Future of Stablecoins
In April 2024, Stripe, the massive internet-native payments company, bought the stablecoin company Bridge for $1.1 billion.
I’ve historically been pretty averse to the promises of cryptocurrencies. Partially due to the sheer number of grifters in the space and partially because the value proposition of a currency that purposely isn’t backed by the US government didn’t sound tremendously intriguing to me. Stablecoins on the other hand… interesting!
Here are some loose thoughts I’ve had about what stablecoins might due to the political-economy.
De-de-dollarization
Globalization and the collapse of the Soviet Union left the US with a stranglehold on financial power. Under Bill Clinton and his Treasury Secretary Robert Rubin, the government made a deliberate shift towards the use of financial sanctions as a core foreign-policy tool. In effect, the dollar’s status as a reserve currency became a weapon of the state. The passing of the Patriot Act in response to 9/11 expanded the Treasury’s reach over foreign banks.
More recently we’ve seen use of this financial warfare against Iran, Venezuela, some Chinese firms, and North Korea. The 2022 invasion of Ukraine and the subsequent Russian sanctions were a turning point. The Central Bank of Russia’s overseas foreign-exchange reserves were seized (~$300 billion), Russian banks were kicked out of SWIFT, and oligarchs’ assets were frozen.
Country coalitions like BRICS (Brazil, Russia, India, China, South Africa) have emerged as possible attempts to de-dollarize. They want to institute a new common currency that is detached from US control. But these measures are driven largely by top-down authoritarian states. The people? Well the people really like dollars.
Chinese investors are hitting their state-imposed outbound investment limits. There is such a demand for US currency that black markets, powered by the fentanyl trade, have enabled Chinese nationals to convert their yuan to USD.
In hyperinflationary economies like Venezuela or Zimbabwe a substantial percentage of transactions are done in dollars, despite heavy currency controls from governments.
Stablecoins enable this latent demand. Now you don’t need to go through a US bank or payments-tech company like AliPay or WePay or whatever. You can open a wallet freely and anonymously and transact through the blockchain. In some parts of Argentina and Turkey you can buy a coffee with tether.
Governments want to de-dollarize. The people want to de-de-dollarize.
Ramifications
Authoritarians get sad
If this goes all the way then some governments lose currency control all together. Their federal reserves become divorced from transactional reality. The Venezuelan Bolivar would only exist on the balance sheet of the government. This could be pretty good for the citizens of the country. Losing currency sovereignty is probably a worthwhile tradeoff when your government sucks at using its currency sovereignty. Almost anything is better than hyperinflation. But the authoritarians lose a powerful tool.
Bank centralization
Everyone starts using tether wallets -> the local banks lose all their reserves and close down. All Venezuelan cash reserves now live in the nebulous non-locality of Singapore-Hong Kong-Virgin Islands.
The IMF said that stablecoins can “amplify currency substitution”, “weaken monetary policy transmission”, and “increase banking stress”. What does the banking stress mean though, if its an increasingly small fraction of the total number of depositors?
The United States and a select few continues to Financialize. The bankers disappear in Venezuela and more of them show up in the US. More Americans become bankers. Fewer become engineers. They become even more entrenched as the backbone of Capitalism. In the extreme, the rest of the world ends up outsourcing their finance sector to three or four countries.
More US Treasury demand
Stablecoins aren’t backed by dollars. They’re backed by treasuries. Tether holds over $100 billion in US Treasuries already. A stablecoin future means perpetual rolling demand for US government debt. That means lower borrowing costs and even stronger financial leverage. And it means the government can kick the deficit problem down the road for another decade.