By Edward W. Mandel
Stablecoins have been a growing part of the crypto landscape for a couple years now. Apparently, they have far more staying power than the ICO market and more acceptability than true cryptocurrencies.
And yet, the whole concept of stablecoins is running into exactly the same kind of headwinds as ICOs and free-trading cryptos have.
We at BQT are curious to see what the long-term prospects are for stablecoins as a class and, more importantly to active traders, which ones will succeeds and which ones are destined for dead links at the bottom of a Wikipedia page.
View from the G7
Recently, no less august a body as the Group of 7 — the grown-ups’ table of economic powerhouses — released a report on stablecoins’ impact.
“Cross-border payments remain slow, expensive and opaque, especially for retail payments such as remittances. Moreover, there are 1.7 billion people globally who are unbanked or underserved with respect to financial services,” the report concedes, then takes the position that stablecoins present only one potential solution to these problems. And a risky one at that.
According to the study, which was performed by the Bank for International Settlements at the G7’s behest, stablecoins’ risks include:
- Legal certainty;
- Sound governance, including the investment rules of the stability mechanism;
- Money laundering, terrorist financing and other forms of illicit finance;
- Safety, efficiency and integrity of payment systems;
- Cyber security and operational resilience;
- Market integrity;
- Data privacy, protection and portability;
- Consumer/investor protection; and
- Tax compliance.
But wait, there’s more. Those just refer to stablecoin-denominated transactions within one country. Of course, if you have to use stablecoins in domestic settings it says more about the riskiness of your country’s central bank than it does about the riskiness of crypto assets, but that’s a side note.
On a global scale, according to the BIS, stablecoins’ risks extend to:
- Monetary policy,
- Financial stability,
- The international monetary system, and
- Fair competition.
“The G7 believes that no global stablecoin project should begin operation until the legal, regulatory and oversight challenges and risks outlined above are adequately addressed, through appropriate designs and by adhering to regulation that is clear and proportionate to the risks,” the paper posits, before giving itself a little wiggle room. “That said, depending on the unique design and details of each stablecoin arrangement, approval may be contingent on additional regulatory requirements and adherence to core public policy goals.”
“Approval” by whom isn’t stated. The G7 isn’t any kind of polity which can “approve” anything. It’s an economic coordinating council. The BIS’s main role is to provide banking services, host meetings and, apparently, write papers. It has no enforcement arm, so “approval” is fairly meaningless in that context.
Who you lookin’ at?
Reading between the lines of this report, it’s clear who’s being singled out, if not by name. Libra. I’ve written here before about Facebook’s stablecoin project, wishing CEO Mark Zuckerberg luck with it.
But Libra isn’t even off the ground yet. And I stress, “yet.” Despite the fact that many of its initial partners have backed out. These partners are, after all, part of the infrastructure that crypto is likely to disrupt. Other partners, which might seem more fringy at the moment, are the ones who are going to take huge steps forward on the strength of their aligning with crypto at a time when the major players are taking a pass.
But even if Libra crashes — and again, I strongly doubt that’s going to happen — it’s hardly the only stablecoin around.
They date back to 2014, when BitShares debuted its BitUSD project which persists, but it’s thinly traded and hasn’t lived up to its promise of being worth at least $1. The most popular stablecoin is Tether, which is the only one with a market cap exceeding $1 billion, according to Stablecoin Index. There are a number of others, none of which is particularly frothy when it comes to trading volume, although TrueUSD, USDCoin and Paxos are halfway respectable. One that has made headlines because of its popularity in Venezuela’s benighted economy is Dai. All of these except BitUSD exceed the trading volume and market cap of Gemini, the brainchild of the Winklevoss Twins, no doubt to the delight of Zuck, their arch-nemesis.
Also, let’s not forget that there are different kinds of stablecoins. Tether and TrueUSD are fiat-backed, as Libra proposes to be. Others, including Digix Gold Tokens, are backed by precious commodities while others, like Dai, are backed by other cryptocurrencies. There’s at least one, Basis, which is in essence a crypto-fiat — not backed by anything but the full faith and credit of the project. Like a central bank, the Basis team issues and destroys its currency in order to maintain a steady value. (While I think this is a good idea, I’m not sure the world is quite ready for it yet.)
Baked-in bias
Frankly, though, I don’t know why that screed is being touted as the G7’s report. It was written by the BIS, the Switzerland-based central bank of central banks. Considering how predicated the bank’s entire existence is on the primacy of fiat currency, we in the crypto space should really expect nothing other than its contempt. My friend William Freedman has written about how this institution — with recourse to literally all the money in the world — feels threatened by crypto.
This is an organization desperate for relevance. Even if you accept the premise that central banking is a good thing — as I do, as most conventional economic thinkers do, but as most crypto enthusiasts do not — it doesn’t necessarily follow that you see an important role for the BIS. It was founded in 1930 to facilitate reparations payments under the Versailles Treaty. That lasted about a year before Germany stopped making them. The BIS was left with a secondary mission of “foster[ing] international monetary and financial cooperation” which basically meant hosting meetings.
Then World War Two broke out and it found a new purpose: enabling the Nazis’ plunder of European wealth. Among the BIS directors at the time was Reichsbank President Walther Funk. Intimately connected with the appropriation of Jewish property, Funk was labeled by Nuremberg Trials prosecutor Robert Jackson as the “Banker of Gold Teeth” before sending him off to a 12-year stay at Spandau Prison. Funk was joined on the BIS board by his adjutant and co-defendant Emil Puhl, as well as a couple other high-ranking perpetrators of crimes against humanity.
Toward the war’s end, the World Bank and International Monetary Fund were set up at the Bretton Woods Conference, so the question becomes: Why did the BIS persist? It had no real purpose and was only 14 years old at the time, so the European fascination with old things had no purchase. In fact, the joint statement at the end of Bretton Woods called for the liquidation of the Bank for International Settlements at the earliest possible moment”. And yet that never actually happened. I don’t know why not.
Eventually, it found another portfolio: serving as a clearinghouse for European currencies. And, granted, for about 50 years there was some call for that. But now that most the continent subscribes to a single fiat currency issued by a single central bank, there really isn’t any reason to have a BIS anymore, if there ever had been.
But wait, there’s more
So what’s the takeaway for crypto enthusiasts seeking to adjust their stablecoin holdings? I wish I knew but, frankly, I think this G7-commissioned study will soon be forgotten. While it calls for stricter regulation of stablecoins — and their outright ban until those regulations are in place — I’m not sanguine about the chance of these regulations and bans actually going into effect. Certainly, not among all seven members of the organization that called for it. And absolutely not among all members of the broader Group of 20. And if even one signatory backs out, the whole scheme falls apart as stablecoins find themselves at rest there.
Ultimately, this paper issued by the BIS will have all the effect of the paper issued at Bretton Woods calling for the BIS’s dissolution.
We can’t predict the future. But I hope you join us in experiencing it together.
Edward is an Ernst and Young Entrepreneur of the Year Finalist, Blockchain Enthusiast and visionary behind many successful organizations. An avid entrepreneur, Edward has a knack for designing distinctive business models complemented with superior technology to deliver unparalleled service and profitability. Edward also has been advising and consulting for various successful Blockchain technology and recently launched BQTX.COM exchange, BQTUniversity.io Blockchain Education Platform, BQTexchange.com beta-P2P exchange helping traders connect with each other to leverage their crypto assets.
The information can be found online at BQT.io, on Telegram @BQTCommunity.
