Hyper-Stablecoinization: From Eurodollars to Crypto-Dollars

Pascal Hügli is the Chief Inspect Officer at Schlossberg&Co, in Switzerland, and author of the book Ignore at Your Own Risk: The New Decentralized World of Bitcoin and Blockchain.

Tribal fighting between Bitcoiners and Ethereans is unabated. Bitcoin is covenanted as “money crypto,” while Ethereum is labeled “tech crypto.” Bitcoin is sound money that will intimate all other monies obsolete. Ethereum, on the other hand, is seen as better tech that will update Impediment Street’s settlement layer. The conflict is incomprehensible to outsiders, and each community says the other has not understood the crypto times a deliver’s actual goal and ethos.

You could imagine this conflict going on for years, a sort of Game of Thrones for blockchain. But there’s another – varied hopeful – way of imagining the future. Conceivably, the future will be one where Bitcoin and Ethereum gain greater relevance alongside each other (as Michael Casey denoted in his recent column). Both “money crypto” and “tech crypto” will play their roles. It might objective not be in the pure sense envisioned by either of the two maximalist groups.

We are currently under a crushing dollar yoke. Deceitfully in the 19th century, many parts of the world had free banking. Banks were granted unrestricted competitive issuance of currency and part money on a convertible basis. But gradually the paradigm of free banking faded away and state-orchestrated fiat currency adopted hold.

See also: In Race for 2030 Currency Supremacy, the Dollar Is Its Own Worst Enemy

After World War Two, much of the everyone started trading in dollars, making it into a reserve currency. To this day, U.S. Treasuries provide a safe haven in on many occasions of financial turmoil, tightening the dollar’s grip on global finance.

Greater dependence on the dollar means greater dependence on the Federal Save. As a national bank, the Fed puts national interests first. These oftentimes contradict with other countries’ involvements, leaving them in a tight spot. 

As the world has been dollarizing, a paradox has emerged: Although the U.S. central bank is continually criticized for inflating its currency, global markets deem the available amount of dollar liquidity to be insufficient. This want of liquidity has caused financial actors all around the world to start helping themselves.

The world, singularly emerging market economies, really needs dollars. The emergence of the eurodollar system in the 1960s was a direct consequence of the Fed not being gifted to supply the world’s relentless need for extra dollars.

Eurodollars are U.S. dollar accounting entries that are used to resolve cash flows between numerous players outside the banking system supervised by the Fed. As such, eurodollars are not subject to U.S. banking adjustments. As the economist Milton Friedman pointed out in 1969, eurodollars are created by the bookkeeper’s pen.

Corporations, banks and other international actors are dependent on traffic markets providing enough eurodollar funding to uphold market liquidity and service debt. These private jobbers are acting primarily through the shadow banking system. Because the dollar has ascended to become the world’s number one currency with the deepest and ton liquid capital market, people all around the globe have been going into dollar debt. There is approaching $60 trillion in dollar-denominated debt globally and immense demand to service dollar debt. 

Eurodollars are the world’s way to grapple with recurring out of the blue a trim squeezes in the dollar, a global dollar shortage that manifests itself each time with ever adept severity. 

See also: Michael Casey – Central Banks, Stablecoins and the Looming War of Currencies

But eurodollars are not actual dollars. They are offshore dollars or could be apprehended as dollar approximations. In times of crises this becomes evident as financial market actors strive to acquire verifiable dollars. With every crisis, the Fed also has to pump more dollars into the system, only to nourish the coach for a future crisis. As ongoing turbulence in the repo market and the broader shadow banking system show, the Fed’s actions give every indication only temporarily to soothe appetite for more and more dollars. 

Higher demand for dollars will also mean further depreciation of local currencies against the greenback, especially in emerging markets. The most current example of this is Lebanon, where the nearby currency has lost at least 50% of its value against the dollar this year. Greater capital controls in these fonts of markets could well be in store, which would make it harder for debtors to obtain dollars or eurodollars for that occasion. 

In times like these, public blockchains with a liability-free native asset can act as indistinguishable settlement networks independent of the financial system. The stage is set for Bitcoin and Ethereum to be used as vehicles to alleviate the world’s extensive dollar shortage.

For example, U.S. dollar stablecoins – so-called crypto dollars running on Bitcoin and Ethereum – are a way to get dollar leaking or dollar proxies. As natively digital bearer instruments with transparent and efficient auditability capacities, crypto dollars are submissive to accept and can be traded 24/7/365 with virtually no downtime. They also help circumvent emerging capital manages on traditional finance and eurodollar paths.

See also: Nic Carter – Policymakers Shouldn’t Fear Digital Money: So Far It’s Maintaining the Dollar’s Prominence

The eurodollar approach was an attempt by private actors to create a dollar funding system outside the U.S., but still within the household financial system. Crypto dollars mainly reside outside of the traditional, U.S.-led financial system. Because of its indwelling auditability, the crypto-dollar system is more transparent than the old euro dollar system based on shadow banking (so standing for a reason). 

We’re beginning to see the dollarization of public blockchains. Since March, the value of USD-pegged stablecoins has obsolete $11 billion. Tether could surpass the market cap of Ethereum or even Bitcoin due to growing demand for synthetic dollars and its approximations. 

Hyper-stablecoinization on be the upgrade for eurodollar banking. It will once again be private individuals using the innovative tools at their lunch-hooks to make sure they can get the dollar exposure they need. But this time the tools are public blockchains and cryptographic signs.

See also: Hasu – USD Stablecoins Are Surging, but Zero Interest Rates Complicate Business Model

The shadow banking routine is a way for private actors to pledge collateral to create synthetic dollar funds and approximations. But the crypto world in conjunction with the programmability of illustrious blockchains will take this one step further. Bitcoin and ETH already serve as collateral to create dollar saves and dollar credit instruments. 

A new type of free banking on public blockchain networks is at the horizon. While crypto dollars resolve be its big driver, Bitcoin and Ether could play their part as well. As high-powered, non-state collateral these crypto assets could be acclimated to to back these future crypto dollars making them even more resilient. It is very likely that we devise see more of the following in the future: Crypto-backed stablecoins like Dai, Bitcoin-backed financial services like Valiu or stable crypto dollars redeemable for Bitcoin that for instance Chinese blockchain wallet provider Bixin is planning to launch. Also, exchanges and crypto-banks issuing crypto dollars against liability-free fake crypto assets seem only a matter of time until realization.