Stablecoin
Context
RWA Report 2024:
"The existence of stablecoins as a tokenized version of fiat currencies allowed for a stable unit of exchange in a volatile environment. Since 2014, firms such as Tether and Circle have issued tokenized stable assets that are backed by real-world collateral such as bank deposits, short-term notes, and even physical gold."
Description
1. Philipp Sandner et al.:
"Stablecoins are based on blockchain protocols that have the principle of price stability inherently encoded and, thus, fulfill the function of a reserve currency. The introduction of stablecoins set the foundation of the functioning decentralized financial system, as they enable participants to engage with each other without the underlying risk of price volatility
2. Harry M. Claverty:
"The token market is volatile, which is a problem for utility tokens because their prices need to be stable to have utility, otherwise, we’d use them purely to speculate. If a token performed similarly to a mature currency, it would be useful enough to exchange within this ecosystem. Enter: The Stablecoin.
A ‘Stablecoin’ is a ‘cryptoasset that maintains a stable value against a target price (e.g. USD)’. These assets could offer the best of privacy, stability, scalability, and decentralisation (more here). Moreover, a stakeholder can exchange in their own currency, significantly reducing the barrier to entry."
(https://medium.com/@harrymclaverty/reverse-icos-part-3-db72547afd87)
Status
RWA Report 2024:
"Currently, RWA stable assets are predominantly comprised of USD-pegged tokens. The top 3 USD stablecoins – USDT ($96.1B), USDC ($26.8B), and DAI ($4.9B) – make up 95% of market share. USDT dominance has continued climbing to 71.4%, while USDC saw a hit in market share after its brief depegging during the US banking crisis in March 2023.
‘Others’ comprises other fiat currencies (i.e. EURT, CNHT, MXNT, EURC, EURS, and TRYB). Collectively, these stable assets make up just 0.2% of the market.
Total market cap of fiat-backed stablecoins had seen a meteoric rise from $5.2B at the start of 2020 to a whopping $150.0B at its peak in March 2022, before declining gradually throughout the bear market.
Inflows have started seeing an uptick since November 2023. Since the start of 2024, the market cap of fiat-backed stablecoins have grown by 5% from $128.2B to $133.6B as of February 1.
...
In 2023, tokenized US treasuries saw a surge in
popularity, increasing its market cap by 7.82x
from $104M in 2023 January to $917M by the
end of the year. However, that momentum has
somewhat stalled in early 2024, increasing by
just 1.5% to $931M in 2024 January.
While these tokens are largely based on ETH, with 52.9% market share, firms such as Franklin Templeton and Wisdomtree Prime have chosen to issue them on Stellar, which currently holds 35.8% of the total market cap. Other networks include Polygon, Solana, Base and Mantle."
Typology
Philipp Sandner et al.:
"There are three options how a cryptocurrency can reach price stability.
First, stablecoins can reach high degrees of price stability by pegging a currency to other assets. For example, for each issued unit of USD Coin a real US Dollar is held in reserve.
From a decentralized finance perspective, another interesting approach is the issuance of stablecoins by using other cryptocurrencies as collateral. A central protocol for the Defi ecosystem is Maker DAO, which issues the cryptocurrency DAI that is backed by other cryptocurrencies and ensures with its algorithm that the value of 1 DAI is hovering around the value of 1 US Dollar.
Thirdly, there are more experimental approaches that aim to reach price stability without the use of collaterals. For instance, the protocol Ampleforth automatically adjusts the supply of token in accordance with demand."
Discussion
Why Trump supports Stablecoins and crypto
Peter Ryan:
"A statement from Treasury Secretary Scott Bessent at last week’s summit was the latest indication that there is a deeper strategy: maintaining dollar hegemony in an increasingly multipolar world. Bessent declared: “We are going to keep the US [dollar] the dominant reserve currency in the world, and we will use stablecoins to do that.” Stablecoins are cryptocurrencies that maintain a one-to-one peg with a fiat currency based on a stablecoin provider, usually a centralized private firm, maintaining real reserves of the currency. They provide the non-volatile value of a fiat currency, but with the regulatory flexibility of cryptocurrencies. Stablecoins are mostly used for trading cryptocurrencies within market exchanges. About 75 percent of trades are done with stablecoins. In short, there is no crypto sector without stablecoins. And it just so happens that 99 percent of stablecoins are pegged to the US dollar. That means that increasing cryptocurrency demand increases stablecoin demand, which increases US dollar demand. This is because the expanding market of cryptocurrencies is dollar-denominated, so dollars are needed to buy stablecoins to buy cryptocurrencies. Stablecoin demand, in turn, also increases demand for US Treasuries, because stablecoin providers convert customer dollars into Treasuries to hold as reserves, instead of non-interest bearing cash. Stablecoin providers own $120 billion worth of US debt through Treasury purchases. This makes them the 18th largest holder of US debt in the world, larger than countries like Germany. The approach taken by World Liberty Financial (WLF), a dollar-pegged stablecoin project launched by Trump last year, is consistent with the strategy of using stablecoins to support dollar and Treasury demand. WLF’s X account stated in September: “By spreading US-pegged stablecoins around the world, we ensure that the US dollar’s dominance continues.” Boosting dollar and Treasury demand matters to the current administration because of the rising risk of de-dollarization."
(https://www.compactmag.com/article/the-real-reason-trump-backs-crypto/)
Why stablecoins won't work
Yanis Varoufakis:
"The idea behind the Gold Standard was that national currencies gained credibility because their state/central bank gave up the right to print money at will. By fixing the exchange rate of a national currency to the price of gold (e.g. $35 for one ounce of gold), and freely allowing two-way convertibility, it was common knowledge that, if the authorities printed money in total value exceeding the value of the gold in the central bank’s vaults, at some point people holding paper money would demand gold that the central bank did not have.
A currency board (e.g. the system underpinning Bulgaria’s national currency today) is similar in that the central bank fixes the national currency’s exchange rate to equal the average price of a basket of hard currencies. Again, as long as there are no capital controls and the national currency is fully convertible to the hard currencies in the currency board, if the central bank prints more money than is equivalent (under the fixed exchange rate) to its foreign currency reserves, it risks a run on its reserves. As with the Gold Standard, currency boards have proven fragile – at the sign of economic crisis, war, or other types of stress, they are abandoned.
A stablecoin is a currency board with the difference that it applies to a stateless digital currency (like Tether), not a national currency. This means that there is no state to legislate that the system administrators honour the fixed exchange rate; that they not create stablecoins in excess of the value of their reserves, cash them in, and do a runner. In other words, in addition to the inherent instability of currency boards, stablecoins are ripe for fraud.
In conclusion, the fact that stablecoins or Bitcoin itself acquire the aura of saviours in countries hit by inflation, like Turkey, is nothing more than a measure of the desperation of the people: they will clutch at straws. Stablecoins offer Turks no respite from inflation that buying euros or dollars cannot offer. So, why buy Tether instead of dollars or euros? Why rely on the shadowy characters running a private currency board? Only because the latter deploy good marketing to exploit desperate people."
(https://metacpc.org/en/crypto-blockchain/)
Private Stablecoins as a Challenge to Democratic Sovereignty
Saule T. Omarova:
"In developed economies with democratic governments, digitization of money has been primarily a private market phenomenon, whereby multiple privately issued digital currencies co-exist, sometimes uneasily, with sovereign money. The recent growth of stablecoins poses an especially serious challenge to the long-term stability and monetary sovereignty of democratic governments. Stablecoins are digital currencies claiming to keep “stable” value pegged to the value of the USD or some other state currency. Typically, the issuer of a stablecoin – including USDC, Tether, and Binance USD –maintains the peg to traditional money by setting up a “reserve” to hold USD or other safe assets backing it. A stablecoin thus “borrows” its stability from the sovereign money and functions as its tokenized derivative, or a privately-controlled digital representation.
In this sense, stablecoins are both a direct competitor to, and a direct outgrowth of, sovereign currency. They facilitate trading, lending, and investing in a wide variety of crypto-assets, particularly in the so-called decentralized finance (DeFi) universe, and serve as “onramps” connecting crypto-markets to the traditional financial system. This critical infrastructural function gives stablecoin issuers – private crypto-exchanges, banks, and technology companies – potentially enormous market power. As the issuers of the widely accepted “means of exchange” and “store of value” within the crypto ecosystem, these private market actors can replicate the functions of traditional central banks, but without the accompanying legal obligation to act in the public interest. In effect, stablecoins enable what may be called synthetic privatization of the fundamental public function and a critical public resource – sovereign money and credit – with no democratic accountability or express political commitment to provide public goods.
The political risks this business model creates are especially visible in the case of Big Tech stablecoins. In June 2019, Facebook (now Meta) launched its Libra project (later renamed Diem): a global stablecoin to be issued by a Swiss-based consortium of large corporations led by Facebook. From the start, Libra was promoted as a service for the billions of people around the globe locked out of the traditional financial system. The original plan was to have the Libra Association issue a global cryptocurrency, backed by a basket of sovereign currencies (the “Libra Reserve”), and manage a cross-border payments network built on top of Facebook’s vast social-media platform. Facebook was to run the digital wallet built into the Libra ecosystem, and provide other potentially lucrative services tied to it. The unprecedented scale and structural design of this project, which would effectively put Facebook at the center of global money and payments flows, generated strong political and regulatory backlash. Despite the newly renamed Meta’s efforts to scale down and rebrand it, the project was ultimately wound down.
The Libra/Diem saga is nevertheless highly instructive. It revealed how private digital currencies and payments systems created and controlled by globally dominant techno-financial conglomerates can directly threaten the stability, autonomy, and resiliency of the world’s leading democracies. If successful, the Libra/ Diem stablecoin would have made Meta a “shadow” Federal Reserve, a source of globally ubiquitous digital currency, potentially more powerful than the actual Fed.26 It would have given Meta and its corporate partners direct access to the financial and transactional data generated by the users. Meta would have been able to monitor in real time daily activities of billions of users, manipulate their preferences and shape their behavior, and otherwise commercialize their personal data in deeply invasive ways. It would have been able to condition individuals’ access to, or price of, Libra/Diem either on their willingness to purchase other goods or services offered by Meta or on some form of “social scoring” maintained by it. From there, it is not hard to imagine Meta using its newly-minted power over digital finance for political reasons, in effect replacing old interest-group politics with the new tactics of digital authoritarianism.
This is not such a far-fetched scenario, particularly given the highly personality driven culture of the tech and crypto industries. Successful technology firms – including publicly-traded Apple, Microsoft, Amazon, and Meta – tend to be closely associated with their charismatic founders. Many tech firms also have corporate governance structures that explicitly concentrate control in the hands of the few insiders. These private authoritarian tendencies under the guise of techno-meritocracy are even more extreme in crypto-finance, where they provide the fertile ground for the rise of potentially autocratic “visionaries” with grand political ambitions.
The tech-driven ability to control digital money and finance networks, therefore, offers not only an unprecedented economic advantage but also a new set of previously non-existent political levers.
From this perspective, the ongoing expansion of Big Tech platform companies into digital money and payments – including the recent announcement of Twitter’s intentions to offer payments services – raises potentially far more troubling and complex issues than is commonly acknowledged. The same is true of financial institutions, such as JPMorgan that currently issues its own JPM Coin and runs a permissioned blockchain platform for trading of tokenized financial instruments. It is critical to see these private conglomerates’ push into digital money not simply as a technologically innovative business strategy, but as a politically salient project of redefining the core public-private balance in finance.
To date, the prevailing response to this challenge has been a call for regulation. What the appropriate regulatory regime should seek to accomplish, and by what means, however, remains unclear. In the U.S., the vast majority of policy proposals seek to make private stablecoins actually “stable” and “safe” as the means of payments, either by limiting their issuance to federally-insured banks or by mandating the composition of reserves backing them.
While consumer protection and avoiding failure are important policy goals, this approach ignores or downplays the perilous structural implications of legitimizing – and publicly subsidizing – private stablecoins. Instead of defending the state’s monetary sovereignty, this seemingly pragmatic approach risks further erosion and ultimate loss of democratic control of public money and finance.
But there is a bigger problem with treating regulation as the only possible response. As shown in my prior work, our existing technocratic paradigm of financial regulation is inherently ill-suited to deal with the unique challenges of digital finance. That raises the question about other, more direct and effective, options we may need to consider."
(https://cdn.sanity.io/files/9xbysn2u/production/4d7f42a888168a1d66292f26cdc50b5e3ff8d698.pdf)
Source: Article/Chapter: Digital Finance and the Specter of Digital Authoritarianism. Saule T. Omarova. In: Decoding Digital Authoritarianism. Global Affairs Canada, 2023.
More information
- Report: Real-World Assets 2024: "Real-world assets allow traditional financial instruments to be represented on-chain as tokens,
democratizing access to a wider userbase." pdf