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Fraud, Confidence, and Money Printing Power
The stablecoin alert is a variation of the crypto-fiat battle.
Every few months, you shall come across articles, tweets, or Reddit discussion threads about the conspiracy of Tether and the USDT stablecoin.
Similar accusations appear again and again, but still, no one can shoot them down yet. USDT remains at the top of the stablecoin billboard, it is the largest issuer globally in terms of tokens created, and volume transacted.
Unlike the above, the purpose of this article is not to debate whether the claims are valid or if any stablecoin is legitimate. Instead, we would like to dig deep into the root clause and discover and uncover the reasons behind its glory, which alarm us all.
Do fate and destiny determine it, or are invisible hands mastering the success behind the scene?
Crypto Is Not Currency Yet
If you have been in the crypto world long enough, you must have remembered the market slaughters that happened in crypto history. Even the flagship cryptocurrency, Bitcoin, has dropped by 80% to over 90% within one year.
It is what the moment investors are calling “crypto winter”. The worse is, winter is not a moment but a period. It usually lasts for several months, if not prolongs to years.
The idealist will say if you HODL your Bitcoin, you will make a fortune eventually.
But what does it mean indeed? It tells you if you have bought Bitcoin previously and do not sell, you are now a lot richer in terms of US Dollars. Sadly, the denomination is in US Dollars but not in Bitcoin or other cryptocurrencies.
People still believe Bitcoin is a commodity but not a currency.
At present, the crypto economy is depressed in the real world. You have to use fiat currency to purchase most of the goods and services offered. Though Visa announced earlier this year to partner with Crypto.com and Anchorage for digital currency settlement, the settlement currency they chose is not any cryptocurrency but USDC, a stablecoin deemed to have complete redemption for US Dollars.
The Rise Of Stablecoin
Bitcoin, mentioned initially as a peer-to-peer electronic cash system in the whitepaper, is not a perfect solution for digital payment because of its massive price fluctuations.
People rush in to place heavy bids, overheat the market. The subsequent correction is so deep that it hurts the value storing power (at least short term) of Bitcoin.
The value of Bitcoin as a new medium of exchange, paradoxically, makes Bitcoin undesirable as a new medium of exchange.
The volatile tendency of Bitcoin prompted the emergence of stablecoin. A stablecoin is a digital currency using blockchain for book-keeping. Still, its monetary policy depends on another fiat currency, whether USD, EUR, or precious metal such as Gold.
Thus, stablecoin is filling this gap by providing constant value storage (in terms of fiat currency), plus the convenience of digital payment without the hassles of traditional financial institutions. As of May 2021, the total stablecoin supply surpassed the $100B mark.
First Mover Advantage
The snapshot below suggests that though the market is diversifying, USDT is currently the most prominent stablecoin, followed closely by USDC.
While USDT had the foresight on the market since 2014, it took nearly four years to have the next stablecoin. This early move established USDT to be the stablecoin with the most significant trading volumes. Plenty of altcoins contain a USDT trading pair as traders widely adopt it.
The original trust — that every USDT is fully backed by US Dollar was not rigorously verified in older days because the demand for stablecoin covered it up.
As long as people are not redeeming simultaneously and a secondary market exists, the one-to-one peg is only a side benefit.
Even if there are occasional suspicious claims, USDT continues to be the main bridge for cryptocurrency and fiat currency traders in the upgrowth market.
Join Hands Or Declare Clone War
Stablecoin finally becomes the arch-rival of fiat currency. It serves from a derivative for the liquidity in the cryptocurrency market to a multi-functional financial vehicle, working on investment, lending, payment, and settlement, which are bread-and-butter businesses for banks.
The claimed one-to-one USD backup reserves from stablecoin issuers, especially Tether, turn out to be some unknown commercial papers, but people still have faith in it.
It acquiesces stablecoin issuers to print their own money, offending the Governments’ monetary policy autonomy, aka the “financial stability”.
This cannibalization poses a real threat to the financial market that regulators have to put close surveillance on the development of stablecoin.
The money printing power endowed by citizens from no regime is tempting but excessively risky. Some issuers are choosing to give in, complying with regulators, and increasing transparency to the public.
Circle revealed applying for a national banking license in the US and changing their USD reserve with cash and Treasury bonds. Paxos, another issuer, has received conditional approval from OCC to operate as a National Trust Bank.
Meanwhile, Tether, the bellwether, has settled with the Office of New York Attorney General with $18.5M and retreat from New York. A bail essentially but better than none.
Bitcoin as Digital Gold: Bretton Woods 2.0?
Authorities have the upper hand so far, but we cannot cast away the enigma of fiat currency.
Regulators are pressing hard on stablecoin because they suspect it is “money created in thin air”, but crypto enthusiasts will put the same question on regulators’ table. Is “In God We Trust” convincing?
A little piece of history is worth mentioning. Under the backdrop of World War II, in 1944, allied countries opted in a fixed exchange rate to US Dollars, ultimately backed by Gold, to pursue “economic security” against FOREX manipulations.
The Bretton Woods System, which eventually crackdown in the early 1970s due to inflationary monetary policy in the US, making a bank run by allies to convert US Dollars for Gold. The US suspended the Gold conversion and became a fiat currency.
Deemed to be more flexible, central banks gained back their monetary policy autonomy after the unpegging, designed according to self-economic conditions.
It was until the 2008 global financial crisis, which triggered the rethinking of a new international currency. A decade later, Bitcoin is acclaimed as digital Gold, and some have been using it as a currency substitute.
The Central American country is the first to adopt Bitcoin as a legal tender, parallel with US Dollars.
El Salvador was one of the developing countries that carried Dollarization, once hoped to revive its domestic economy by giving up the monetary policy autonomy. Unfortunately, it felt.
From Dollarization to “Bitcoinization”, it is not an easy journey. Around 2 million Salvadorians are working in the US, and remittance from the US sums up nearly 25% of El Salvador’s GDP. Trading activities aggravated the dependency on US Dollars because the US is their major import and export partner.
The Bitcoin Law in El Salvador is both an economic and political move, but legislators shall not regard national currency simply for domestic reasons. Most of the international settlement today is domiciled in US Dollars, but Bitcoin is negligible.
El Salvador is a bold pioneer ambitiously waiting for Bitcoin to bloom, but whether other international players will chip in is still doubtful because money printing machines are too powerful and attractive.
China, Sweden, the Bahamas, Eastern Caribbean Areas, and the Marshall Islands are all experimenting with their Central Bank Digital Currency (CBDC), and many countries are following.
Expectation and Confidence
Because we trust in the power of the US Government, we choose to accept their Dollars, a fiat currency without collateral as the common medium of exchange across borders, and a leading “asset” that stablecoin mirrors.
Bitcoin is another discipline. With a redefined monetary policy, no one controls the money supply besides the preset lines of codes.
Public confidence is the ultimate remedy. If there is no single sovereignty (such as the example of fiat currency and the derived stablecoin), we prevent inflation from the overissue of banknotes. Still, we are exposed to the risk in an open market, which is about confidence again. The ubiquitousness of the network determines its intrinsic value, not speculation.