Overview
The rapid adoption of cryptocurrencies has disrupted traditional financial services greatly. This has led to skepticism on the potential impact of crypto on fiat currencies like the US dollar. Well, because most cryptocurrencies like Bitcoin, Ethereum, Dogecoin, and Binance coins are extremely volatile, the skepticism is somewhat justified.
Nevertheless, the US dollar has a chance to enforce its dominance thanks to stablecoins. A stablecoin is a special type of cryptocurrency whose prices can be maintained by tethering to the real world on a 1:1 basis. Examples of stablecoins include Tether and US Dollar Coins. There has been an exponential growth in stablecoins since the efforts to Launch LIbra by Meta, formerly Facebook. The key difference between Libra and other stable coins is that the crypto was tethered to several fiat currencies while other stablecoins are pegged to one currency, usually the US dollar.
The rapid growth of stablecoins
Between December 2019 and December 2021, the market cap of stablecoins grew from $5 billion to a whopping $150 billion. The significant and rapid growth can be attributed to the many benefits that these coins have over their volatile counterparts. As far as transaction costs are concerned, unstable coins have high transaction costs. On the other hand, stablecoins have little or no transaction costs.
Another benefit is literally in the name, stable. These coins are stable and therefore investors wary of the extreme volatility in other currencies can invest in stablecoins without fear of price change. In 2021, the value of major currencies plummeted a great deal leading to disruptions in the crypto market. Investors in stablecoin were not affected by this problem.
Let’s look at a practical example of the impact of stablecoins. Migrant workers in the United States use traditional financial systems which have issues like long processing periods that amount to weeks and high transaction costs. In most cases, transaction costs average 7 percent of a worker’s income. Stablecoins addresses this problem by providing an instantaneous transfer of funds at little or no cost.
Impact of Stablecoins on USD
These coins have triggered an increase in the demand for the USD. Notably, the majority of stablecoins are pegged on the USD and thus, their rapid adoption across the globe provides a perfect opportunity for the US dollar to increase its dominance over other fiat currencies. Presently, the largest stablecoin platforms such as Circle hold their reserves in USD, a key factor that increases the availability of the dollar to crypto buyers across the globe. The increased demand of the USD as a result of stablecoins is enough reason to push the US Government to embrace stablecoins.
The stablecoin market will continue to embrace USD as the stablecoin blockchain pushes for the popularity of USD-backed coins. USD stands a chance to gain popularity in countries that have not embraced the USD fiat currency through the adoption of stablecoins. An example of such a country is Argentina, where the government has imposed regulations to limit USD.
Can the US fail?
Truly, the potential of expanding the dominance of the USD through stablecoins is unquestionable. Notwithstanding, the lack of proper regulations could destroy stablecoins in the US while the stablecoin market continues to grow outside the United States. Failure by the US government to enforce clear blockchain regulations has forced key US crypto players to move their operations to countries with better clarity in blockchain regulation. Such countries include Portugal, Singapore, and the Cayman Islands, and the list is expected to grow as other countries adopt permissive regulations. For instance, Fidelity Investments, one of the leading investment consultants in the United States opted to launch its Bitcoin ETF in Canada since this was not permissible in the US.
Moreover, the US Government recently passed an infrastructure bill that has complex digital tax requirements that will continue to push blockchain companies to other jurisdictions if amendments are not made. Following the effects of this bill, legislators have been trying to make necessary changes to the law, an effort that may not bear fruits in time.
On stablecoins, specifically, policymakers are divided. The latest Senate Banking Committee hearing on stablecoins had no positive outcome. Senators reiterated the same issues that Libra presented which demonstrated the senators’ incomprehension of the workings of stablecoins. Surprisingly, a bipartisan congressional committee expressed its enthusiasm for stablecoins. At the same time, Jerome Powell, Chair of the Federal Reserve surprised the public after he said that stablecoins can be useful and efficient if they are imposed with proper regulations.
If the US government intends to support stablecoin innovation, they must enforce regulations that protect industry players while not inhibiting innovation. Policy Makers and regulators should focus on stability and transparency while implementing permissive regulations.
Furthermore, policymakers should look at the negative impact that stablecoins can have on countries that cannot compete with the US. Notably, stablecoins are a good way to disempower corrupt governments but can also serve as a tool to weaken financial systems in countries with weak currencies.
Regardless of whether the US government pushes deliberately or unwittingly pushes stablecoins away, foreign governments will largely benefit from stablecoin at the expense of the United States. Foreign companies have launched stablecoins pegged on other currencies like the Euro and the Canadian Dollar. The US needs to take a keen interest in central bank digital currencies(CBDCs). A CDBC refers to a stablecoin backed by a particular central government. Countries such as China, Sweden, South Africa, and South Korea are in the frontline promoting these currencies.
Conclusion
The competition in the stablecoin industry is growing exponentially and any country that is not ready will be left behind, including the US. The US enjoys the huge power the USD has over other currencies. Cryptocurrencies threaten to shake this dominance and therefore the US government must be strategic to maintain the power of the dollar.
Stablecoins provide a perfect opportunity for the US to not only maintain this dominance but expand it to countries that limit the usage of the US dollar. Whether or not the USD stays competitive is entirely dependent on the regulations the government puts in place. It is the hope of every stablecoin player in the US that the policymakers get the job done.
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