Greetings from seat 21E, currently 35,000 feet over, uh, North Edge Butte, ND. What better time than the lead-up to a 4th of July week than to discuss how crypto is helping to maintain American global soft economic power! And I’m normally the first to hate on United WiFi, but the fact that I can semi-efficiently research, write this and then blast it to my millions (?) of subscribers reminds me that everything is amazing and we should at least try to be happy.
Anyway, my wife editor tells me that my posts are still too long insightful. I continue to insist that there is so much room for dumb memes fascinating detail to cover that I can only trim so much. But, as in all good relationships, I will throw her a bone make a healthy compromise and test out a new summary so my readers can actually skip the whole thing and just get a high level takeaway.
Today, we’ll talk about the most boring interesting thing in crypto: stablecoins. Here’s your TL/DR:
Stablecoins are just dollars on a blockchain. Broadly, they should always be worth $1. The most common form of stablecoins are backed by a “real” dollars sitting in a bank somewhere and should be redeemable for a fiat dollar at any time.
Stablecoins may be the first killer app of crypto. Besides providing liquidity for crypto applications, they allow people to send money a) instantly, b) across borders, and c) for pennies a transaction.
The U.S. Dollar has 99.9% market share in stablecoins. The growing use of stablecoins will likely support the dollar’s role as the dominant global currency.
Let’s get to it.
🟢 What are Stablecoins?
Stablecoins come in lots of flavors, but the core premise is that they are always worth $1. Fiat backed stablecoins essentially hold $1 of “real” dollars for every digital dollar they issue. Every stablecoin has had moments where they have “lost the peg” and been worth more or less than $1, but these are rare for the biggest stablecoins.
Circle, for example, is a highly regulated and highly transparent U.S. company. If you have enough size, you bring them real dolla dolla bills and they “mint” you pretend dollar bills called USDC on a blockchain somewhere (USDC now works on virtually every major blockchain). The key part, of course, is that this works in reverse so you can turn your pretend USDC back into real dollars at any time.
In the meantime, Circle does very responsible things with your dollars and totally doesn’t spend them on hookers and blow. In fact, Circle publishes, down to the CUSIP, each of the three month treasuries that they hold in reserve to back USDC. Circle fully KYCs their customers, gets audited up the ying yang and cooperates, as best it can, with all arms of the U.S. government.
Circle has over $32 billion in USDC in circulation, but they are a semi-distant #2 to USDT issued by a company called Tether which has a whopping $112 billion in circulation. Tether was the first stablecoin issued and it has a much more checkered history. Two of its founders were a) a plastic surgeon and b) a child actor from the Mighty Ducks movie; perhaps not the crew you would assemble if you were looking for your LinkedIn all-stars. For much of its history, there have been active debates on the certainty of Tether’s assets, how much of it may have been lent out and lost or, perhaps, spent on hookers and blow. Adding to these concerns, Tether has been, how do you say, more “flexible” in its audit history and to this day has only ever received “attestations” versus full audits.
For quite a while, the crypto community had major concerns about Tether being a systemic risk to crypto, but those qualms have eased, in part, because issuing stablecoins right now is such an amazingly good business.
Even when interest rates were low, since this batch of stablecoins don’t pay any interest, storing billions of dollars allows you collect a lot of interest. And, hey, it doesn’t cost that much to issue blockchain bucks and not get audits. With 3 month Treasuries yielding 5.3% right now, Tether is earning more than $5 billion a year fot not a lot of work (right up there with Google and private equity for great business models).
Stablecoins are such a good business, in fact, that people have tried all kinds of variations over the years. The U.S. figured out in 1971 that printing dollars out of thin air was a better business than having to hold gold. Crypto companies have been trying this trick for years. Many crypto OGs don’t trust centralized authorities, especially those in cahoots with Washington D.C., to safely secure their collateral. So they created “crypto-backed stablecoins” that can live entirely verifiably onchain without trusting Gordon from the Mighty Ducks to actually hold your dollars.
This varation of stablecoin, holds crypto assets worth approximately $1.30 as collateral for a coin pegged at $1. The largest crypto-backed stablecoin is DAI (well worth it’s own breakdowns) which has roughly $5.5 billion in circulation.
Finally, there are “algorithmic stablecoins” which try to use some external mechanism to maintain a $1 peg. The most famous of these was Terra Luna, which offered 20% interest and then, quite predictably, massively imploded. Algorithmic stablecoins are like Tobias Fünke discussing open relationships:
Lindsey: Did it work for those people?
Tobias: No, it never does. I mean, these people somehow delude themselves into thinking it might, but ... But it might work for us.
🟦 OK, So What?
One of the knocks you hear on crypto is that it is still laking a “killer app.” Clearly these people are not familiar with CryptoDickbutts, but setting that aside, stablecoins have garned massive adoption and make a strong, but boring, case to be one of the first crypto killer apps. [The irony is not lost on me that one of the most successful product in cryptos is the only one that doesn’t go through wild price fluctuations.]
The total value of stablecoin transfers is now edging up around $2 trillion per month. For comparison, Visa processes about $1.2 trillion per month so that is what experts call a “buttload.”
But what are people actually doing with stablecoins?
1) Digital payments. While the original Bitcoin whitepaper called it “electronic cash” and people have been trying to pay for a cup of coffee with Bitcoin ever since, it was never a great payments platform: too slow, too volatile and most importantly, why would you spend down an asset that has historically gone up in value 60% per year in the last 10 years?
But now, on virtually all blockchains, you can use stablecoins to send money from one account to another in no more than 10 seconds for under one cent, completely regardless of borders. It took me about a week, two failed tries, three phone calls and $30 in fees to wire $500 to Canada last summer. And I’m rich and semi-sophisitaced when it comes to financial doodads. According to the World Bank, the average cost of remittances from the U.S. to Mexico is 3.3% and can take up to 3-5 days.
Look, do I expect that your average American is going to start buying their groceries with Solana Pay? No, not so long as merchants are subsidizing our points habit. But living in the U.S., it’s easy to forget that the rest of the world does not have as many low-cost, tangentially subsidized ways to send money as we do. Even in the U.S., wires are expensive, ACH is slow, both are closed on weekend and the PayPal/Venmo/Cash App/Zelle world is painfully fractured.
2) Crypto Liquidity. Bloomberg kind of “dunked” on crypto with a report that claimed that only 10% of stablecoin volume was actually used for “organic payments activity.” Fist, that still leaves a huge absolute dollar value for a platform based on network effects that is still quite young. Second, it speaks to a growing set of financial applications running on these new crypto rails. The rest of the volume they claimed were “bots and large-scale traders.” That’s not the same as cross-border payments, but if they are paying even small fees to do these transactions, the economist in me thinks that’s a sign that they are doing so because there is actual value greater than those fees.
“DeFi” (Decentralized Finance) has had its fits and starts, but every year there are more and more interesting financial tools that are attracting users and their capital. Decentralized exchanges (like Uniswap that we discussed before), lending protocols, onchain futures markets, staking and dozens of other applications use stablecoins at their core. As these use cases grow, it will suck up more and more stablecoins value as liquidity and to provide additonal depth to these markets.
3) Store of value. For now, the crypto world and the traditional financial world exist in largely separate spheres. The on and offramps are improving, but it’s still a pain to move from one to the other. Increasingly, users are just leaving their money in the crypto world and removing price risk by using stablecoins. Coinbase pays 5.15% interest on USDC holdings, better than almost all TradFi high-yield savings accounts, with a risk profile that may not be much different from a SoFi account.
Meanwhile, for those that want to take some additional risk for additional yield, you can currently earn over 10% lending out your USDC on Solana with some semi-predictable risk or chase even high yields moving up the risk curve. Should you do this? Almost certainly not! But brave individuals and even more and more hedge funds are and it becomes another area drawing stablecoin market cap.
◆ Bringing It Back to the U.S. of A
As a Crypto Curious subscriber you are clearly insightful (and good looking) so you likely noticed that in all these discussion of stablecoins, they are all pegged to 1 U.S. dollar, not a Euro, a Yen, a Ruble or a Yuan. In fact, roughly 99% of stablecoin value is tied to the dollar.
Nic Carter has pioneered the idea that stablecoins are basically tokenized Eurodollars and might follow a similar path in their development. After World War II, there was huge demand for dollars in Europe, but it didn’t make sense to hold them in U.S. banks. This gave birth to the Eurodollar, outside of U.S. control, and now estimated at $16 trillion in size.
While many crypto purists think that Bitcoin may some day challenge the dollar as a global reserve, the dollar’s dominance in stablecoins only buttresses U.S. dollar hegemony. Japan holds $1.2 trillion of U.S. treasuries, the largest owner outside of the U.S. At $160 billion, the stablecoin market is bigger than Saudi Arabia’s holdings ($111 billion), but would need to 10x to be as important as Japan. However, with stablecoin supply growing 30% a year, it might not take too long for it to play a major role.
Parts of the traditional finance world are perking up to this. Federal Reserve Governor Chris Waller gave a speech espousing “that any expansion of trading in the DeFi world will simply strengthen the dominant role of the dollar.” Meanwhile, Trump’s former Comptroller of the Currency (BTW, is there a cooler title in the world than “Comptroller”?) Brian Brooks argued in the Wall St. Journal that “stablecoins could bolster the postwar arrangement in which the dollar’s dominance helped foster global trade and the biggest reduction in global poverty ever,” (spoken like a true baller Comptroller).
Whether or not you think it’s a good thing that the U.S. can continue to print money however it pleases, losing that ability would be a dramatic change that not many people would be prepared for.
This Week’s Burning Hot Take
Jared Bernstein, chair of the United States Council of Economic Advisers, totally nails current monetary policy:
There is no question that the government prints money and then it uses that money to um, uh… I guess I'm just, I can't really, I don't get it, I don't know what they're talking about… It's like, the government clearly prints money, it does it all the time, and it clearly borrows, otherwise you wouldn't be having this debt and deficit conversation. So I don't think there's anything confusing there."
Happy to be your Canadian hawala correspondent for a much more reasonable rate next time round 😉