World Economic Forum States That Stablecoins Could Temper US Dollar Domination Risk

  • Stablecoins are pegged directly to a specific asset, which could inherently increase domination of the dollar.
  • The debt of the US rose “to levels not seen since the Second World War” with the 2008 crisis.

Stablecoins are cryptocurrency assets with their value tied to a specific asset, like gold or the US dollar. They serve many purposes in the industry, but an opinion piece in the World Economic Forum states that they may be able to curb the potential threat of global foreign currency reserves domination of the US dollar. This suggestion was made by John Liu (Fusion Foundation) and Peter Lyons (Lapa Capital) in an article published on November 26th.

The Fusion Foundation focuses their non-profit efforts on the development of blockchain technology’s infrastructure, for the purpose of decentralized global finance. Lapa Capital, on the other hand, focuses on tech-related investments and is based in New York.

Both Liu and Lyons have pushed to maximize the potential of stablecoins to create a more “sustainable, inclusive, and resilient global system” for investments and trading, as well as banking and payments. The authors shed light on the fact that, of all foreign reserves that are presently held at central banks, the dollar accounts for 62%, based on data from IMF for Q1 2019.

The domination of the dollar has pushed along the systemic threats that have been seen since the financial crisis in 2008. Back then, the investors around the world clamored around the “safe” assets, which were also based in the dollar, which created a massive liquidity crunch around the world.

Even as the authors overlooked the risks, as small as they could be, locking up the USD reserves within bonds for the government just prolonged the skewed economy around the world. As a result, US interest rates remained low, while the debt rose “to levels not seen since the Second World War.” The authors added, “A global scarcity of USD creates major headwinds for US exporters, widening the trade deficit and pressuring economic growth.”

Mark Carney, the governor of the Bank of England has continually argued that having a diverse digital currency would reduce the need that the world has to rely on the dollar, and it could even function as a new currency for international reserves. This type of stablecoin would, in an ideal world, be weighted in multiple currencies, like the yen, the British pound, the euro, and the dollar.

The main point of the article by Liu and Lyons is that the development of stablecoins must prioritize blockchain interoperability if there’s any chance of diversifying the source of global liquidity. In doing so, trade flows can effectively be balanced. If a stablecoin fails, regardless of whether it is privately issued or issued by a central bank, there’s a risk of it simply taking the place of the dollar’s dominance, but with a digital body.

Benoit Coeure, a board member of the European Central Bank, stated that global stablecoins remain untested, which leaves the possibility of threatening the “autonomy and resilience of European payments system.” Right now, the ECB is considering their own launch of a central bank digital currency, though they are still focusing on the impact that such an asset could have on the currency intermediation of the financial sector.

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