It used to be that if you lived in a remote village in Africa, or for that matter, Southeast Asia, Latin America, or even behind the Berlin Wall in Eastern Europe, you had desire and need for U.S. dollars, but no easy way to access them. You couldn’t readily exchange monetary value with family, friends, or business partners far away without significant cost and inconvenience. Your local currency may have faced frequent debasement, inflation may have been rampant, and local banks not likely trustworthy. Or perhaps you had goods to offer, but no simple way to get paid for them in hard currency. To get one’s hands upon U.S. dollars was to find paper gold that could be saved, traded, and used nearly everywhere. Dollars were king, but they were largely inaccessible and at risk of confiscation.
All of this has changed with the advent of the blockchain. Digital assets, and stablecoins in particular, have launched a financial inclusion transformation that holds potential to democratize access to universally-accepted transactional money like never before. Now, anyone with access to a smartphone (i.e., nearly everyone in the world) has the potential to invest, buy, sell, hold, and transact in U.S. dollars through stablecoins using blockchain technology. With stablecoins, at least in theory, neither banks nor governments can stand between a willing buyer and a willing seller in markets around the world. But like most innovations, they pose hidden risks.
Fiat-backed stablecoins, backed 1:1 by an underlying currency such as the U.S. dollar, now represent a rapidly-growing market of nearly a quarter of a trillion dollars. Most popular among these are USDT (issued by Tether) and USDC (issued by Circle), each of which are 100 percent collateralized by U.S. Treasury and agency securities. These stablecoins have quickly grown as a medium of exchange not just for crypto transactions but for real-world payments (such as purchases of goods and services) around the world where speed, efficiency, and low cost are valued.
Stablecoins have proven particularly useful in cross-border payments and remittances, where the alternative is a cumbersome, expensive, and painfully slow process intermediated by banks or payments companies. Stablecoin transactions are near-instantaneous, require no bank or other payment intermediary involvement, are free of bureaucratic red-tape, and can be made anytime, to and from anywhere around the world.
For billions of individuals around the world, access to the U.S. dollar via stablecoins is a game changer. They are brought into the global financial market without the need for a bank account, something that remains an insurmountable obstacle for nearly twenty percent of people globally.
It is not just individuals who find benefit in stablecoins. Large financial institutions are also getting into the act, using stablecoins to disintermediate complex transactions and program smart contracts for faster execution, all of which reduces costs.
A smaller but growing market exists for asset-based stablecoins backed by gold, silver, or any conceivable physical commodity or financial instrument. For investors or savers concerned about the value of the U.S. dollar, whether from falling exchange rates or diminished purchasing power from inflation, asset-backed stablecoins provide an attractive alternative.
All stablecoins retain one substantial flaw from the traditional financial system. They rely on a trusted third party to hold and custodian the assets, whether U.S. Treasuries or gold bullion. There remains substantial incentive to cheat, i.e., by holding fewer assets than promised, and there is no reason to believe that centralized issuers of stablecoins will be any more prone to high integrity than banks and other financial institutions.
Wyoming, which has been a blockchain innovator amongst the American states, has announced plans to issue its own digital stablecoin. Wyoming’s digital initiative comes at a time when many states are considering bills to allow gold and silver—traditional forms of money from time immemorial—to be used as transactional currencies alongside the U.S. dollar. Wyoming has long positioned itself as a crypto-friendly jurisdiction, and this move bolsters the image. WSTY, set to launch this summer, would be the first stablecoin issued by an American state. WSTY will be pegged 1:1 against the U.S. dollar, and backed by U.S. Treasury securities. Wyoming hopes that earnings on collateral will help fund their educational budget.
However, some crypto industry participants and lawmakers, such as House Majority Whip Tom Emmer, warn against Wyoming’s stablecoin initiative. Rep. Emmer argues that a centralized approach to digital currencies run counter to crypto’s core principles—including decentralization and monetary autonomy—and creates a slippery slope towards central bank issued digital currencies (CBDCs). Detractors warn that CBDCs give governments (whether Federal or the states) too much power to surveil and control citizens’ behavior, and ultimately to seize the digital assets they issue.
Stablecoins don’t fully address privacy concerns. Stablecoins operate on blockchains, which act as form of transactional ledger fully accessible to the public. As a result, stablecoins won’t be able to provide the same level of privacy and anonymity that cash does. While technically fully traceable, stablecoin transactions can easily be diverted and camouflaged, by any number of means, providing some degree of privacy and anonymity. The U.S. government has recently shown a shifting position towards favoring crypto privacy, as indicated by U.S. Treasury’s recent delisting and removal of economic sanctions against Tornado Cash, a popular crypto “mixer” used to anonymize transactions.
Stablecoins hold promise as an efficient, cost-effective, and simple alternative to the traditional bank and payments systems. With this comes opportunity to bring many unbanked and underbanked into the global financial community. However, stablecoins fail to solve the issues of centralized control, collateral risk, fraud, government intervention and manipulation. For this, Bitcoin remains pristine collateral and a digital asset unlike any other.