Can Stablecoins Strengthen America in a Deglobalizing World?
- Paul Gordon
- Dec 21, 2024
- 5 min read
You may easily have missed it in recent weeks, but president elect Trump and his cabinet picks are particularly bullish on crypto, especially stablecoins. But why? What is going on? Let's take a look.
Before we dive into stablecoins and their future role in the U.S. system, let's look at the bigger picture, and we are on the precipice of a major paradigm shift in global macroeconomics.
A New Paradigm & End of the International Monetary Non-System
For over 50 years, the global economy operated under what many economists call the international monetary non-system—a fragile arrangement held together by China’s managed exchange rate and massive accumulation of U.S. debt.
The West bought yuan with dollars to buy Chinese goods, and China printed money to keep the yuan cheap and fund infrastructure to temper inflation. China used their dollars to buy massive stores of US government bonds, helping the US fund a decades-long borrowing spree.
This dynamic created a mutually beneficial, albeit precarious, relationship:
For the U.S.: China’s appetite for U.S. debt kept borrowing cheap, fueling a Keynesian cycle of deficits, low interest rates, and domestic consumption.
For China: By suppressing the value of its currency, China gained a competitive edge in global trade, exporting low-cost goods and accumulating foreign reserves.
The system worked—until it didn’t. Now, we are living through the resulting macroeconomic paradigm shift.
As the U.S. and China’s relationship shifted from frenemies to rivals, this delicate equilibrium unraveled. Tariffs, reshoring, and growing geopolitical tensions have triggered a paradigm shift in macroeconomic policy. In this new environment, the U.S. faces dual challenges:
Preserving the dollar’s dominance in global markets.
Attracting demand for U.S. debt instruments as traditional buyers like China reduce their exposure.
Enter stablecoins—a disruptive innovation that offers the U.S. a unique opportunity to anchor the dollar in a decentralized world.
Stablecoins: A New Chapter for the Dollar
What Are Stablecoins?
Stablecoins are digital assets pegged to traditional currencies or hard assets, designed to maintain a stable value. Unlike volatile cryptocurrencies, stablecoins bridge the gap between blockchain technology and financial stability, making them ideal for cross-border transactions, decentralized finance (DeFi), and global trade.
A Tool for Dollar Dominance
In a deglobalizing world, stablecoins present an opportunity to:
Expand the Dollar’s Reach: As decentralized assets, stablecoins can circulate beyond traditional banking systems, making the dollar accessible in regions with weak or failing financial infrastructure.
Counter Rival Currencies: Stablecoins pegged to the dollar ensure its relevance in a world where alternatives—like China’s digital yuan—are gaining traction.
Modernize Payment Systems: By integrating with blockchain technology, stablecoins reduce the friction and cost of international payments, reinforcing the dollar’s utility in global trade.
From Foreign Reserves to Decentralized Dollars
The end of the international monetary non-system has created an urgent need for the U.S. to reimagine its debt markets and currency strategy.
China’s Reduced Demand
As China moves away from U.S. treasuries, the U.S. must attract new buyers for its debt while maintaining lower and more growth-friendly borrowing costs. If you're paying attention to the Chinese economy right now, they are going through some pretty unsettling deflation that is causing them to experiment with ultra-dovish monetary policy (forceful inflation to stimulate growth).
Stablecoins as Anchors
As the U.S. looks for new buyers for their government bonds, they have found an innovative partner in drumming up new demand. For context, the crypto world's famous speculation and volatility is in large part due to the uncertain regulatory environment surrounding tokenization and trade. The need for sound and innovation-friendly regulations has found a new ally in Trump 2.0, where the new adnimistration is openly calling for requirements that dollar-pegged stablecoins like USDT and USDC must be backed by U.S. treasury notes.
Asset-backed stablecoins—tied to U.S. treasuries—could create a natural demand for dollar-denominated assets in the decentralized ecosystem, ensuring continued liquidity for U.S. debt markets. Simply the speculation that this is likely to happen has sparked a massive increase in the stablecoin market cap.
The Geopolitical Opportunity
Countering Deglobalization
Stablecoins offer a lifeline for the dollar in a fragmented world. By promoting regulated, asset-backed stablecoins, the U.S. can:
Strengthen Alliances: Stablecoins provide a seamless scalable mechanism for trade among allied nations, bypassing traditional systems that may be vulnerable to geopolitical shocks.
Compete with Digital Rivals: As China’s digital yuan and other state-backed currencies grow, stablecoins ensure the dollar remains the currency of choice for digital transactions.
Ensure U.S. Influence: Offering rule of law and innovation-friendly regulations in America means that the U.S. would have some level of authority and control over how these are traded (and who can use them) in a deglobalizing (tariff-filled) world.
Regulatory Leadership
The U.S. has a chance to lead the global stablecoin market by establishing clear regulations and encouraging innovation.
By establishing clear regulations that require stablecoins to be fully backed by hard assets, the United States becomes de facto custodian of these investments, fostering wealth and economic growth within its borders.
Encouraging innovation within a secure framework and attracting entrepreneurs and investors to the U.S., America stands to be the global hub for digital finance.
AI and Stablecoins: A Perfect Synergy
Innovation and entrepreneurship have much to do with mixing new combinations of resources like new technologies. The rise of AI-driven automated platforms creates new use cases for stablecoins, particularly in:
Automating Payments: Stablecoins simplify and rapidly accelerate decentralized machine-to-machine transactions, enabling seamless financial flows in AI-enabled supply chains and logistics.
DeFi Optimization: Stablecoins provide the liquidity and stability needed for decentralized financial applications, creating a more efficient and transparent financial system.
This synergy between AI, DeFi, and stablecoins represents a new and exciting frontier in financial innovation, with the potential to transform industries ranging from energy, manufacturing and cloud computing to e-commerce and crowd-sourced financing.
Stablecoins and Financial Inclusion
Beyond geopolitics, stablecoins have the power to:
Expand Access: Billions of unbanked and underbanked individuals can participate in the global economy through stablecoins, bypassing traditional financial barriers.
Lower Costs: Stablecoins eliminate intermediaries, reducing transaction fees for cross-border remittances—a vital lifeline for developing economies.
Empower Entrepreneurs: By democratizing access to financial tools, stablecoins foster a more inclusive and innovation-driven global economy.
The Risks and Rewards
While stablecoins offer immense potential, they come with challenges:
Regulatory Risks: Overregulation could stifle innovation, while underregulation might undermine trust and stability.
Systemic Vulnerabilities: Poorly managed stablecoins could create systemic risks if not adequately backed by hard assets.
The key lies in striking a balance: fostering innovation while ensuring stability and transparency.
Conclusion: A Digital Dollar for a Decentralized World
As the global financial landscape evolves, stablecoins represent a critical opportunity for the U.S. to reinforce its economic leadership. By embracing this technology, the U.S. can anchor the dollar’s dominance in a decentralized ecosystem, attract new demand for U.S. debt instruments, and foster a more inclusive and innovative global economy.
The paradigm shift away from the international monetary non-system isn’t just a challenge—it’s a chance for the U.S. to play a crucial role in the future of finance. Stablecoins, when leveraged effectively, could ensure that the digital dollar remains the backbone of a new, decentralized world.
Next in the Series...
In the next article, we’ll explore the boldest idea of all: a Strategic Bitcoin Reserve (SBR) and how it could redefine the U.S. financial system for the 21st century.
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