Stablecoins are called “second-generation cryptocurrencies” because they are a logical response to the emergence of Bitcoin from the less flamboyant and more business-focused fintech entrepreneurs. Before stablecoins, the experiments with digital cash were mostly academic because Visa, MasterCard, MoneyGram, Western Union and PayPal were thought to be perfectly capable of satisfying the need for both local and global monetary transactions. It took years after the infamous 1988 Foreign Affairs article entitled “Technology and Sovereignty” before Tether busted open the financial sector in 2014, adding to the spirit of defiance embodied by Bitcoin in the wake of the 2008 crisis. So it’s fair to say that with the emergence of DeFi and continuous decoupling of the globalised workforce from conventional banking came the jolt of energy that financiers, governments, and tech giants needed to shift the digital dollar/yuan/peso/ruble projects into high gear.
Today digitised national currencies are no longer computer science projects but rather a reality that almost lost its appeal once the Governor of the People’s Bank of China Yi Gang mentioned in passing that the digital yuan is a mere convenience that has nothing to do with blockchain technology and is largely privatised. That may be true, but what a convenience that is! The real questions are, will CBDC (central bank digital currency) push out private stablecoins, or will the two remain what Stephen Jay Gould would call a “non-overlapping magisteria?” In my opinion, the two technologies will augment each other and, in time, subvert our perception of monetary relations altogether, but let’s not get ahead of ourselves.
Taking it from the top: what are Cryptocurrencies?
To answer the question of whether or not stablecoins are as necessary for “connecting every person, every merchant, every financial service and every currency” as Centre Consortium – the issuer of USDC – claims on its website, it’s helpful to take a step back. It’s important to remember that cryptocurrencies as a novel form of digital money compared to conventional forms of digital money (the kind that lives in your bank account), ostensibly, do not require any form of agency. Instead of utilising a network guarded by a centralised banking system that takes its cut whenever it can, cryptocurrencies establish a peer-to-peer protocol for storing and transferring funds over the Internet using what’s called decentralised ledger technology (DLT). The network (you may know it as – you guessed it! – blockchain) relies on cryptography to guarantee privacy and security. The truly groundbreaking potential of cryptocurrencies is combining the benefits of two forms of money that have been previously separate: electronic money and cash, and stablecoins are all about that plus the added value of state-guaranteed stability.
And now to Stablecoins. What are those?
There are 180 currencies currently operating across statel economies, each with its own electronic protocol interoperable with local and international custody and money transfer services designed to move your cash from point A to point B. In one way or another, they are guaranteed and insured by state issuers and regulators. Local economies rely on the use of fiat (government-issued) currencies because financial relations are still IOU-based: if you, the government, guarantee that the price for a loaf of bread will not fall below or rise above a certain level, I, the merchant, will find a lawful way to “sell it to a willing buyer at the current fair market price.” We can say that, essentially, stablecoins are a private effort to subsume the ten millennia-old government prerogative to mint money by collateralising the value of an underlying asset (e.g. state currency, gold, or baskets of assets). Ostensibly, it’s an additional layer (created by private enterprise) of value put by the private sector on government-issued money. Too complicated? Think of stablecoins as private electronic money pegged to state-issued currencies 1:1 – this ought to do the trick.
The beauty part is, stablecoins are public blockchain-based, which means they are cryptocurrencies and enjoy all the attributed benefits of being crypto (speed, transparency, privacy). But issuers of fiat stablecoins that are fully backed by official currency are also contractually obligated to maintain the peg and the dollar reserve equal to the number of coins (fiat tokens) in circulation, which makes them as stable as the fiat currency they are pegged to (as a rule, USD). This is actually a brilliant concept that in today’s remittances-based post-COVID economy addresses the half-of-trillion question: how does the highly mobile and at times unbanked global workforce get paid – in full and on time?
So, which one is the best stablecoin?
I don’t mean to start a rumble here, but to me, the answer is obvious: it’s USD Coin (USDC) and for a good reason. Even though USDC is the natural consequent of Tether (USDT), with both coins having somewhat similar functionality, the fundamental difference between the two is regulatory oversight and transparency. Tether claims to be a fiat-collateralised stablecoin, meaning that its dollar reserves (fiat collateral) are fully pegged 1:1 to USD, which proved to be untrue throughout several very loud scandals. Besides, USDT is no longer backed entirely by cash, but also by private debt, and other types of risky assets, raising a strong issue of transparency and accountability.
On the other hand, Circle was the first company to receive a BitLicense from the New York State Department of Financial Services. It continuously publishes monthly attestations from independent accounting firm Grant Thornton LLP, which for me makes USDC a far superior option. Despite the fact that one of the coin’s early backers was Goldman Sachs, the issuer – Coinbase-powered Centre Consortium – is vigorously upholding the ethos of cryptocurrency with its drive for consumer mass adoption. Another reason is that USDC is the only stablecoin currently supported by the latest hero of the crypto space – Coinbase. It’s built on the Ethereum blockchain as an ERC-20 token and is pegged 1:1 to USD held in reserve by the U.S. Bancorp Asset Management (USBAM), a registered investment adviser and a subsidiary of the U.S. Bank National Association. The supply’s gone up to $14.38 billion from the measly $518 million in 2020, firmly planting USDC as one of the leading stablecoins in the space, and its momentum is rapidly growing.
How does USDC work in the remittances market?
The age of global mobility presents both employers and employees with the challenge of putting foreigners on the official company payroll, which is complex, lengthy, and ungodly expensive. This means that if your EEA-based business needs specialists that reside in another hemisphere, you’re paying through the nose. Or if you want to invite a brilliant engineer from Iran to France, and French banks simply refuse to open a current account for a potential hire from a sanctioned country, your only hope is a Visa-issued crypto debit card with personal IBAN. TRASTRA is the perfect example: it doesn’t require a bank account, it can get you paid in crypto or USDC, you can then exchange your crypto into EUR inside the mobile app faster than Joe Biden says, “we choose truth over facts,” and have you on your way to an ATM or any point of sale where Visa is accepted in minutes.
USDC allows users to send money anywhere via either a dedicated app for payroll or a mobile wallet app like TRASTRA without the need for a correspondent bank or any other type of intermediary. The transfer is done at costs nearing negligible, unlike with legacy money remittance operators who charge substantial transfer fees in addition to spreads on currency conversions.
Technically speaking, stablecoins should have become the backbone of the new international monetary system as soon as Tether pushed out USDT. If done right, the concept of virtual money created to move smart contracts globally and is pegged to a global-reserve currency overseen by, say, a UN specialised agency makes all the sense in the world. But money has always been political, and there’s nothing more political than the power of the world’s largest private currency – USD – that’s been used to subdue and dominate the global economy since 1944.
So let’s not talk about the challenges stablecoins supposedly present to the current international economic order or the enforcement of sanctions through the payments system. First of all, it’s a major downer. Secondly, those “challenges” are mostly a “cry wolf” effort on the part of the international financial oligarchy that wants to keep tabs on the global money supply. No one is threatening the dollar’s status as an international currency; conceptually, stablecoins cannot exist unless they are deeply (technologically, politically, and from the business standpoint) embedded into the global reserve system. There isn’t going to be a fragmentation of the international monetary system facilitated by national governments: national governments are the ones who stand to benefit the most from the transparency and predictability of the most reputable stablecoin ecosystems. And private money will not take over fiat. In many respects, it has already happened, but the most progressive governments are becoming more and more vocal in promoting the rise of new alternative payments systems, which are, and, no doubt, will continue to be tightly integrated with the private sector.
Speaking plainly, we now have the technology and, more importantly, practical justification for dismissing the potential geopolitical effects of an alternative international monetary architecture. In the post-COVID world, the bottom line is that there are many people out there who will need to get paid very soon, and stablecoins such as USDC are the perfect tool for the job.