Wall Street Journal Why should the US government support stablecoins denominated in USD?
WSJ Why should US government support USD-denominated stablecoins?
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This article was published in the Wall Street Journal Opinion section.
Author: Brian P. Brooks and Charles W. Calomiris
Brian P. Brooks served as Acting Comptroller of the Currency from 2020-21 and was Chief Legal Officer at Coinbase from 2018-20. Calomiris is the Director of the Department of Economics, Politics, and History at the University of Austin. He served as Chief Economist of the Currency Supervision Bureau from 2020-21.
Stablecoins are blockchain-based assets backed by bank deposits and government bonds, and they are at the core of the dollar-based revolution that developing countries are experiencing. Their prices are supposed to remain stable, usually at $1. They can be seen as digital versions of prepaid cards, and in a world where the role of the dollar is being questioned, they have the potential to become an important tool of U.S. soft power.
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Stablecoins are more than just a more efficient electronic payment method. Some economists and policymakers are concerned about “de-dollarization” – the replacement of the dollar’s status as the world’s reserve currency. Stablecoins could support the post-war arrangement where the dominance of the dollar helped promote global trade and reduce global poverty. However, this can only happen if Congress implements a robust and stable regulatory framework.
This is why the Stablecoin Regulation Act proposed by LianGuaitrick McHenry, Chairman of the House Financial Services Committee, is crucial. It establishes federal and state regulation for stablecoin issuers, sets qualifications for reserve assets, and implements rules regarding redemption and public disclosure. It is hard to argue against these seemingly bipartisan goals, as McHenry (a Republican from North Carolina) has been working with Maxine Waters (a Democrat from California) on this bill for over a year. However, in last week’s vote on the measure, Ms. Waters and most of her Democratic colleagues withdrew their support, with no clear reason for this sudden change. Do they suddenly think stablecoins are no longer important?
Any tool that could enhance the status of the dollar should be considered. Over the past few generations, the share of the dollar in foreign exchange reserves held by foreign central banks has declined. In 2000, the dollar accounted for nearly 73% of global central bank foreign exchange reserves, while now it accounts for about 59%. Although many international trade and large-scale commodity transactions are still settled in dollars, this year major countries including Brazil and Argentina have signed bilateral agreements with China to settle trade in renminbi and their local currencies.
There are rumors that a summit next month involving Brazil, Russia, India, China, and South Africa will consider creating a new monetary arrangement. While leaders of the so-called BRICS countries deny an imminent currency alliance, Anil Sooklal, South Africa’s ambassador-at-large for Asia and BRICS countries, said that the era of a “dollar-centered world” has “ended” and that BRICS countries intend to settle trade in their local currencies in the near future. This year, Mohammed al-Jadaan, the Saudi Minister of Finance, stated that Riyadh is open to settling oil trades in currencies other than the dollar – something that was once unthinkable.
The policies of the United States have not strengthened global confidence in the US dollar. The freezing of the Russian Central Bank’s US dollar assets following the invasion of Ukraine by Russia, although understandable from a political perspective, still shocked investors and central bankers, who realized for the first time that the US dollar may no longer be as safe as it used to be.
A non-dollarized world is harmful to the United States. The reduced reserve currency status of the US dollar lowers the borrowing costs for the United States, which is crucial in an era of record-high government borrowing and spending that continues to rise. The reserve status also protects the US government, banks, and the public from foreign exchange risks. Under equal conditions, the reserve status also allows US consumers to purchase foreign goods more cheaply, as foreign producers prefer to hold dollars rather than other currencies.
The nationalist and anti-colonialist impulses behind the de-dollarization of developing countries are unlikely to benefit the citizens of those countries. Argentina’s decision to price its trade transactions with China in renminbi 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 rapidly decline. This is nothing compared to Zimbabwe’s 175% inflation rate or Venezuela’s 400%. As of the end of last year, inflation rates in 17 countries exceeded 20%, and in 57 countries, inflation rates exceeded 10%.
This is where stablecoins come into play. Faced with the bleak prospect of storing wages in local currency in local bank accounts, citizens of more high-inflation countries are choosing to use US dollar-backed stablecoins as comprehensive savings accounts. Dozens of startups are offering stablecoin savings and payment options in Latin America and Africa – often in countries where leaders openly and explicitly abandon the US dollar.
Stablecoins backed by the US dollar have a market value of hundreds of billions of dollars and support transaction volumes far exceeding that amount. In these countries, these products are attractive to ordinary people because they do not need to open accounts at local banks, they just need an internet connection. In addition, many stablecoins pay interest and have no minimum balance fees, with low or no transaction fees. Most importantly, they free people from the constraints of the monetary policies of developing countries, allowing them to store the value of their hard work in a relatively stable form of the US dollar.
When the United States tries to communicate with other governments but fails to do so, stablecoins can directly convey US monetary policy to residents of other countries. If stablecoins thrive, citizens of other countries will increase their demand for the US dollar, independent of their government’s political decisions (or even the opposite). But for stablecoins to succeed, US politicians need to recognize the importance of global economic re-dollarization.
The McHenry bill is a good start.