Category: International Finance

Namaste Yogis.   Welcome to the Blockchain & AI Forum, where your technology questions are answered!   Here no question is too mundane.  As a bonus, a proverb is also included.  Today’s question was submitted by Nick and he asks: is it in the U.S. national interest to dominate the stablecoin market?

Nick, this is a great question.  I’ll start by defining stablecoins then get to your question.

Stablecoins are a type of crypto currency, hence the “coin” in stablecoins.  Why the “stable” in stablecoin?  The reason for that moniker, is stablecoins maintain a steady value via a monetary stabilization process.  In other words, the value of a stablecoin does not fluctuate.  But this begs the question, the value of stablecoins do not fluctuate relative to what?

Stablecoin values do not fluctuate relative to what they are “pegged to”, or tied to, as you and I might say.  In crypto, stablecoins are generally pegged to the U.S. dollar; hence, one stablecoin equals one U.S. dollar.  Essentially, the U.S. dollar dominates stablecoin pegging and that’s no coincidence.  The size, stability, strength of the U.S. economy, plus our deep and liquid debt financial markets make the U.S. dollar a natural choice.  Moreover, as the world leader in crypto, it shouldn’t surprise that stablecoins are overwhelmingly tied to the U.S. dollar.  However, stablecoins need not be pegged exclusively to the U.S. dollar.  A stablecoin could be pegged to the Euro, Yen, a basket of currencies, or any real-world asset that holds its value and is liquid.  And, therein lies the possibility of a competitor to the U.S. dollar. 

Let’s discuss types of stablecoins. 

There are two general categories of stablecoins:  asset-backed and algorithmic.  Asset-backed stablecoins represent 93% of the market and I already explained above how they work; hence, no need to repeat.  Instead let’s understand algorithmic-based stablecoins.  Algorithmic stablecoins maintain their stability through complex mechanisms, often involving smart contracts and automated algorithms that manage stablecoin supply in response to changes in demand or market conditions. Algorithmic stablecoins are often collateralized by other cryptocurrencies, introducing an additional layer of innovation in maintaining price stability, but perhaps more risk say critics. 

Note there is a further distinction—bank issued and non-bank-issued stablecoins. Bank-issued stablecoins are digital currencies issued by regulated financial institutions. Obviously, these ensure a higher degree of regulatory compliance and oversight. Non-bank stablecoins, such as USDT issued by Tether, operate outside of traditional banking systems, often leading to questions about their regulatory status and transparency of their reserve holdings. 

Let’s now examine why the U.S. must dominate the stablecoin space in order to maintain its hegemony.

Preserve the Dollar’s Global Reserve Currency.  Stablecoins pegged to the dollar reinforce the U.S. dominance of the world financial system because they extend the dollar’s reach into digital economies and decentralized finance ecosystems. 

Control Over Financial Infrastructure.  Stablecoins are a shift toward digital financial infrastructure.  If U.S. regulated or U.S. developed stablecoins become the de facto standard, the U.S. can exert enormous influence over these new emerging financial networks, analogous to our control using the current system—SWIFT.  This ensures the U.S. retains leverage over international monetary policies.

Maintain Monetary Policy Influence.  If stablecoins become dominant, (not if, when in my assessment) and are backed by the U.S. dollars, they indirectly tie global digital transactions to U.S. monetary policy.  This helps the Federal Reserve maintain control over global liquidity, interest rates, and economic stability, as stablecoins would mirror the monetary behavior of the U.S. dollar.

Counter Foreign Digital Currency Competition.  China, and others, (e.g., the BRICS nations) may propose stablecoins backed by their central bank thus undermining U.S. dollar dominance. 

Data and Transparency.  Stablecoins generate vast quantities of data.  By dominating the market, the U.S. gains access to critical data flows, which can be used to monitor financial trends.

Sanctions Enforcement.  Stablecoins networks dominated by the U.S. makes it easier to enforce sanctions, thus limiting adversaries’ financial options.  The US has weaponized the dollar and sanctions nearly 30% of the world.  If the U.S. controls stablecoin pegging, compliance with whatever standards the U.S. decides to impose, e.g., anti-money laundering, terrorism financing, etc. becomes possible.

Standard Setting.  By pegging the dollar and stablecoins, the U.S. standard becomes the de facto world standard, thus compelling other nations to comply with American rules.

Economic Leverage.  Stablecoins provide a way for the emerging markets in Africa, South America, and Asia, to access dollars easily, thereby deepening their reliance on the U.S. financial system.  This is particularly critical given the potential challenge by BRICS nations.

Bottom line—the Trump administration understands this situation far better than Biden and in part this is why they are more pro-crypto and will seek to solidify the U.S. dollar as the peg for stablecoins on a global level.

Time to end with a proverb from the Kenya: “he who doesn’t know one thing knows another.”

Until next time,

Yogi Nelson