Stablecoin leaders are singing a more pragmatic tune as of late. Paxos’ former head of portfolio management Austin Campbell spoke at the U.S. Financial Services subcommittee on digital assets. Himself, among other industry leaders, gathered in part to defend the industry and highlight good actors in the space.
Austin started by noting that jobs will move overseas if the lack of domestic clarity continues. More interestingly, he said that stablecoins back issuance with Treasury bills and in turn help fund U.S. government spending. Finally—and perhaps an even more vital benefit—Austin pointed out that USD stablecoin usage globally bolsters the dollar’s status as a world reserve currency.
The tone and content of the hearing are indicative of the challenging times we live in—both for the digital asset sphere and the country as a whole. The fallout of crypto associated banks have brought more scrutiny to the industry than ever. Meanwhile deficit spending issues weaken dollar perception stateside. Geopolitical shifts are causing BRICS nations to push harder for alternatives to dollar use in trade, further bringing into question the U.S. dollar’s dominance abroad. As I am writing this, news broke that Janet Yellen, Treasury Secretary, stated “The U.S. should expect a slow decline in the dollar”. Well, the current course we are taking in the crypto industry isn’t helping.
As a more pragmatic focus takes hold, talk of helping the “unbanked”, reducing remittance costs, and other lofty ideals fall by the wayside. Regulators and politicians are now primarily interested in how they can directly benefit from the digital asset industry. As a platform to champion themselves as heroes of the proletariat, denouncing the unscrupulous bourgeoisie emerging in the space. The right views it as an opportunity to promote freedom, even if only superficially. Amidst the political theater, one crucial question unites both sides: Could these new advancements in currency bolster the dollar’s reserve status and even improve our finances?
Cyberdollar
For the purposes of this article, a distinction(and reunification)must be made between the “digital dollar” and “crypto dollar.” The “digital dollar” commonly refers to central bank currency enhanced with new payment technologies, and is associated with CBDC’s. While the “crypto dollar” refers to decentralized, blockchain-based currency. The following article encompasses both forms of dollar as a unified theme. A broad technological movement moving the dollar into the future. A new umbrella term is required: The cyber dollar. The cyber dollar represents a coexistence and interoperability between the advanced digital dollar and crypto dollars. The future is not a winner takes all scenario. More likely, both will thrive, compliment and augment each other.
Depending on the characteristics of these stablecoins, there could be large shifts in desired holdings between these stablecoins and deposits, leading to large-scale redemptions by risk-averse users at times of stress that could prove disruptive to financial stability. In such a future state, the coexistence of CBDC alongside stablecoins and commercial bank money could prove complementary, by providing a safe central bank liability in the digital financial ecosystem, much like cash currently coexists with commercial bank money. It is essential that policymakers, including the Federal Reserve, plan for the future of the payment system and consider the full range of possible options to bring forward the potential benefits of new technologies, while safeguarding stability.
Fed Governor Lael Brainard
The potential for the cyber dollar goes beyond meeting financial obligations—it could serve as a keystone in the financial system, preserving the dominance of the USD worldwide. However, this vision can only be realized with the necessary endorsement and support. People are gradually recognizing that the widespread adoption of a digital or crypto dollar may be as vital to our future as the petrodollar has been to our past. Let’s talk about that past.
Proliferation of The The Petro Dollar
As you probably have heard by now, following World War II, the US dollar became the global reserve currency. Accepted as a universal form of payment abroad used to back the currencies of foreign nations.
However, after the war, the U.S. faced more competition as the Japanese and German economies gradually came back online. Then a negative balance of payments, growing public debt incurred by the Vietnam War, and monetary inflation from the Federal Reserve caused the dollar to become increasingly overvalued in the 1960s. This inflation crisis culminated in the Nixon Shock, essentially a default on USD backing in gold.
This all should sound very familiar… Replace Japan & Germany with China. Replace the “Nixon Shock” with the current Federal debt issues. Compare the inflation rates back then, with today’s. Even an analogy can be drawn from the calamitous withdrawal from Vietnam to the current withdrawal from Afghanistan. Vietnam ultimately fell to the communists, Afghanistan now falls to the Taliban…
Luckily, back in the 70’s, the U.S. had something up its sleeve to turn the tides of inflation, failed foreign policy and weakening dollar. In October of 1974, a newly established economic commission between the U.S., Saudi Arabia and other OPEC nations held its first meeting. They would soon trade oil exclusively for dollars. In exchange, protection would be provided by the strongest military the world had ever seen. Legendary negotiator Henry Kissinger, serving as President Nixon’s Secretary of State, played a pivotal role in hammering out the deal, the creation of the “petrodollar” system.
This collaboration with the world’s largest oil producers was able to stem the tide of the Nixon shock and the failed Vietnam war. The scheme worked. As long as countries needed to trade for oil, there was constant demand for dollars. The Dollar index bottomed in the late 70’s, beginning a massive bull run lasting until 1985.
Later, after another dollar slump, NAFTA created a trade bloc between the U.S., Canada and Mexico in 1994. America was also at the forefront of the tech boom. Just like in the petrodollar, the U.S.’ leadership role in technology and partnerships contributed to a similar bottom in the DXY and yet another dollar bull run. The inevitable bust followed of course, but due to our pioneering role, the best tech firms subsequently emerged, then thrived. These are now the most prolific tech firms the world has ever seen. Companies like Google and Amazon.
We can derive a lesson from these historical precedents—that U.S. Dollar strength and relevance is bolstered by key strategic partnerships and open access to the flow of dollar currency. The U.S. simply needs to position itself with favorable policy, be a leader in technology, and be a central node to the most vital commodity in global trade—oil.
That is until now. The petrodollar system is failing to provide enough support to the dollar as it once did. As you can see, although the dollar has been relatively strong in recent years, it has never been able to reach the highs the petrodollar initially created. On a larger time-frame we can see the dollar has made two lower highs. A slight but clear bearish trend.
This makes sense when you consider oil decline in power generation has been in steady effect for decades. Now the trend is starting to take hold in transportation as well. Ride sharing, EV’s, and now remote workers are taking their toll on gasoline demand. Office occupancy rates remaining as low as 60-40% of pre-pandemic levels.
While occupancy should improve over time, it’s becoming clear that a large chunk of remote workers are simply never going back to the office and don’t need to commute. On the other hand, the digital world continues to grow at a rapid pace. Meta and Apple are now pumping billions of dollars into VR technology targeting work meetings. “Zuck” thinks the main hurdle to a largely remote future is enabling eye contact, non-verbal expressions, and spatial context. Something that will soon be solved. The bottom line is, the digital economy is growing, while the petroleum economy is shrinking.
A new paradigm is required. Although oil will remain an important fuel source, its relevance in global trade is fading. It is no longer a sufficient prop to the world’s reserve currency. Meanwhile, the market cap of digital assets on blockchains now hovers around 1 trillion dollars and counting. This does not include other digital items, like in-game items, the most expensive of which have sold for millions. At the same time, smart contracts are on the verge of unlocking billions of dollars in productivity and efficiency thanks to blockchain based systems.
Here we find a second pillar emerging that could potentially support our reserve currency. The evidence is certainly mounting that: Data is the new oil, and blockchain is global data. So the cyberdollar(both in digital and crypto form) must be the new petrodollar.
A New Paradigm and a New Dollar
To understand mechanistically how the petrodollar made itself as the premier safe haven in the first place, we can turn to a modern explanation; one from the creator of the first decentralized certificate of deposit, Richard Hart. As everyone in the space have observed at one point or another, cryptocurrencies tend to move together. Richard found that contrary to popular belief, crypto is correlated less because of technological similarity and more so because of the common market structure they participate within. Hart’s law states that: prices of assets that trade against each other tend to be correlated, because they’re bonded by the liquidity of their trading pairs. This is the same reason why the petrodollar has been so successful. The liquidity from all the currencies of sovereign nations are bonded to the dollar as a result of its position in international oil trade.
To solidify the dollar’s role into the future, legislators should take a page from the petrodollar playbook, and use that same philosophy to promote a new cyber dollar strategy. This cyber dollar should be more than a dollar in a digital format, it should be deeply immersed in the digital world, embedded in rich data and enhanced with superior functionality. The U.S. needs to bond as much liquidity to USD as possible just as it has done with the petrodollar. All roads must lead to the dollar.
For the digital dollar & CBDC integration, collaborating with companies such as column, who enable programming of the traditional banking system would be highly beneficial. This programmability will also benefit decentralized blockchains which can then more easily access and integrate with traditional banking.
So how exactly do you back a currency with data?
If a tech savvy Henry Kissinger were alive today, and tasked with reinforcing the dollar, he would likely be in talks with the largest crypto projects. He would be offering incentives for use of the dollar as a primary fiat on-ramp. He would also be encouraging institutions like the fed, and other agencies involving currency to enable easy integration with smart contracts, as they will be foundational to the future. Smart contracts will not only improve efficiency, they will also assist law enforcement and help institutions manage systemic risk more effectively. Today, this would mean close ties to Chainlink, which is the main innovator in the smart contract space. The main guard rail to be implemented is proof of reserves. This would ensure a 1:1 backing of a digital or crypto dollars held by exchanges. Kissinger would of course ensure that all those involved played by the rules.
It’s possible that in the future, the U.S. could provide cybersecurity benefits to partner nations, assuming they use cyber dollars and are customers of digital goods, much like how the U.S. now provides physical security abroad on the open seas & along trade routes. This is something the U.S. is certainly capable of doing with Cyber Command. A modern Kissinger would see our current capabilities and would certainly leverage them.
Freedom of Navigation Operations (FONOPs).
FONOPs are military operations designed to demonstrate and uphold the right of freedom of navigation in international waters and airspace. This includes the right of US vessels and aircraft to operate freely and unimpeded, without interference from other countries. These security assurances help to deter aggression and promote confidence among US trade partners, which is essential for maintaining a free and open trading system.
As the trade value of digital goods skyrocket, the battlefield moves into the digital sphere, we will need FONOP 2.0 in cyberspace.
Final Thoughts
Proponents should embrace the cyber dollar, recognizing that both the crypto and digital dollars are two sides to the same coin, that will ultimately improve each other. Contrary to recent rhetoric, legislators and regulators should be eager to insert the dollar into the digital sphere, whatever form that may come in. Crypto dollar, or digital dollar. They should be making it as easy as possible to use dollars, no matter the bank, no matter the market, no matter the blockchain. The USD should to be the eternal well that everyone returns to drink from. It’s now a race for many nation states to do just that, whether they know it or not.
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