In today’s Money Morning…DeFi needs stablecoins and stablecoins need fiat, so…if US fiat players take advantage of its incumbent status, then…it’s not as crazy as it sounds…and more…
What if in a strange turn of events, the USD actually became more powerful due to the crypto revolution?
Bizarrely, this scenario is now a distinct possibility.
In one of last week’s Money Morning pieces, I profiled the recent comments made by a one Randal Quarles, who is the Federal Reserve’s vice chair for Supervision.
Quarles suggested that stablecoins may not be something for central bankers to be scared of.
Quarles instantly became a hero in the crypto community.
Crypto types frequently divide people into the ‘friends’ camp and the ‘enemies’ camp all too quickly.
But putting that to one side for now, let’s take a look at how the USD could actually benefit from crypto proliferation.
DeFi needs stablecoins and stablecoins need fiat, so…
In some core ways, DeFi needs fiat.
Call it the transitive property of monetary value. And in a convoluted way, the world of fiat may ultimately need DeFi.
As in, if fiat players in the US don’t embrace DeFi, they may lose out to competitors like the digital yuan.
Let me explain.
DeFi takes TradFi principles and reimagines TradFi’s mechanics, but the core principles remain the same.
Lender, borrower, collateral, payback period, and yield or interest.
So TradFi needs to choose between DeFi or taking a regressive step and attempting to ram CBDCs down consumers’ collective throats.
Which brings us to the curious case of Randal Quarles.
Here’s the key passage from Quarles’ speech:
‘[Stablecoins] could encourage [international] use of the dollar by making cross-border payments faster and cheaper, and it potentially could be deployed much faster and with fewer downsides [than CBDCs].’
The way things are currently poised, the US Federal Reserve is walking a tightrope.
Push back too hard against crypto and they could cause chaos.
But if they regulate in a gentle and sensible manner, they could actually beat the Chinese digital yuan to the innovation punch.
That’s because in the long run, there’s little guarantee that a US Digital Dollar would be the preferred option in a competitive landscape with a digital yuan.
The crypto ethos are in many ways the US ethos, or at least the way it used to be.
It would be a grave mistake for the US to forsake its roots and try to out-China China.
And in the end, it all comes down to who trusts what.
Take El Salvador, for example.
In El Salvador the local currency is broken — nobody trusts it. Instead citizens prefer to transact with USD.
As a result, with such a heavy reliance on USD remittances coming from overseas, it’s understandable why they rolled the dice by accepting Bitcoin [BTC] as legal tender.
By my understanding of El Salvador’s relationship with Strike — the mobile payments app helping El Salvador with the move towards BTC — USD remains the currency at the start of the transaction and the end of the transaction.
But instead of working on the legacy financial system’s ‘rails’, it uses BTC as the transfer method.
USD remains the bedrock and this means one important thing.
If US fiat players take advantage of its incumbent status, then…
Paradoxically, it could eventually ride out the beginning of the crypto revolution with its reserve status intact.
A lot of this comes down to the fact that in large swathes of the developing world, the USD is the foundational layer in their monetary systems.
These countries aren’t going to suddenly switch to crypto-based monetary systems.
Yes, China is muscling in on these developing economies with funding for infrastructure and development plans like the Belt and Road initiative.
However, if the US can swoop in with various DeFi initiatives for the unbanked, all based on stablecoins based on US fiat, they could nip China’s advances in these parts of the world in the bud.
This is probably the smart move for the US — call it ‘techno-monetary soft power’.
Make the right choice here, and the US could win the innovation race, and in turn reassert itself as the most powerful country in the world.
Conversely, make the wrong choice here (force CBDCs on consumers) and the end of US hegemony is definitely on the cards.
DeFi protocols to help the US win the current Cold War with China?
It’s not as crazy as it sounds.
For Money Morning
PS: Lachlann is also the Editorial Analyst at Exponential Stock Investor, a stock tipping newsletter that hunts for promising small-cap stocks. For information on how to subscribe and see what Lachy’s telling subscribers right now, please click here.