Central Banks, Stablecoins and the looming currency war
Michael J. Casey is chairman of CoinDesk's advisory board and senior advisor for blockchain research at MIT's Digital Currency Initiative.
T his essay is presented as part of No Closing Bell, a series leading to investing: Asia 2019 focused on how Asian crypto markets interact and influence global investors. To keep the conversation going, you can sign up for Invest: Asia 2019 coming up in Singapore 11-12. September.
Facebook's Libra project, in which a group of companies that manage a basket of fiat currencies will maintain a digital symbol at a stable, redeemable value, has taken the idea of "stablecoins" out of the crypto-echo chamber and thrown it into the public arena.
But if the raging debate that Vågen triggered among government officials, finance executives and businessmen seems overwhelming, you should get used to it. A flood of competing stablecoins is coming to the world economy. And Asia, with its lively cross-border trade, may be Ground Zero in their struggle for supremacy.
This is both exciting and a little daunting.
The most important player here is not a startup, a bank, or even a tech company. It is the Chinese government.
People's Bank of China's future central bank-backed digital currency, or CBDC, is not a stable currency in itself ̵[ads1]1; its value is not simply expressed in terms of a fiat currency reference index; it is a completely digital version of the renminbi itself. Nevertheless, China's move will inevitably cause other entities – private and public – to develop their own actual or de facto digital fiat currencies.
CBDCs and stablecoins potentially solve one of the biggest problems in solving smart contracts and blockchain projects. Until now, designers of blockchain solutions for, for example, supply chains or transfers had two choices of payment mechanism: They could make an integrated chain of a volatile, cryptocurrency like bitcoin that most people don't use, or they could run it, inefficiently, off- chain through the existing, bulky banking system. If, instead, a proven monetary entity like the dollar had programmable, smart contract qualities of its own, it would in theory be possible to achieve significant new efficiency in trading.
When China moves first, I see other central banks reactively following, partly for fear that a digital renminbi will play a greater role in international trade, especially within the 65 countries of the Belt and Road initiative. (For why this means geopolitical, imagine a Russian importer and Chinese exporter using smart contracts and nuclear exchanges to secure currency risk between digital versions of yuan and rubles – that would make the dollar obsolete as a reliable, stable intermediary for international trade. )
Especially days before the state-owned China Daily first reported China's CBDC progress, Agustin Carstens, head of the Bank of International Settlements, made a startling face. While previously depreciating the value of digital currencies, he now told the Financial Times that other central banks' digital currencies may come "faster than we think."
We have already seen regional central banks, such as Thailand, experiment with digital currencies for interbank transfers.
One problem is that CBDCs will raise fears of state surveillance, especially from China, whose civil liberties intervention has fueled wild protests in Hong Kong. Enterprises and people do not want their own governments, much less foreign authorities, to monitor their spending.
Here is an opportunity for stack loans from non-governmental cryptocurrency developers, especially if they can offer stronger privacy insurance than Facebook's Libra designers.
Among these, the choice is now between backup supported stack coins and algorithmic stack coins.
The former market was once dominated by Hong Kong-based Tether & # 39; s USDT, but since its opaque reserve management system has raised doubts, a new set of coins backed by more tightly regulated entities has gained prominence, including Gemini & # 39; s GUSD, Paxos PAX and Circle & # 39; s and Coinbase & # 39; s USDC.
Among algorithmic stack coins is the clear leader Dai, a dollar-nominated token developed by Ethereum-based MakerDaothats based on smart contract-controlled, security-coated ether loans.
Algorithmic stablins have the advantage of not relying on a reliable third party, while the backup model requires an identified entity to support its declared holdings of fiat currency. But stablecoins like Dai can potentially be played by high-frequency trading bots and rely on ethereum growth to overcome its scaling challenge and to continue expanding the unstable and potentially systemically risky market for ether security.
Notwithstanding a report from TradeBlock last month, these private stacks do grow rapidly in volume, with their total value surpassing Venmo in the second quarter.
Image via Shutterstock
