A Brazilian Stablecoin

Purchasing power stability is a central component of any mainstream currency. Without it, currency cannot be relied on as a store of value, as the value of one’s savings could plummet overnight. Price volatility is also unacceptable for mediums-of-exchange for a similar reason, as it introduces a risk of appreciation on the part of the purchaser and a risk of depreciation on the part of the merchant. Finally, volatile price currencies cannot be used as a unit of account, as the purchasing power implied by contractual obligations and balance sheets would become unpredictable.

Traditional cryptocurrencies, such as Bitcoin, excel at being a borderless digital asset that can last over time and is virtually impossible to be confiscated by tyrannical governments. While modern liberal democracies set on paper the fundamental freedoms for society, none of this can be ultimately achieved without the existence of an easy-to-hold asset that is not controlled or overseen by any government. In this sense, Bitcoin has given the power to citizens to hold assets utilizing a purely private method.

We acknowledge and support all the disruption put forward by Satoshi Nakamoto with the Bitcoin protocol and the ethos presented on his great whitepaper [1], but we cannot overlook some of its fundamental barriers to become a widely used currency, being the main reason behind it its volatility. Its inflexible scarcity is fundamental from a macroeconomic point of view, but in practice has given Bitcoin an asset-like behavior that has vastly enriched early investors and alienated late-comers in a sequence of short-term bubbles since its inception.

To overcome this limitation, many economists and blockchain developers have been partnering with investment firms to develop a cryptocurrency that keep its purchasing power relatively stable over time. Different approaches have been tried, from pure stable cryptocurrencies to tokens fully-backed by fiat and fiat-like instruments. The former case is an attempt to design the scheme of contraction and expansion of currency’s supply by creating open markets for bonds denominated in the underlying cryptocurrency. Although this mechanism is widely used by central banks to control for inflation, the small scale of the so-called “stable coin” projects makes it highly vulnerable to speculative attacks and, consequently, the failure of the intended monetary policy. The latter case, on the other hand, was so far successful in maintaining price stability for cryptocurrencies pegged to certain currencies such as the US dollar. The existence of arbitrage opportunities when negotiated prices in the secondary markets are below or above the parity is enough to keep the price of the token hovering the targeted parity.

The existence of arbitrage opportunities when negotiated prices in the secondary markets are below or above the parity is enough to keep the price of the token hovering the targeted parity.

We recognize that in a world of privately issued and “pure” stable digital currencies, the role of governments in controlling monetary policy might be alienated and the ability of nations to influence economic activity in times of overheating or economic downturn put in jeopardy. However, mainstream “fully-backed” stable cryptocurrencies would still find space in economies plagued by explicit or implicit capital controls without impacting the governmental mandate in conducting monetary policy.

Mainstream “fully-backed” stable cryptocurrencies would still find space in economies plagued by explicit or implicit capital controls without impacting the governmental mandate in conducting monetary policy.

Furthermore, despite our awareness that a privately created protocol might increase the idiosyncratic risk for the whole economy and trying to reproduce a process that already exists can be seen as pouring limited resources in creating an overly complicated solution for a problem that is already tackled by Central Banks, we understand that issues related to price-stability, freedom of capital flows and monetary policy are present in most parts of the world despite the intervention of these governmental entities.

A blockchain powered cryptocurrency, backed by fiat money, is not new, with several similar projects claiming to have the best and more trusted solution. Currently, the most used protocol is the USD Tether, though other projects have increased in importance in recent years, such as True USD and Gemini Dollar. These projects are listed on established digital assets exchanges, thus providing a fiat-like instrument for traders that is to a certain degree independent from traditional banking mechanisms.

Commingling the perceived benefits of State oversight over the pegged-currency purchasing power stability — made possible using monetary policies executed by Central Banks and fiscal policies executed by the Government — and citizens’ control over assets that can be exchanged online — features allowed by blockchain technology — can be a viable solution for promoting larger adoption of cryptocurrencies.

Currently , our financial system lies on the ingenuity of Central Banks to operate monetary policies, while the infrastructure that allows degrees of free trade in society depends on the Inter-Bank Payments Network operated by Financial Institutions and their management of a Fractional Reserve System. Current electronic payments infrastructure is making it easier for people to buy and sell goods and services, but governments and private companies are gaining unfair access to citizen’s consumption behavior. In this sense, a blockchain-based currency gives us, the crowd, an insurance policy against an Orwellian future [2].

[1] Bitcoin: A Peer-to-Peer Electronic Cash System, October 2008. https://bitcoin.org/bitcoin.pdf

[2] Nassim Nicholas Taleb, prologue of The Book “The Bitcoin Standard”, by Saifedean Ammous, 2018