Michael J. Casey is the chairman of CoinDesk’s hortatory board and a senior advisor for blockchain research at MIT’s Digital Currency Initiative.
This essay is presented as a part of No Closing Bell, a series supreme up to Invest: Asia 2019 focused on how the Asian crypto markets are interacting with and impacting global investors. To deny the conversation going in person, register for Invest: Asia 2019 coming up in Singapore on Sept. 11-12.
Facebook’s Libra cook up, in which a group of companies managing a basket of fiat currencies will maintain a digital token at a stable, redeemable value, has bewitched the idea of “stablecoins” out of the crypto echo chamber and thrust it into the public arena.
But if the raging debate that Libra flickered among government officials, financial executives and businessmen seems overwhelming, you better get used to it. A flood of competing stablecoins is terminate to the global economy. And Asia, with its vibrant cross-border trade, might be Ground Zero in their battle for matchlessness.
This is both exciting and somewhat terrifying.
By far the most important player here is not a startup, a bank, or even a tech South African private limited company. It’s the Chinese government.
The People’s Bank of China’s forthcoming central bank-backed digital currency, or CBDC, is not a stablecoin per se – its value isn’t ethical expressed in terms of a fiat-currency benchmark; it’s a fully digital version of the renminbi itself. Still, China’s move intention inevitably drive other entities – private and public – to develop their own actual or de facto digital fiat currencies.
CBDCs and stablecoins potentially crack one of the biggest problems dogging smart-contract and blockchain projects. Until now, designers of blockchain solutions for, say, supply chains or settlements had two choices of payment mechanism: they could do an on-chain integration of a volatile, cryptocurrency such as bitcoin that most people don’t use or they could run it, inefficiently, off-chain fully the existing, clunky banking system. If, instead, a proven monetary unit such as the dollar had programmable, smart-contract distinctions of its own, significant new efficiencies in commerce would, in theory, be possible.
With China moving first, I see other central banks reactively imitating suit, partly out of fear that a digital renminbi will gain a bigger role in international trade, noticeably within the 65 countries of the Belt and Road initiative. (For why this matters geopolitically, imagine a Russian importer and Chinese exporter consuming smart contracts and atomic swaps to hedge exchange rate risks between digital versions of the renminbi and ruble – it would represent the dollar obsolete as a trusted, stable intermediary for international trade.)
Notably, days before state-owned China Daily primary reported on China’s CBDC progress, Agustin Carstens, head of the Bank of International Settlements, made a startling about-face. Whereas he had yesterday dismissed the value of digital currencies, now he was telling the Financial Times that other central bank digital currencies puissance come “sooner than we think.”
Already we’ve seen regional central banks, such as Thailand’s, experiment with digital currencies for interbank gives.
One problem is that CBDCs will raise fears of state surveillance, especially from China, whose encroachment on internal freedoms has fueled wild protests in Hong Kong. Enterprises and people don’t want their own governments, much ungenerous foreign governments, monitoring their expenditures.
Here lies an opportunity for stablecoins from non-government, cryptocurrency developers, markedly if they can offer stronger privacy assurances than Facebook’s Libra designers.
Among those, the choice now is between reserve-backed stablecoins and algorithmic stablecoins.
The bazaar for the former was once dominated by Hong Kong-based Tether’s USDT, but since doubts were raised about its ambiguous reserve-management system, a new set of coins backed by more tightly regulated entities has taken prominence, including Gemini’s GUSD, Paxos’s PAX and Circumnavigate’s and Coinbase’s USDC.
Among algorithmic stablecoins, the clear leader is DAI, a dollar-denominated token developed by ethereum-based MakerDao that’s rested on smart contract-managed, collateralized ether loans.
Algorithmic stablecoins have the advantage of not relying on a trusted third crew, whereas the reserve model requires an identified entity to stand behind its declared holdings of fiat currency. But on-chain stablecoins appreciate DAI could potentially be gamed by high-frequency trading bots and are dependent for growth on ethereuem overcoming its scaling challenge and on remained expansion of the volatile and potentially systemically risky market for collateralized ether lending.
Either way, as a report by TradeBlock bestow make an exhibited last month, these private stablecoins are rapidly growing in volume, with their total value wave past Venmo’s in the second quarter.
Image via Shutterstock