the ability to control world events through monetary policy helps to explain why regulators take such a strong interest in stablecoins.
As we explained earlier this week the present strength of the US Dollar is due to the fact that over 80% of world trade has to be settled using dollars and there’s currently a shortage of dollars. This places the US in the enviable position of being able to negotiate foreign policy on the basis of supplying dollars, otherwise known as swap lines.
A swap line is an agreement between the US Federal Reserve to allow the central banks of certain countries the ability to swap their currency for US Dollars. Only 5 countries have unlimited swap line access, meaning they can access as many dollars as they wish, while another 9 countries have limited access.
Swap lines are crucially important for countries when the dollar is in limited supply as it means they can provide their corporate clients with the necessary dollars they need to satisfy their debt payments. This prevents cascading debt defaults and helps to stabilize each country’s economy.
A growing trend in US foreign policy is granting access to swap lines in return for agreements by governments to support US objectives. As such the position of the US Dollar as the world reserve currency is an essential aspect of furthering the global aims of the US.
If, as many within the crypto space hope, digital currencies gain mass adoption this presents a significant threat to the US Dollar status, unless those currencies are fully backed by dollars. Some commentators even claim that China’s crackdown on crypto was because its citizens used Tether to move capital out of the country and as such, the stablecoin could threaten the future stability of the Yuan.
To avoid situations like this, regulators are placing their focus on stablecoin issuers while central banks are simultaneously developing their own stablecoins as Central Bank Digital Currencies (CBDCs). These, however, come with their own risks as Deniz our CEO explains, “I believe that CBDCs will likely have a significant role in the future of blockchain. We must remain cautious in our oversight of the way governments implement and design them. Blockchain technology gives participants a high level of freedom and we must ensure this continues when CBDCs are fully implemented.”
On the surface, it may seem strange that regulators see stablecoins as securities that need oversight, especially when you consider the low reserves required for the fractionalized banking system. However, their concern is because US Dollar denominated stablecoins have the ability to operate outside the system controlled by central banks.
It’s not so much of an issue now but could be a significant issue in the future if commodities were to be settled in dollar-denominated stablecoins that are backed by something other than dollars. It would solve the dollar supply problem, weaken the strength of the dollar, and undermine the need for swap lines.
You only have to look at the rise of stablecoins within the crypto ecosystem to see the potential scope for future growth. As Wilson, our COO describes, “Stablecoins have secured a large percentage of the overall cryptocurrency market. A vital benefit of a stablecoin is allowing investors to take gains while keeping value within the crypto ecosystem and increasing the overall TVL. Additionally having a means of stable value transfer is key to a healthy market. The creation of stablecoins has been very important to the adoption rates that we’ve witnessed today.”
Unfortunately, the de-pegging event of Terra Labs stablecoin UST and its subsequent death spiral gave regulators all the evidence they needed to justify their focus on stablecoins. It was a case of growing too big, too fast, and not properly mitigating vulnerabilities until it was too late. It was the perfect storm of greed, speed, and overconfidence that many regulators had been hoping for.
Fortunately, that’s not the case with all stablecoins as Simon, our CTO explains, “Not all stablecoins are built the same. We have witnessed the tragic events when these tokens don’t function as intended. While an algorithmic stablecoin doesn’t necessarily mean it is guaranteed to be issue free, there are some, such as our partners Djed, that have robust and tested infrastructures. These are the kinds of tokens that will give confidence for investors to continue using and placing a higher percentage of their net worth into.”
As the space develops it’s important to understand how much institutional and generational power is tied to money. Taking a confrontational approach to regulators and legacy structures will always end badly for cryptocurrency projects. This is why we place an emphasis on bridge building, cooperative development, and education.
The responsibility is upon the shoulders of the whole crypto community to ensure that as we build the rails for future financial systems we don’t recreate the same power struggles and exclusions as before. Our approach is to educate, involve, and empower everyone because together we can share the great power that blockchain technology will unlock.