As a researcher with a background in economics and finance who has closely followed the evolving landscape of cryptocurrencies and digital currencies, I find myself intrigued by the ongoing development of stablecoins and central bank digital currencies (CBDCs). The prospect of a digital dollar is an interesting one, as it presents both opportunities and challenges, particularly in terms of privacy and the role of traditional fiat currencies.
One of the key topics linking cryptocurrencies to all Americans, regardless of whether they are in crypto, could be the prospect of a digital dollar — a version of the currency issued by the Federal Reserve that is traced on the blockchain.
Discussions surrounding a potential digital U.S. dollar have ignited worries about privacy, resulting in prohibitions in certain states and pledges from political contenders that they would prevent any digital money from supplanting the conventional paper dollar.
In the meantime, private companies’ stablecoins have taken on a crucial role, boosting the global use of the U.S. dollar. Companies such as Tether, which issue stablecoins, have become significant owners of U.S. government debt.
CryptoMoon engaged in a discussion with Eswar Prasad regarding the significance of central bank digital currencies (CBDCs) and stablecoins within the context of cryptocurrencies and traditional fiat money. Eswar Prasad is an esteemed academic, serving as the Tolani Senior Professor of Trade Policy at Cornell University, a member of IC3, and a research associate at the National Bureau of Economic Research.
Stablecoins: Complementary or competitors to CBDCs?
Since 2020, the Federal Reserve has been exploring the concept of a digital equivalent to the US dollar. As per information gathered by CBDC Tracker, at least four research initiatives are being spearheaded by Fed members: the Digital Dollar, Project Hamilton, Project Cedar Phase II, and Project Ubin+, as well as the Wholesale Digital Dollar.
Regardless of the diverse subjects these research initiatives encompass, such as self-contained communities and international monetary exchanges, for numerous U.S. residents, it’s often associated with a perceived reduction in financial privacy.
On numerous instances, the Republican candidate and ex-President Donald Trump has declared his commitment to preventing the implementation of Central Bank Digital Currencies within the nation.
For stablecoin issuers, the absence of a US dollar means a market opportunity. Over the past few years, Tether has gained a market share of nearly 70% among stablecoins pegged to the US dollar. The company has also strengthened its ties with US authorities over the same period, onboarding the Federal Bureau of Investigation (FBI) to its platform.
On July 31, the value of Tether’s reserve exceeded that of Germany, the United Arab Emirates, and Australia, amounting to a staggering $97.6 billion in U.S. Treasury bonds.
2021 saw the US Commodities and Futures Trading Commission (CFTC) imposing a $41 million fine on the company, as they were found to have falsely represented the assets backing their stablecoin.
For Prasad, programmable stablecoins may still have a place in decentralized finance, but CBDCs could be a substantial competitor to cryptocurrencies as a medium of exchange for common transactions:
He stated that both Stablecoins and Central Bank Digital Currencies might serve as alternative means of payment, although they could potentially overlap in their roles.
In simpler terms, an economist suggests that if stablecoins replace the role of traditional currency as a medium of exchange, their peaceful co-existence with a potential digital dollar might pose a threat to the effectiveness of monetary policies.
Prasad noted that digital currencies, which potentially disrupt the role of traditional central bank money as a means of exchange, might exacerbate existing doubts about how monetary policies influence economic actions and price increases.
As the integration of cryptocurrencies and conventional finance deepens, it might introduce potential threats to market stability. For instance, an incident like the March 2023 U.S. banking crisis, which forced the closure of Silicon Valley Bank, could trigger ripples affecting stablecoins such as Circle’s USD Coin (USDC), which has approximately $30 billion in U.S. Treasuries as its reserves. This event briefly caused USDC to deviate from its intended pegged value.
As a crypto investor, I’ve noticed the increasing use of stablecoins in our digital economy, but I can’t help but feel the need for more transparency and regulatory certainty surrounding their application within our financial system. Unfortunately, as of now, the United States Congress has not yet established a clear framework to address this issue.
In simpler terms, the latest legislative move regarding digital currencies is the “Clarity for Payment Stablecoins Act of 2024,” proposed by Senator Bill Hagerty in October and based on earlier suggestions.
The proposed legislation establishes various state-based regulatory avenues for stablecoin companies. Smaller entities with a market value below $10 billion may be managed under state regulations, whereas larger companies have the option to request exemptions to operate under state control rather than federal supervision.
Stablecoins and the US dollar dominance
In the second quarter of 2024, a study by venture capital firm a16z revealed that stablecoins had a total transaction volume of $8.5 trillion, with over 1.1 billion individual transactions worldwide. This figure surpassed Visa’s transaction volume of $3.9 trillion for the same period, indicating a significant growth in the usage of stablecoins compared to traditional payment systems like Visa.
As suggested by Prasad, stablecoins theoretically have the potential to diminish the dollar’s dominance as a global currency for transactions, making it easier to use alternative currencies instead. Yet, at present, stablecoins appear to be heading in the opposite direction.
According to a16z data, roughly 99% of the value held in stablecoins is tied to the U.S. Dollar. Prasad clarified this point for us.
“Here, too, matters have taken an unexpected turn. Stablecoins backed by dollars are the only ones getting any real traction, thereby indirectly making the dollar more prominent as a payment currency.”
As an analyst examining the current financial landscape, I’ve noticed a trend where innovative technologies are indeed facilitating novel forms of currency. However, this transition doesn’t automatically result in decentralization. Instead, it’s essential to closely monitor and understand how these advancements are shaping our financial ecosystem.
The economist pointed out that there’s a chance these new forces could actually lead to increased centralization, resulting in certain currencies gaining significantly more strength and control. Interestingly, this development may actually strengthen rather than diminish the US dollar’s dominance.
globally, approximately 50 nations are pursuing Central Bank Digital Currency (CBDC) initiatives, ranging from initial stages to completion, with a focus on either domestic transactions or facilitating international commerce via cross-border payments in foreign trade.
One of the nations spearheading this competition is China. If successful, its digital yuan might significantly boost the renminbi’s standing as a global payment currency. To make this happen, though, it may require restructuring China’s financial system to lift barriers on capital movement.
Prasad stated that the belief that digitizing the yuan will boost its influence in global finance is more of an illusion. He explained that the dollar’s power isn’t solely based on the size and accessibility of American financial markets, but also on the robust institutional structure that supports its status as a secure investment option.
The growing presence of digital currencies like the digital yuan, DREX in Brazil, and numerous CBDCs in major economies could potentially enhance their standing as international payment instruments, but they are unlikely to significantly challenge the U.S. dollar’s dominant position as the world’s primary reserve currency.
“Digital technologies are enabling new forms of money that could challenge fiat currencies, setting off a new era of domestic and international currency competition.”
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2024-10-25 21:18