The centralization of stablecoins: a silent dilemma
The on-ramps to crypto are being clamped down. This is a resistance movement
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The crypto market is facing arrows from all sides. Only after the tide goes under, do we realize who has been swimming naked. The war has begun as the regulators are in full swing. This happens, a revolutionary idea breaks the markets but only after years pass by do the people in charge realize that this is a threat. Everything seems to be a threat to them because of the inevitable wealth inequality. The people in power want their share of the pie and will do all things necessary to pose hurdles in innovations. Humans are like this we feel it necessary to spread our ideologies even as we are departing instead of handing the baton to the next generation in the most gracious way possible.
The present financial system has blessed wealthy overlords with great financial success and who wants the bounty from stopping? Greed is a necessary component of financial authority, it does play its part. Bitcoin has been labeled rat poison, a Ponzi, and a completely useless coin lacking intrinsic value. This is primarily because it replaces and makes the present financial system more efficient and just which the conservatives just can’t tolerate.
A dire need for a revolution
If we look back a decade, many industries have had a breakthrough in how it is present today. The way we communicate information, from large and sturdy mainframes to a powerful device in our hands and everything under a few clicks. Similarly many industries have gone through shifts that have resulted from building on the foundation of progress that our ancestors left behind. However, if we consider the financial industry, it has failed to make that major leap that revolutionizes how we interact financially.
Let’s face the fact, bitcoin is not something to hold in the normal portfolio. The main reason is volatility and lack of optimal user interfaces. You’re always worried that your Bitcoin wallet will be hacked, funds stolen, and lost due to immutability. The instability in price also makes it cumbersome to carry out significant transactions. This can be imputed to the fact that Bitcoin is not that widespread to be able to gain confidence for all transactions. We need an on-ramp for fiat currency to enter into the crypto realm. If everyone were using Bitcoin for their everyday payments there would be no need for a currency to use as a relative value marker. But in the meantime, we need an on-ramp linked to the value of the dollar considering its status as the global reserve currency. Only if people have the gateways to buying Bitcoin or any preferred cryptocurrency will we be able to see mass adoption. This is where stablecoins come in as a way to store their “dry powder” in a liquid alternative for the US dollar for it to be easily used to buy crypto.
The Trust Façade
Buying stablecoins is not similar to buying a dollar. It is like entrusting someone else with your money. A stablecoin is an entry in a supposedly decentralized ledger that signifies that your association with the US financial system is protected as part of an agreement with a third party responsible for holding the funds equivalent to the dollar. You don’t own the dollars, just the promise of redemption which depends on the promise by the said company. Haven’t we heard this logic before? Yes, the US government. The dollar is, after all, a promise by the Treasury to make those paper bills have value. So this is a promise over a promise with no guarantee for the harsh times when these fetters are tested for their strength.
Just like an NFT. It is a token on the blockchain that points towards the actual thing which is stored in some cloud storage or any other storage facility. The ardent supporters of NFTs cherish this false impression that you own the image. Unless the image itself is stored on a sufficiently decentralized and censorship-resistant blockchain, you cannot call it your own. Similarly, unless the dollar bills are in hard copy in your wallet, you can’t call them your own and have to depend on a trusted third party. Well, you can’t even rely on the dollar bill in your wallet, but that is another story.
Introducing our players
Tether’s USDT is the giant being the third most traded token after Bitcoin and Ethereum. Although it has been accused multiple times of money laundering and falsifying financial records, doing such large business without a secured audit and providing an attestation in its place, and having murky individuals with a noncredible past functioning in the leading positions in the company, it has still managed to fortify its ground as the most used stablecoin in the crypto space. This can be attributed to its long history in the market and being a pioneer in addition to competitors that have been crippled by market forces. Following is the reserve breakdown of Tether:
Circle’s USDC is the second largest stablecoin after USDT known for its affiliation with regulators and ties with large financial authorities such as BlackRock. It is the most transparent of all the stablecoins such that its website affirms that "every digital dollar of USDC on the internet is 100% backed by cash and short-dated U.S. treasuries," and that "USDC reserves are held in the custody and management of leading U.S. financial institutions, including BlackRock and BNY Mellon". However, its association with Silicon Valley Bank and the credit crunch it faced because of depositors’ bank run led to the seizure of its account in the bank. This raised questions about the ability of Circle to facilitate USD redemptions for the stablecoin. One taint on its ability to be stable and it loses $6.5 billion.
Other stablecoins that are worth mentioning are BUSD of which the parent company PAXOS faced a lawsuit by the SEC charging it with the sale of unregistered securities. And then there is Terra’s LUNA, a debacle no one can forget from this cycle. With company management issues, illegal practices, and mishandling of funds, that was a coin bound to lose its status just waiting for the tide to go under. Such stablecoins function through arbitrage mechanisms. The algorithm maintains the value through an algorithm by adjusting the supply of the tokens. It is different from a collateralized stablecoin which maintains reserve assets that can be redeemed for the tokens. Algorithmic stablecoins have not gained popularity yet and not one has stood out to gain mainstream status.
How it all sums up
The dominance of a single company in the realm of stablecoins makes it vulnerable for regulatory bodies to take control in the wake of a revolution or some catastrophic event. In this particular scenario, the consolidation of all dollar-denominated stable coins in a single one creates ease for the FED for its FEDNOW payment system and launches the government-controlled Central Bank Digital Currency (CBDC). This system is dedicated to making payments between banks seamless and providing a better settlement network thereby consolidating the financial networks towards a single financial system. It will, conclusively, wire money from the small and medium-sized banks to the big banks.
What is often neglected when considering the presence of such a user-friendly system is the fact that competition diminishes between commercial banks such that financial activity becomes concentrated in large banks. You can’t choose a different bank if one does not serve you well as now JPMorgan, Citi Group and Morgan Stanley have all the influence. All is good as these banks are often bailed out by the government in the wake of a credit crunch but problems arise when you speak against the system. The government can block your activity by cutting your access to capital as we see in trucker’s protests against COVID-19 requirements.
The FEDNOW payment system does not threaten cryptocurrencies as they stand out for their cross-border payments. Ripple, the company behind XRP has helped the FED in developing this payment system. The problem arises when the largest stablecoin, Tether’s USDT, is influenced by the government to block all financial transactions that are not suited to the interests of the government. That is where censorship reigns supreme and financial freedom diminishes.
Because in the end, it is not about how much money you have, it is the amount you are free to spend wherever you prefer to.