The $100 Billion Stablecoin Question

In case you missed it, so-called stablecoins are becoming huge. 

This week, data from The Block showed that the total supply of all stablecoins broke $100 billion.

The $100 Billion Stablecoin Question

The biggest stablecoin still, by far, is Tether, which is also the most infamous, and also the stablecoin that’s closest to being a household name. It’s at the center of many cryptocurrency conspiracies and theorizing. And then the next biggest is USDC, created by the company Circle. The easiest way to think about a stablecoin is that it’s like a money market fund meets a bearer instrument that anyone can hold on their phone or personal device and then pass to someone else. The value of a stablecoin is pegged to the dollar or another currency or asset. 

But let’s back up for a second and talk about Bitcoin. What made Bitcoin a breakthrough was that, for the first time on the internet, someone could hold a scarce asset without a third party knowing about it or having a record of it in their database tied to the holder’s identity. And two people, say Alice and Bob, can pass a Bitcoin back and forth to each other without having to go through a centralized intermediary, like a bank or PayPal or Venmo or Zelle. 

And obviously people buy Bitcoin for many reasons, but one of them is the appeal of holding an asset that’s not tied to some centralized company like a bank or Facebook or a government issuer. People have always been able to personally hold a decentralized store of value before (like gold in a vault in the basement) but not digitally. So Bitcoin solved a problem.

But now stablecoins exist and are booming. And while, again, there’s plenty of mistrust toward them from all corners, they’re growing quite massively. The biggest use case for them is making it easy for crypto traders to transfer dollar-denominated assets between different cryptocurrency exchanges, something that happens faster using stablecoins and public blockchains than, say, a bank wire. 

But what if people just wanted to hold stablecoins as a way to hold dollars which, despite what a lot of people will say, have proven to be a pretty good store of value?

Bitmex Research, the research arm of the cryptocurrency exchange Bitmex, posted this provocative tweet earlier in the week.

There are two things to note here. One is that BitMEX is implying that if you can just hold digital dollars yourself (on your phone, on a device etc.) and pass them between two parties without intermediaries, you do undermine one of the key selling points of Bitcoin. Bitcoiners hate this point because they go on about the Fed balance sheet and the 21 million coin cap and inflation and the Fed and all that. And yes, sure, that’s a reason some people won’t want dollar assets. But since most people around the world have considered dollars to be a pretty solid store of value for some time, this ability would be powerful.

But then the other point is that there’s actually a history of “stablecoin-like-assets” that long precedes the existence of stablecoins. Multiple endeavors have attempted to do something like hold gold in a vault and then give you a token or something allowing you access to that gold, which can then be passed between individuals. And they’ve all been smothered or shut down eventually by regulators or law enforcement for some reason or other. Now, of course, those other entities that got shutdown in the past like Liberty Reserve were more “pirate" operations that operated on the edge or outskirts of the law. Stablecoins like USDC aim to be different than that. Working within the existing system.

But there are still question about their future. In the short term, lots of the focus is on what kind of assets they hold, and how can people know exactly how safe they are. But the bigger question for the industry may be what the regulatory environment looks like going forward, and the degree to which an industry that allows dollar-denominated assets to be passed around P2P is always allowed to flourish.

In the meantime, read Josh Younger of JPMorgan on just how big these players have become.

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