Get ready. It is coming.
This is something that we discussed a bit over the last year. The US dollar is not about to lose it place as the global reserve currency anytime soon. Much of this statement comes from the understanding of the network effects it enjoys.
We are in the digital realm. Network effects are at the core of everything.
For all the talk of other currencies, we are likely to see a push even deeper into the dollar. This is being recognized by Washington, with the discussion focusing upon it.
We can expect the United States Congress to pass a stablecoin bill that helps to cement the US dollar in place.
Image generated using Ideogram
US Dollar Hegemony Through Stablecoins
There is little doubt that crypto is getting attention in the halls of Washington DC. Unlike the previous administration, this one is supportive of what is happening.
My view is that the United States passing stablecoin legislation will open up the floodgates. Upon passage, we will have everyone and their brothers involved in this. We already has Bank of America on record as saying they create a USD stablecoin once regulation is approved.
This is going to happen because it is to the benefit of both the US government and the stablecoin issuers.
Overcollateralized stablecoins, which use short-term US Treasury bills and cash deposits to back their digital fiat tokens and thus drive demand for US debt instruments, have been pitched as a way to extend US dollar dominance.
As we can see, this will build in demand for US Treasuries. I am going to presume that any bill will require the backing of Treasuries to be legal (to enter any part of the regulated system). Since we are dealing with corporations, they will likely abide by this.
From a company perspective, it is free money.
When people deposit their dollars for a stablecoin, the issuer uses the money to buy T-bills. The stablecoin is used for transacting on whatever platform they are located. Money is made from the interest garnered via the bonds. The company issues $1 in value to transact for a dollar, but earns interest off it.
My forecast is those with medium to large platforms will be the first to jump in. Social media is primed for this.
US Dollar Explosion
The idea of USD stablecoins supporting the dollar should be clear. It is to the point that Governor Wallet of The Fed spoke up. For those who do not remember, he is one that gave a number of speeches regarding central bank digital currencies (CBDC). He accurately assessed they are "a solution looking for a problem".
Here is what the Governor said about stablecoins:
Federal Reserve Governor Christopher Waller also voiced support for using stablecoins to prop up the dollar in February 2024.
Waller argued that the corrosive effect of cryptocurrencies on the market share of the US dollar would be mitigated by stablecoin demand.
I disagree with him on the second point. To me, there really was not going to be much of a decline in market share of the dollar due to cryptocurrencies. As stated repeatedly, most crypto does not quality as currency. A more accurate description is "crypto-assets". The lack of price stability coupled with the HODL idea means failure as a medium of exchange. There is no way to serve this role without distribution.
What gets lost is the explosiveness in the digital world. In spite of the shortcomings, some transactions will be conducted using value capture tokens. However, this pales in comparison to the growth in transactions due to the digital world moving into its next phase.
We already see the domination of the dollar in the stablecoin market. Tether and Circle have a couple hundred billion tokens already. Legislation being signed into law (in the US) will move this into the trillions over the next year or two.
All of this is only going to enhance the network effects the US dollar has. This will be enhanced by the fact that a lot more dollars will be required. The digital world is growing at an insane rate, meaning we require more money to transact. We are dealing with a world that is no longer limited by units. Instead, bandwidth is the driving factor.