Crypto Currencies and De-Dollarization

Paul Goncharoff

This past fall I gave a talk on de-dollarization at the Global Business Forum in Canada. Since that time, I had some further thoughts on the de-dollarization trend. Back then I mentioned a U.S. Army War College study concluding that America’s power is in decline because the world has entered a new phase of transformation, where the U.S. led international order is unravelling.

Strong words, given the popular view that the U.S. dollar is stronger than ever, unemployment is at its lowest level in 20 years, the stock market is historically robust despite recent volatility, and the Federal Reserve just tweaked up interest rates together with QT (quantitative tightening) as we head into the new 2019 year. 

Not many people think about what makes a currency like the dollar a valued means of exchange for goods, services and greasing the wheels of life. Why is a fiat currency like the U.S. Dollar, or to a lesser extent the Euro, Yen, and so on considered to be of similar value as say gold or silver? After all, about 75% of the financial flows worldwide operate under the U.S. Dollar umbrella.

So why is de-dollarization a growing and increasingly important topic? We all know the buck is worth something; after all, it thrives and exists. People clamour for the dollar, big demand, and a reputational advantage over other fiats. The dollar possesses the four key fundamental advantages; they areliquidity, trust, security, and a well-known accepted infrastructure. These have historically formed the pillars that prop up the de-facto reserve currency of the world. However, when government, any government, comes under financial, political, and external pressures it cannot resist printing money and debasing its currency to pay for control, expansion and the inevitable debt.

Debt, this four-letter word is the elephant in the U.S. Dollar room. Of the several dollarized groupings of debt that are ticking away percentages in the market, just the Federal debt alone (and that is not the biggest) is currently at over $21.5 trillion and growing daily is expected to go over $22 trillion by first quarter 2019. 

The quantitative easing program that saw the Fed’s assets skyrocket from $900 billion to $4.5 trillion in 5 years, made it cheap for the U.S. government to continue to print, borrow and spend with rates close to zero.

What that did was showcase that the United States and other fiat currency economies were not following sound fiscal policies; they were printing money to keep on going. It was rather obvious that the U.S. was on a spending and borrowing vicious cycle with no planned end.

The world is still buying U.S. Treasuries, not so much for reasons of trust, but because there are no other traditional alternatives, known in the financial markets today. That said, the dollar has continued to show a number of cracks in its foundation, both geopolitically and fundamentally.

Are there any alternatives to the U.S. Dollar? After all, a means of exchange outside the dominating dollar corridor is in demand, especially as faith and trust in the fair impartiality of America as both open trade policy and vaunted global values fade away. Bites have and continue to be taken out of the dominance of the petrodollar, and a number of countries are now trading in their own or agreed upon non-dollar currencies. What choice do many nations have? What other choices are there?

Over these very recent years, cryptocurrencies, which are powered by blockchain, are making measurable inroads in global finance, and particularly in the foreign exchange (FX) industry. They are still wildly volatile, not fully understood by the financial or public mainstream, and yet are consistently expanding with their market presence increasingly apparent.

While central banks like the Bank of England and the Federal Reserve ultimately maintain the liquidity and price of world currencies this means that the same organizations that control supply, also indirectly control demand – not a recipe conducive to free trade.

The five main influences on the FX industry are corporations, banks, traders, investment funds and governments. The world’s largest currency trader is Deutche Bank, followed by the other key players like UBS AG, Citi, JP Morgan and HSBC. Three of the largest banks participating in the market are the European Central Bank, the Bank of England and the Federal Reserve.

Two years ago, the worldwide blockchain technology market was worth an estimated U.S.$210 million. By 2021, some experts estimate the same market will have grown conservatively to U.S.$2.3 billion. Some believe the industry could hit U.S.$7.68bn by 2022. To cope with this rapid increase in market activity, the markets dedicated to blockchain are set to expand by around 42.8% every year until 2022. After that, it is anyone’s guess as to how the blockchain and cryptocurrency saga will further unfold, only that it will continue.

One of the main ways in which blockchain will have an impact is in terms of decentralization. As blockchain is a reliable, permanent way to record information, it offers the FX industry the rare opportunity to decentralize record keeping and increase the availability of the information stored.

What it also does is give more control to smaller market participants and governments, this is the ability to exchange money directly rather than going through any of the central banks or major players, something that was previously considered improbable.

As blockchain fintech grows, we are seeing aspects adopted by central banks and other major financial institutions in efforts to maintain competitiveness, market share, increase efficiencies and reduce their costs. 

Consider a fiat currency like the U.S. dollar. It is printed by the U.S. Treasury Department and distributed by banks like the Federal Reserve. If for some reason these institutions decided to stop, otherwise channel, or restrict issuing currency, it would be difficult then to access any new dollars. Sanctions and unilateral tariffs are geopolitically popular cases in point.

Cryptocurrencies differ in this respect. They are decentralized, meaning not controlled by governments or banks. That means anyone in the world is free to buy and sell cryptocurrencies like Etherium or Bitcoin.

Right now, cryptocurrencies are not the best option for fiat-to-fiat money transfers. It is simply too unwieldy for consumer remittances. However, along with the blockchain, it is quickly evolving at the speed of tech to a point where such trades are rapidly adapting and will very soon change the systems of monetary transfer forever.

As cryptocurrencies are decentralized, they do not rely on governments or financial institutions to exist. This means blockchain transactions can and do bypass the web of financial intermediaries, including central banks which have been built up over decades. Blockchain is being embraced enthusiastically by the financial industry. Many banks are aware that they must evolve with the changing times or eventually become redundant.

When the blockchain was first envisioned, it was not developed to play a supporting role to a fiat currency system. It was created to entirelytake over financial systems through the medium of cryptocurrencies.

This will not happen today, next year or perhaps even this decade, but the trend is established, and it is growing at an unprecedented rate. Broad based acknowledgement and public acceptance will take time, but it will happen. The stages are several; first, it will effectively overhaul the financial industry, as it is doing today. Blockchain fintech is improving the movement of money in every way, and soon will be indispensable for nearly every remittance company in the world. Thereafter widespread low-cost remittances in both cryptocurrency and fiat, and the transition from fiat to crypto becomes closer.

Meanwhile, in this developing acceptance period much is afoot. The blockchain community is addressing the need for some asset-backed base for cryptocurrencies. Recently a ‘hybrid’ currency appeared in the realm of asset-backed cryptocurrencies, it is an audited, fiat backed cryptocurrency called TrueUSDIt is fully backed by the dollar and held in managed trusts with monthly audits by a third party. This is addressing the financial world’s learning curve, and the demand for a market that looks a bit more like the traditional financial market they know well rather than token trading in unfamiliar business environments. This is just one of a handful of crypto’s that are linked to fiat currencies and termed ‘stable coins’. It is the audited stable coin, in theory, that brings a level of traditional, professional financial industry trust to the market.

There are now plans to launch similar Hong Kong dollar, euro, silver and gold crypto’s by 2019. A growing number of developers and investors around the world all believe that the best cryptocurrencies will be securitized and regulated. When that happens, a cryptocurrency portfolio will be as common as any portfolio that holds forex.

Russian investor and tech entrepreneur Gregory Klumov is developing a stable coin called Stasisbacked by the euro. He moved operations to Malta, a tiny island nation in the Mediterranean Sea that is racing to get a rules system in place for cryptocurrency investing since it passed its virtual financial currency law in 2018. 

There are around 15 stable coins in development. Tetherand MakerDAOout of Gibraltar are the most liquid. Audits mainly provide crypto money managers the security of knowing their coin is a cheaper-to-trade version of fiat. One EURS is equal to one euro, held in an escrow account owned by the same holder of the EURS.

There is certainly merit to this approach, which would iron out some inefficiencies with the existing cryptocurrency offerings. Firstly, it addresses the problem of volatility. Today using digital monies as a means of exchange or store of value is difficult to rationalize, with frequent extreme price swings making this unwise. Secondly, it ‘anchors’ the value of these tokens, in effect collateralizing.

Fiat currency is legal tender whose value is backed by the government that issued it. The U.S. dollar is fiat money, as are the euro and many other major world currencies. This approach differs from money whose value is underpinned by some physical good such as gold or silver, called commodity money. Several market professionals have gone as far as to believe that all fiat currencies are essentially government approved cryptocurrencies as they are not backed by anything but faith (and armed muscle) of a given political system.

Consider the gold standard, where currency’s value stemmed from the fact that it could be redeemed for a fixed amount of gold. Many hold that this period was superior in many ways to the current fractional reserve system, and would like to see it return. This would be an excellent application of blockchain technology. In fact, a number of companies are doing ICO’s and are quite active in establishing their presence in the gold-cryptomarket space.

Other asset-backed cryptocurrencies are linked to property and property development where the underlying physical properties and land form the basis of valuation and growth. The first in this space for foreign direct investing in global property development is Relex.iothat has maintained a solid and accountable lead position in this field. Its tokens are in fact stablecoins based on Etherium, and invest in selected specific high standard projects without restrictive politics of fiat currencies. This opens secure access to a far wider investment world, especially in the frontier and restricted markets space.

Stablecoins were an inevitable development due to the understandable reluctance of the real world to completely let go of physical stores of value. Many people prefer to have something solid that backs the value of their digital tokens. 

Therefore, the appeal for asset-backed pools with tangible, real world stores of value that help maintain a more “stable” price and lessen the typical volatility that many cryptocurrency platforms face at this stage in their development and acceptance.

A well-known billionaire promoter Tim Draper recently commented that cryptocurrencies have the potential to grow tremendously over time. He stated that the crypto market might approach $80 trillion over the next 15 years. He went on to say that the way blockchain and cryptocurrencies are behaving at present resembles the internet a few years back before the technology took over the world with quantum leaps.

Who can really say what it will be in 15 years? If it rises to even one fourth of what Draper says, it will be the equivalent of today’s U.S. federal debt. Not a shabby sum by any measure. Time will tell, meanwhile steadily and surely, the trend to de-dollarization and the need among many countries to decouple from an increasingly political and controlling dollar continues, and who knows where our economic world will be in 2 or 5 years, much less 15? Interesting times.

Paul Goncharoff 

Moscow, December 21, 2018

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