Who will be first, which will be best?
Here is our pick of the 3 most important Stablecoin news stories during the week.
A friend asked me this week to answer this simple question. He runs a business and wishes to be prepared for what many believe will be the biggest disruption to society since the Industrial Revolution – the Digitization and re-invention of a central pillar of our world – money.
To answer that you have to take a deep breath, step back and first analize who the major players are and will be. We have three:
- Western Central Banks and States (BIS, US FED, BoE, ECB, BoJ, SNB)
- China and its Central Bank (PBoC)
- Large Tech players mostly Silicon Valley based (Facebook, Tether)
This week all three made significant progress, let’s look at what they have achieved and then try and answer the question.
The US has two dogs in this fight and the most to lose. The primacy of the US dollar which in the global wholesale market (processes 6.6 trillion per day) is on one side or the other of a trade 89% of the time. Both figures are as per the Bank of International Settlement or BIS which is often referred to as the Central Bank for Central Banks.
This gives the USA clout, but it is not betting alone on maintaining that clout via the State (dog number one) but also via it’s industry (dog number two).
Dog number one, being the Central Banks launched a major report and update on progress made. Central banks and BIS publish first central bank digital currency (CBDC) report laying out key requirements
Compiled by the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, Sveriges Riksbank, the Swiss National Bank and the BIS, and highlights three key principles for a CBDC:
- Coexistence with cash and other types of money in a flexible and innovative payment system.
- Any introduction should support wider policy objectives and do no harm to monetary and financial stability.
- Features should promote innovation and efficiency.
In short, they are still trying to figure out the what and how.
Dog number two (US Tech and Banking Industry) got some significant support this week when the USA’s currency regulator made sure it could fight unencumbered.
The Wall Street Journal This Regulator Wants to Help Banks Embrace Cryptocurrency Article reports that the Office of the Comptroller of the Currency is hoping more regulatory guidance will help traditional banks warm up to cryptocurrency. The Treasury Department unit, which supervises national banks and federal savings associations, has issued interpretive letters in recent months to spell out its view of how traditional financial institutions. The agency is trying to counter the perception held by some traditional banks that transactions involving cryptocurrencies present heightened risks that require lengthy and expensive due-diligence checks.
“They feel like the whole crypto world is a bit too risky for them, and many of them are reluctant to dip their toes in the water,” said Daniel Stipano, a partner at law firm Buckley LLP and previously a deputy chief counsel at the OCC.
In July, it issued an interpretive letter saying that national banks and federal savings associations are authorized to provide cryptocurrency custody services for customers, including holding unique encoded keys associated with digital currencies.
Last month, an OCC note said national banks and federal savings associations may hold deposits that act as reserves for certain stablecoins as a service to bank customers. Stablecoins, a type of digital currency backed by an asset such as a commodity or fiat currency, such as U.S. dollars, have the potential to increase efficiency on a broad scale and are more in demand, the OCC said.
The agency clarified that its interpretation of deposit services applies only to stablecoins associated with “hosted wallets”—programs that store the cryptographic keys for account holders—and, for some types of stablecoins backed by a single fiat currency on an one-to-one basis.
That just leaves China to take a look at. It has the first mover advantage from a Central Bank perspective, having a real live trail up and running.
A sovereign digital currency being developed by the People‘s Bank of China (PBOC) has been used for more than 1.1 billion yuan (US$162 million) worth of transactions as part of a series of ongoing pilot programmes, according to a deputy governor at the central bank.
So decision time, who will be first and who will be best:
- The Western Central Banks are still in think mode,
- The Chinese have a working trial,
- US Industry represented by Tether has about 20 billion in circulation and Facebook is getting close to launch.
Therefore who will be first, is already decided, it’s Tether and will the recent moves by the US currency regulator to give more certainty we can expect it to continue growing in the short term, but also the path is being cleared for Facebook in 2021.
But what is best? Two stories really caught my attention this week. Firstly, the US Dollar that Tether has pinned itself too could be in real trouble. Here is some sombre analysis by a market veteran in The Financial Times. In short it is going to depreciate 30% in 2021. So much for being stable! The end of the dollar’s exorbitant privilege
This has profound implications for the world economy, get ready for the USA to import significantly less and export significantly more. This is bad for both China and Europe as it fundamentally changes the global trade dynamic they have heavily relied upon for the last 30 years.
However, from the perspective of the question which is the best stablecoin, unless you, your assets and your future are in the USA, it will not be a very stable and reliable store of value (SoV). Secondly, a depreciation of this size will erode (not completely destroy) it’s privilege as the world’s reserve currency. We are heading into new territory.
The answer, a gold backed coin. In times of massive change, such as the World Wars either hot or cold, technological and societal change, gold wins!
Alan Scott is an expert in the FX market and has been working in the domain of stablecoins for many years.
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