What would happen if the dollar were to crash, hypothetically? How would fiat-backed stablecoins fare?
Private cryptocurrencies have become the newest form of money during the past ten years. This is especially true for stablecoins, which Harvard Business Review referred to as "a private kind of money" and which provide a useful substitute for fiat issued by the government.
Although a common industry narrative aims to remove cryptocurrencies from the legacy system, there is some interdependence between the two. For instance, the top three stablecoins are backed by the dollar.
As the macroeconomic environment continues to deteriorate, economists are raising concerns about what would happen to stablecoins in the event of a currency crash.
Increased use of stablecoins
For the purpose of price stability, stablecoins are digital currencies that are linked to another asset, such as gold, fiat, or a cryptocurrency token (such as in the case of algorithmic stablecoins). They provide a way for investors to fluctuate their holdings of crypto tokens and manage market volatility.
Stablecoin market capitalization have increased significantly in recent years, illustrating their rising popularity and power over time.
Tether's market capitalization was about $15 million in the beginning of 2017. This increased by more than 5,500 times in just five and a half years, reaching a peak of $83 billion in May 2022.
The corporation must have an equivalent sum in cash to cover redemptions since Tether tokens can be redeemed for dollars. However, concerns about the company's ability to cover its token issuance with reserves have been voiced throughout its life.
“All Tether tokens (USD₮) are pegged at 1-to-1 with a matching fiat currency and are backed 100% by Tether’s reserves. We publish a daily record of the current total assets and reserves.”
Despite this, Tether has passed each stress test that has been administered to it so far. Additionally, it routinely generates more trading volume each day than any other currency, maintaining its status as the top stablecoin.
Authorities are interested in stablecoins for a variety of reasons, and they want to govern and regulate them to safeguard consumers. Some believe that this is the proper course of action in light of the June de-peg of the algorithmic stablecoin Terra UST, which is thought to have lost $42 billion.
Stablecoin systems, not simply the token itself, should be regulated when it comes to stablecoins, according to international authorities. For instance, the IMF stated that stablecoin standards "should cover the entire ecosystem and all its fundamental operations," and the BIS suggested directly integrating supervisory requirements into stablecoin systems.
Currently, it is unclear how these concepts will function in reality, particularly the embedded supervision idea, which has Central Bank Digital Currency undertones. However, it looks that managing stablecoin issuers is the preferred approach. Once more, this raises a number of issues with regard to censorship and jurisdiction.
The lesson from this is that, at least in their thoughts, global authorities consider stablecoins to be "their own" and are working to integrate them into the system, further obscuring the distinction between stablecoins and traditional finance.
Markets turn pessimistic for 2023 after the FOMC meeting
The fund rate was raised by 50 basis points (bps) to 4.5% on December 14th, according to Fed Chair Jerome Powell.
Markets anticipated a 50 bps increase, but Bitcoin responded by first falling 3.2%, with sell-side momentum continuing into the following day. Similar sell-offs occurred in the Dow, S&P 500, and Nasdaq.
Powell's remarks at the press conference had a distinctly hawkish tenor, putting an end to the notion of a pivot anytime soon. Before the central bank would think about changing direction, he continued, there needed to be more indications that inflation was under control.
“To the extent we need to keep rates higher and keep them there for longer.”
Based on this, markets concluded that 2023's GDP growth will be modest and that the terminal rate will likely be higher than the 5% originally predicted.
After the press briefing, it became apparent that Powell wants much more suffering before making a U-turn on interest rates.
From the standpoint of belief in the social order, the demise of a significant currency like the dollar is unimaginable. The expense of living issue and the severe response to Covid, however, have damaged people's confidence in the status quo in recent times.
Additionally, there are several instances of currencies returning to their inherent worth, which, in accordance with the French author and activist François-Marie Arouet, best known by his pen name Voltaire, is zero, throughout history.
“all paper money eventually returns to its intrinsic value: zero.”
Although talking heads downplay the severity of decades of easy credit and careless money creation, a closer examination reveals massive deficits, asset overvaluation, and rising inflation, which can no longer be dismissed as passing or inconsequential.
BlackRock: Prepare For Recession "Unlike Any Other"... And What Worked Before "Won't Work Now" was the heading of a recent ZeroHedge piece that portrayed a bleak image of what might occur.
According to the report, the world economy has already left behind 40 years of steady growth and entered a period of greater unpredictability. As a result, generalized macro volatility should be anticipated.
Additionally, according to BlackRock, central banks won't be stepping in to save the economy this time, unlike in previous recessions. The only remaining choice is a severe recession, with some speculating a protracted depression.
Following World War I, the Weimar Republic in Germany experienced a financial crisis. Argentina experienced a crisis in the late 1990s. Venezuela experienced a crisis in 2016.
In light of this, central banks are treading carefully. How much longer can fiat currencies flounder when economic warning lights are screaming red?
Reeve Collins, a co-founder of Tether, told CryptoSlate that, in the worst-case scenario, a collapse of the dollar would result in Tether losing its backing and being unable to carry out its intended purposes.
Collins warned that if this happened, there would be "greater concerns than fiat-backed stablecoins not having any value."
Is the fiat-backed stablecoin era over?
Collins is certain that the current bitcoin infrastructure provides a ready-to-use alternative financial system and a way to transact in this fictitious scenario, somewhat mitigating the chaos of a currency collapse.
People moving to alternative currencies have been observed in case studies of currency crises. For instance, following the collapse of the bolivar, at one time, half of Venezuelan transactions were made in dollars, and Bitcoin trading volumes also increased.
Does the demise of the dollar spell the end for stablecoins? Not totally, Collins believed, as algorithmic stablecoins may fill the gap left by the deceased fiat-backed stablecoins.
“I do believe, at some point, new algorithmic stables will come along which will prove to be as stable as the fiat-backed counterparts, but we are not there yet.”
Although the Terra UST collapse damaged the reputation of algorithmic stablecoins generally, this was due to flaws in the LUNA pegging system's architecture rather than a problem with the idea of pegging to a cryptocurrency in general.
In light of this, in a post-apocalyptic world, people will trade using whatever they have trust in to provide a method of exchange, store money, and serve as a unit of account. What else might serve those purposes more effectively now that currency is out of the picture than an algorithmic stablecoin?