The TechCrunch Global Affairs Project examines the increasingly intertwined relationship between the tech sector and global politics.
Skeptics of the flourishing web3 industry attack it for a number of reasons. One critique that resonates in Washington is that digital currency could undermine the country’s current monetary system, even the U.S. dollar itself.
But while digital assets have undeniably disrupted traditional financial services, they are far from being an enemy of the dollar. In fact, a type of digital asset, the stablecoin, has the potential to cement USD dominance worldwide. But if the U.S. is to capitalize on stablecoins’ potential, policymakers and regulators must take a measured approach to regulation.
Stablecoins are a class of digital asset designed to maintain a stable price over time. They differ from other digital assets in that their price is often pegged to fiat currencies, usually USD. They have also evolved substantially since Facebook’s attempt to launch its own “Libra” stablecoin two years ago (a project so unpopular Facebook subsequently rebranded it to “Diem”).
Facebook initially designed Libra as a new currency, pegging it to a basket of fiat currencies and securities rather than just one. Policymakers globally panned Libra and cited its potential to threaten global financial stability, abuse data privacy and undermine monetary policy. Former president Donald Trump said that Libra would have “little standing or dependability” and that the “only one real currency” in the U.S. is the dollar.
Fast-forward to today and stablecoins’ special connection to the dollar gives them the potential to expand dollar dominance rather than threaten it. However, that potential will only be realized if enough U.S. policymakers understand the promise of stablecoins and pass reasonable regulations that encourage, rather than hinder, innovation.
Stablecoins’ exponential growth
Mainstream use of stablecoins is picking up, with the market growing from $5 billion in December 2019 to more than $158 billion in December 2021.
One reason for this growth is stablecoins’ inherent advantages over current financial technologies. For instance, stablecoins can be transferred instantaneously to anyone around the world with little to no transaction cost.
For a tangible example of the impact of stablecoins, consider their use by migrant workers. Typically, workers send their money home through traditional financial institutions. The process can take weeks and costs, on average, 7% of a worker’s earnings in transfer and conversion fees. Stablecoins, on the other hand, allow migrant workers to send their wages home instantaneously for almost no cost.
Stablecoins increase demand for USD
Since all major stablecoins are denominated in USD, their exponential adoption around the world gives the U.S. a critical opportunity to expand dollar dominance. Meanwhile leading stablecoin issuers like Circle hold their reserves in USD and short-term U.S. Treasuries. This both increases demand for USD and makes dollars more accessible to buyers across the globe. These developments make the U.S. better positioned than any other country to take advantage of consumer interest in this new technology.
The stablecoin market will likely sustain outsized demand for USD given the network effects reinforcing the existing popularity of USD-backed stablecoins. This is particularly true in countries with unmet demand for USD, like Argentina, where the government limits its citizens’ access to hard currencies.
What could go wrong for the U.S.?
Despite its potential, poorly crafted regulations could kill the stablecoin sector in the U.S. while the industry thrives abroad. A lack of regulatory clarity for blockchain companies has already pushed U.S. founders to move their operations to jurisdictions with clearer and/or more permissive regulations, like Singapore, Portugal and the Cayman Islands. Fidelity Investments, one of America’s best-known investment advisers, notably launched its Bitcoin ETF in Canada as regulators have not yet authorized a similar offering in the U.S.
Further, the recently passed infrastructure bill contains unworkable digital asset tax reporting requirements that, if left unchanged, would deepen a growing trend of blockchain companies moving offshore. Policymakers have responded to this threat by trying to amend these requirements, including through the bipartisan Keep Innovation In America Act, but they may not be successful in time.
On stablecoins specifically, policymakers are split. The recent Senate Banking Committee hearing on stablecoins struck a harsh tone. Senators cited many of the same concerns they had with Libra, demonstrating a lack of understanding or interest in the different types of stablecoins. Meanwhile a bipartisan congressional committee surprised observers with its enthusiasm for stablecoins at a key hearing earlier this month. Equally surprising were Fed Chair Jerome Powell’s comments this month that “stablecoins can be a useful, efficient, consumer-serving part of the financial system if they are properly regulated.”
To keep stablecoin innovation in the U.S., policymakers and regulators need to provide the industry with clear guardrails that don’t stifle innovation. Regulations should ensure stability and transparency, without limiting the industry’s potential to grow through innovations like decentralized reserves.
Policymakers should also account for negative externalities that stablecoins can have for countries that can’t compete with the U.S. While stablecoins help citizens disempower autocratic and corrupt governments they may equally undermine the monetary controls of friendly nations with weak currencies.
If the U.S. — purposely or inadvertently — pushes stablecoin issuers away, offshore industry and foreign governments will happily take their market share.
Foreign issuers have already launched stablecoins in other currencies, including in Euro and the Canadian dollar. Demand will continue for USD-denominated stablecoin, but if unreasonable U.S. regulation pushes the industry offshore, the U.S. will have less leverage to set requirements around USD reserves and transparency.
China, South Africa, South Korea, Sweden and others are taking a more active approach to stablecoin development and promotion than the U.S. by piloting stablecoins backed by their respective central banks, known as central bank digital currencies (CBDCs). While it remains to be seen whether CBDCs become popular among consumers, particularly given privacy concerns, they could erode the stablecoin dominance the U.S. currently enjoys.
Global currency competition is here and scaling quickly. Nations that don’t embrace it will be left behind. The U.S. is no exception.
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