The Future of Stablecoins
People often ask, “If one doesn’t use Tether, is it okay to park money in USDC (USD Coin, a stablecoin developed by Circle), Paxos Standard (a stablecoin by Paxos), DAI (an algorithmic stablecoin with cryptocurrencies used as collateral), GUSD (the Gemini/Winklevii stablecoin), or TUSD (a stablecoin developed by Trust Token)?”
There’s a few variances of answers to this that require understanding what kind of individual is asking:
- are you high net worth?
- are you concerned with liquidity?
- are you concerned you will be able to move the price of the stablecoin?
- are you risk averse?
- have you reviewed all of their policies?
If someone is high net worth and concerned they can move markets with their liquidity, it’s probably best to stay away from the lower marketcap stablecoins and stick to Tether (unless you fear black swan events) or USDC. If you are very risk averse, it’s probably best to steer clear of Tether (which has the highest probability of a black swan event) and DAI (which uses Tether and cryptocurrencies to back it).
However, none of this addresses the feasibility of stablecoins and their place in the future of finance.
Are CBDCs Stablecoins?
CBDCs, or central bank digital currencies, aren’t stablecoins. They’re just fiat in digital form, and fiat isn’t stable. The difference between a stablecoin and a CBDC is that one is a synthetic derivative of a fiat currency created by a private company, and the other (CBDCs) is strictly a fiat currency produced by a central bank.
They aren’t the same and shouldn’t be considered as such.
The main point of contention here is that a “stablecoin” is proclaimed as such because it’s supposed to be “stable” in two ways:
- it provides much less volatility than other cryptocurrencies, such as Bitcoin or Ethereum
- it’s supposed to maintain a near-1–1 pricing to some form of fiat currency — which ideally leaves room for arbitrage opportunities
CBDCs, in relation to other CBDCs and cryptocurrencies, aren’t stable at all. Their only purpose is to allow transactions and show transactions transparently to make taxation easier for governments.
What We Know vs What We Don’t
Most developed and even some underdeveloped nations are considering using CBDCs — for the world-at-large, this seems to be a matter of when, not if.
This doesn’t necessarily mean that we will see the death of physical cash immediately — I’m hopeful that for a few decades physical cash will remain in use. But that’s probably overly-optimistic, considering the current fear of disease and the implementation of almost-exclusive use of smartphones for transactions in countries as vast and populated as China and India, and smaller, more wealthy (per capita) countries like Sweden, too.
CBDCs will instantly make money laundering and tax evasion more difficult. As someone who is adamantly opposed to clear criminality, this is good.
But CBDCs are also a cause for deep consternation.
Concerns
Despite my insistence on prosecuting wrongdoers and financial fraudsters in general, I have a lot of worries about what a CBDC means for the future of money in America.
What it will undoubtedly mean is that it will be easier for the taxman to tax every single cent. I do not appreciate this.
Why not? Because as much as I am critical of misanthropes misusing funds, I still understand small scale tax evasion (think waiters/waitresses underreporting cash tips, taxi/rideshare drivers underreporting cash tips, sidewalk food stands operating as cash-only, etc) because it’s totally necessary for some individuals to survive. You can chalk this up to government not enforcing a reasonable minimum wage, outrageous hurdles to begin a business, VC subsidized companies like Uber/Lyft operating at losses for years, or, likely, a thousand other problems with finance/government that you can think of. Regardless, these issues are at least partially solved by “illicit” cash transactions.
However, my number one concern in regard to CBDCs is that homeless people will have little to no recourse nor ability to survive.
This isn’t so much of an issue in authoritarian-socialist realms like China, where there’s few homeless due to the fact that there’s an overabundance of homes and people who refuse to “be useful” are… “dealt with.” Thankfully we have more freedoms, but, unfortunately, also an ample supply of homeless. This remains a problem I can’t properly wrap my head around and can only imagine that homelessness — a condition increasingly difficult for individuals to escape from — will get exponentially more difficult to escape from. The solution is certainly not to ignore ~1% of Americans every year.
Benefits
The positive side of CBDCs is that they should hinder real criminality, as well. And for libertarians screaming, “THE GOVERNMENT IS THE NUMBER ONE CRIMINAL!” it will hinder the government’s ability to use dollars in clandestine operations, too. Instead, like common criminals, the government will be forced to figure out new, exciting ways to transfer money without the public being aware. This is great, because it would make the government become slightly more transparent when attempting to do things like overthrow legally-elected foreign leaders or fund deep sea adventures to get nuclear secrets.
Additionally, if one believes in the rationale behind having a government, CBDCs should provide said government with additional income from taxation along with clearer streams displaying where the income is going, and therefore a greater ability to perform the tasks set out to help the citizens. If you don’t believe in government at all… well, okay then. I guess ignore this.
Bring It Back To Stablecoins
The ongoing question for most people who follow the stablecoin space, whether you think Tether is a fraud or derivatives are stupid or they’re all performing a necessary good, has to be, “What role will stablecoins play once a CBDC is introduced by the US?”
That’s a very difficult question to answer.
It will entirely be determined by The Federal Reserve Board, with influence by Congress. There’s numerous ways they could go about implementing a CBDC, so here’s a few:
- Keep the current format. This would effectively make it so that any dollar — or in this case, digitized dollar — would be sent out to commercial banks on demand and then distributed to retail banks who would subsequently allow redemption by customers. Commercial banks are not the same as retail banks, and both commercial and retail banks definitely meet stricter requirements than stablecoin issuers.
- Offer direct-to-retail banks. This would open up the banking market and probably provide consumers with slightly better interest rates than currently available, but would also push new KYC/AML requirements onto retail platforms that aren’t necessarily used to such stringent measures. This could result in both new expenses for retail banks and consumer products (think Robinhood) and new methods for money laundering.
- Allow for direct-to-customer. This proposition seems farfetched, as banks have enough lobbying power and influence to shut it down, but that doesn’t mean it won’t be possible under certain circumstances and be a boon for citizens (would make stimulus checks and emergency payouts instant, all at once, and available to nearly all of the citizenry).
At the end of the day, there will be a narrow opportunity for stablecoins to play any kind of role in the future of finance, and that role will be defined by their ability to pivot to being loan providers. To become proper loan providers, most of them will have to abide by stringent regulations similar to banks.
No stablecoin can make the claim they adhere to the same KYC/AML procedures and auditing measures as banks. That doesn’t mean banks are better, that doesn’t mean that every stablecoin issuer is running on fumes, and it doesn’t mean that there’s no place for stablecoins at all. But it does mean that stablecoins will be more niche than current market conditions are precipitating.
Stay skeptical friends.