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The history of modern finance has seen several monetary orders, from the 19th century gold standard to the current era based on fiat money from 1971. Each period had a dominant reserve currency, starting with l gold, then the British pound and the US dollar. . The current system is 50 years old, roughly the average length of the previous monetary order. But nothing lasts forever. Cautious should prepare for the next monetary order, with all signs pointing to decentralized finance with a stable currency as the reserve currency. How regulators and Wall Street handle this transition will have a significant impact on the global economy, as it seems destined to happen with or without their blessing.
Cryptocurrencies are decentralized computer networks that operate on networks without an on / off switch, or a global authority that sets rules. The mantra here is “the code is the law”. Using smart contracts on networks like Ethereum and Solana, a whole new financial system is being built. Such an architecture aims to eliminate the need of traditional banks, brokers, insurance companies and exchanges for many processes, including borrowing and guaranteed lending, market making, insurance underwriting and trading. .
Stablecoins are cryptocurrencies whose value is pegged to another asset, such as the US dollar. They have little to no volatility from peg, making them the ideal trading pair in the cryptocurrency world. The most widely distributed stablecoins are USDC and Tether. They are designed to be worth precisely $ 1. Unlike the current international banking system, transferring stablecoins as a means of payment is fast, easy and inexpensive.
The growth of decentralized finance, or DeFi, and stablecoins has been extraordinary. The dollar amount of the coins involved in this space is called the total locked value. According to the DeFi Pulse website, it went from $ 900 million to $ 70 billion in just one year. It doubles about every two months. Since the start of 2019, stablecoin revenue has exploded from a few billion dollars a day to an average of $ 100 billion in April 2021, setting a record high of $ 250 billion on April 16. Stablecoins make up the majority of the daily volume of the crypto universe.
The “real world” is awakening. PayPal Holdings and Visa recently announced that they will allow stable coin payments on their platforms. EBay is looking into this. The use of stable coins for cross-border payments is being seriously considered. But the awakening is most pronounced outside the developed world. A global consumer survey conducted by Statista in 2020 found that cryptocurrencies are owned or used by 6.2% of US citizens, 5.2% in Germany and 4.7% in the UK. But in countries with many unbanked or confiscatory loans and inadequate protections, the percentages are climbing. In Nigeria 32% owned or use crypto, Vietnam 21%, the Philippines 20%, Turkey 16%, and Indonesia 13%.
The United States and Europe enjoy enormous benefits from the current centralized financial system and the dollar’s reserve currency status. It makes sense that they are late in adopting. What is attracting the developing world to cryptocurrencies? As an article on DeFi published in December and co-authored by Campbell Harvey, senior advisor at quantum firm Research Affiliates and professor at Duke University noted: “Our legacy financial infrastructure has both limited opportunities for growth and contributed to the inequality of opportunities. Globally, 1.7 billion people are unbanked. Small businesses, even those with a banking relationship, often have to rely on high-cost financing, like credit cards, because traditional banks exclude them from debt financing. The high costs also impact retailers who lose 3% on every credit card sales transaction. These total costs for small businesses are enormous in every way. The result is less investment and reduced economic growth. “
The current financial system draws high rents for its services, and losers are looking for alternatives. Now that these alternatives are starting to resemble a shadow financial system that can threaten the status quo, the question arises as to what position are financial regulators and banking officials in developed countries taking? Do they consider Charlie Munger that what is happening is “disgusting and against the interests of civilization”? Or do they see financial services as the next to be disrupted and encouraged?
Given the high adoption rates in the rest of the world and how previous bans in China, Russia, Nigeria and India have not stopped its growth, any similar attempt to ban it globally developed will probably be just as inefficient. At worst, they could leave the developed world a less important role in the design of the new global financial system.
Jim Bianco is president and founder of Bianco Research.
© bloomberg
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