Every so often it’s useful to quote arguably the most important passage from Wall Street Journal reporter Craig Karmin’s 2008 book, Biography of the Dollar. Karmin noted that prior to 1971, there “was no need for a foreign exchange market because all major currencies were pegged to a dollar rate and could only be changed in unusual circumstances.”
Implied in Karmin’s passage was that a dollar defined as 1/35th of a gold ounce was quite stable thanks to its peg to the yellow metal. If gold hadn’t been stable, not only would the dollar not have been pegged to it, but it’s useful to point out that there would have been active foreign exchange markets so that the dollar’s instability could be hedged.
Which speaks to where we are today: the dollar remains the world’s currency, but lacking the stability that its gold peg implied to the world, it’s now traded feverishly. $7 to $10 trillion worth of trading each day in global foreign exchange markets. It’s a loud market signal that a world reliant on dollars to referee exchange of actual wealth yearns for the dollar-price stability of old.
All of which brings us to a new study published by the Digital Chamber of Commerce. A crucial takeaway from the study concerns the U.S. dollar, and how it leads the global stablecoin market. Getting more specific, stablecoins are backed by the dollar to the tune of 98%. Please stop and think about what this means for producers in other parts of the world.
Take for instance Iran, a country with a currency (rial) that’s been devalued over 3,000 times since 1971. The rial’s longstanding unreliability is all the information readers require to understand that it’s long since ceased to exist as real “money” or “currency” for Iranians. As a consequence, the dollar has long liquefied exchange in Iran, and a myriad of other countries with currencies that have mimicked the rial’s unreliability.
Stablecoins are a crucial improvement on the dollar simply because they’re easier for the people in corrupt or unstable countries to move around without fear of theft. In particular, Digital Chamber CEO Perianne Boring has talked in moving fashion about how Afghan women have used cryptocurrencies to protect their precious wealth from the Taliban.
All of which speaks to the importance of the dollar to the growing acceptability of cryptocurrencies, and stablecoins most specifically. That stablecoins are backed by dollars is yet another loud market signal that for all of the greenback’s demerits, it remains the world’s currency precisely due to its relative stability and acceptance around the world.
Still, the dollar could be better. Evidence supporting the previous claim can be found yet again in daily foreign exchange trading of the $7 trillion+ variety. All the trading signals a risk that stablecoin owners are taking in storing their wealth in these coins. While the dollar is by far the most trusted currency in the world, it’s not that trusted.
Since it’s not, it’s essential that the U.S. Treasury fulfill its part of the unspoken stablecoin bargain. If the world’s private money forms are going to continue to treat the dollar as currency par excellence, it behooves Treasury to live up to global perception by giving primacy to dollar-price stability. The latter would be brilliant for American producers who earn dollars, but increasingly it will be brilliant for the world’s producers who want to get in return for their production, but who need a reliable store of wealth to protect their ability to get.
In short, stablecoins are doing their part when it comes to perpetuating dollar dominance. It’s now time for Treasury to reward stablecoins with the underlying dollar stability that will make it possible for the coins to live up to their name.
