By Brian Brooks and Charles W. Calomiris
Stablecoins, blockchain-based assets backed by bank deposits and Treasury securities, are at the heart of a dollar-based revolution happening throughout the developing world. Their price is supposed to stay steady, often at $1. Think of them as digital versions of prepaid cards with the potential to be important tools of American soft power in a world where the role of the dollar is in question.
Stablecoins aren’t merely a more efficient means of electronic payments. With some economists and policy makers worrying about “de-dollarization”—the eclipse of the U.S. dollar the world’s reserve currency—stablecoins could bolster the postwar arrangement in which the dollar’s dominance helped foster global trade and the biggest reduction in global poverty ever. But that can happen only if Congress implements a sound and stable regulatory framework.
That is why House Financial Services Committee Chairman Patrick McHenry’s bill to regulate stablecoins is vital. It would establish federal and state oversight for stablecoin issuers, impose qualifications for reserve assets, and implement rules on redemptions and public disclosure. It’s hard to argue with these seemingly bipartisan goals, and Mr. McHenry (R., N.C.) had collaborated on the bill with Rep. Maxine Waters (D., Calif.) for more than a year. Yet at last week’s vote on the measure, Ms. Waters and most of her Democratic colleagues pulled their support, with no clear reason for the sudden change of heart. Did they suddenly decide stablecoins aren’t important?
Any tool that could boost the U.S. dollar should be considered. Dollars as a share of reserves held by foreign central banks have fallen in the past generation. In 2000 dollars represented almost 73% of global central bank reserves; today the share is around 59%. Though much international trade and many commodity transactions are still settled in dollars, this year large countries including Brazil and Argentina entered bilateral agreements with China to use the yuan and their local currencies for trade settlement.
Rumors abound that a summit next month including Brazil, Russia, India, China and South Africa will consider creating a new currency arrangement. While leaders of the so-called Brics countries deny an impending currency union, Anil Sooklal, South Africa’s ambassador-at-large for Asia and Brics, said “the days of a dollar-centric world” are “over” and Brics nations intend to settle trades in their local currencies in the near future. This year, Saudi Finance Minister Mohammed al-Jadaan said Riyadh is open to settling oil trades in currencies other than dollars—once an unthinkable idea.
U.S. policy hasn’t boosted global confidence in the dollar.. The asset freeze on dollar holdings in Russia’s central bank imposed after Russia invaded Ukraine, while understandable politically, shocked investors and central bankers, who realized for the first time that the dollar may not be the safe store of value it once was.
A de-dollarized world would damage the U.S. The dollar’s reserve status reduces U.S. borrowing costs, which is crucial in an era when government borrowing and spending are at a record high and still climbing. Reserve status also insulates the U.S. government, banks and the general public from foreign-exchange risk. All things being equal, reserve status also allows American consumers to buy foreign goods more cheaply, since foreign producers would rather have dollars than other currencies.
The nationalist and anticolonialist impulses behind de-dollarization in the developing world aren’t likely to help citizens of those countries. Argentina’s decision to price trade deals with China in yuan and pesos may reflect Argentina’s national pride, but the country’s 114% annual inflation rate means that workers there will still see their purchasing power quickly decline. And that’s nothing compared with Zimbabwe’s 175% rate or Venezuela’s 400%. At the end of last year, 17 countries had inflation rates above 20%, and 57 had rates above 10%.
This is where stablecoins come in. Faced with the dismal prospect of saving their wages in local currency stored in local bank accounts, more citizens of high-inflation countries are opting to use dollar-backed stablecoins as a synthetic savings account. Dozens of startups offer stablecoin savings and payment options in Latin America and Africa—often in countries whose leaders are vocally and visibly moving away from the dollar.
Dollar-backed stablecoins have market capitalizations in the hundreds of billions of dollars, and they support transaction volumes many multiples of that amount. These offerings are attractive to ordinary people in those countries because they don’t require an account at a local bank, only an internet connection. In addition, many stablecoins pay interest and have no minimum-balance fees and low or no transaction fees. Most important, they free people from tyrannical developing-world monetary policy and allow them to store the value of their hard work in relatively stable dollar form.
Stablecoins could be to finance what Voice of America has been to diplomacy. They can communicate U.S. monetary policy directly to the people living in other countries, when American efforts to engage other governments aren’t succeeding. If stablecoins flourish, citizens of other countries will increase the demand for dollars independent of (and perhaps contrary to) their governments’ political decisions. But for stablecoins to succeed, U.S. politicians need to agree that re-dollarizing the global economy is important.
The McHenry bill is a good place to start.
Mr. Brooks is a partner at Valor Capital Group. He served as acting U.S. Comptroller of the Currency, 2020-21, and was chief legal officer of Coinbase, 2018-20. Mr. Calomiris is dean of economics, politics and history at the University of Austin. He served as chief economist of the Office of the Comptroller of the Currency, 2020-21.
Read the full op-ed here.
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