Pascal Hügli is the Chief Research Officer at Schlossberg&Co, in Switzerland, and author of the book Ignore at Your Own Risk: The New Decentralized World of Bitcoin and Blockchain.
Tribal fighting between Bitcoiners and Ethereans is unabated. Bitcoin is understood as “money crypto,” while Ethereum is labeled “tech crypto.” Bitcoin is sound money that will make all other monies obsolete. Ethereum, on the other hand, is seen as better tech that will update Wall Street’s settlement layer. The conflict is incomprehensible to outsiders, and each community says the other has not understood the crypto world’s actual goal and ethos.
You could imagine this conflict going on for years, a sort of Game of Thrones for blockchain. But there’s another – more hopeful – way of imagining the future. Conceivably, the future will be one where Bitcoin and Ethereum gain greater relevance alongside each other (as Michael Casey argued in his recent column). Both “money crypto” and “tech crypto” will play their roles. It might just not be in the pure sense envisioned by either of the two maximalist groups.
We are currently under a crushing dollar yoke. Back in the 19th century, many parts of the world had free banking. Banks were granted unrestricted competitive issuance of currency and deposit money on a convertible basis. But gradually the paradigm of free banking faded away and state-orchestrated fiat currency took hold.
After World War Two, much of the world started trading in dollars, making it into a reserve currency. To this day, U.S. Treasuries provide a safe haven in times of financial turmoil, tightening the dollar’s grip on global finance.
Greater dependence on the dollar means greater dependence on the Federal Reserve. As a national bank, the Fed puts national interests first. These oftentimes contradict with other countries’ concerns, leaving them in a tight spot.
As the world has been dollarizing, a paradox has emerged: Although the U.S. central bank is often criticized for inflating its currency, global markets deem the available amount of dollar liquidity to be insufficient. This lack of liquidity has caused financial actors all around the world to start helping themselves.
The world, especially emerging market economies, really needs dollars. The emergence of the eurodollar system in the 1960s was a direct consequence of the Fed not being able to supply the world’s relentless need for extra dollars.
Eurodollars are U.S. dollar accounting entries that are used to settle cash flows between numerous players outside the banking system supervised by the Fed. As such, eurodollars are not subject to U.S. banking regulations. As the economist Milton Friedman pointed out in 1969, eurodollars are created by the bookkeeper’s pen.
Corporations, banks and other international actors are dependent on dealer markets providing enough eurodollar funding to uphold market liquidity and service debt. These private dealers are acting primarily through the shadow banking system. Because the dollar has ascended to become the world’s number one currency with the deepest and most liquid capital market, people all around the globe have been going into dollar debt. There is nearly $60 trillion in dollar-denominated debt globally and immense demand to service dollar debt.
The crypto-dollar system is more transparent than the old euro dollar system based on shadow banking (so named for a reason).
Eurodollars are the world’s way to grapple with recurring short squeezes in the dollar, a global dollar shortage that manifests itself each time with ever greater severity.
See also: Michael Casey – Central Banks, Stablecoins and the Looming War of Currencies
But eurodollars are not actual dollars. They are offshore dollars or could be seen as dollar approximations. In times of crises this becomes evident as financial market actors strive to acquire actual dollars. With every crisis, the Fed also has to pump more dollars into the system, only to nourish the ground for a future crisis. As ongoing turbulence in the repo market and the broader shadow banking system show, the Fed’s actions seem only temporarily to soothe appetite for more and more dollars.
Higher demand for dollars will also imply further depreciation of local currencies against the greenback, especially in emerging markets. The most current example of this is Lebanon, where the local currency has lost at least 50% of its value against the dollar this year. Greater capital controls in these types of markets could well be in store, which would make it harder for debtors to obtain dollars or eurodollars for that matter.
Enter public blockchains
In times like these, public blockchains with a liability-free native asset can act as neutral settlement networks independent of the financial system. The stage is set for Bitcoin and Ethereum to be used as vehicles to alleviate the world’s global dollar shortage.
For example, U.S. dollar stablecoins – so-called crypto dollars running on Bitcoin and Ethereum – are a way to get dollar exposure or dollar proxies. As natively digital bearer instruments with transparent and efficient auditability capacities, crypto dollars are easy to accept and can be traded 24/7/365 with virtually no downtime. They also help circumvent emerging capital controls on traditional finance and eurodollar paths.
See also: Nic Carter – Policymakers Shouldn’t Fear Digital Money: So Far It’s Maintaining the Dollar’s Status
The eurodollar approach was an attempt by private actors to create a dollar funding system outside the U.S., but still within the traditional financial system. Crypto dollars mainly reside outside of the traditional, U.S.-led financial system. Because of its inherent auditability, the crypto-dollar system is more transparent than the old euro dollar system based on shadow banking (so named for a reason).
Upgrade for the Eurodollar
We’re beginning to see the dollarization of public blockchains. Since March, the value of USD-pegged stablecoins has passed $11 billion. Tether could surpass the market cap of Ethereum or even Bitcoin due to growing demand for synthetic dollars and its approximations.
Hyper-stablecoinization will be the upgrade for eurodollar banking. It will once again be private individuals using the innovative tools at their hands to make sure they can get the dollar exposure they need. But this time the tools are public blockchains and cryptographic tokens.
The shadow banking system is a way for private actors to pledge collateral to create synthetic dollar funds and approximations. But the crypto world in conjunction with the programmability of public blockchains will take this one step further. Bitcoin and ETH already serve as collateral to create dollar deposits and dollar credit instruments.
A new type of free banking on public blockchain networks is at the horizon. While crypto dollars will be its big driver, Bitcoin and Ether could play their part as well. As high-powered, non-state collateral these crypto assets could be used to back these future crypto dollars making them even more resilient. It is very likely that we will see more of the following in the future: Crypto-backed stablecoins like Dai, Bitcoin-backed financial services like Valiu or stable crypto dollars redeemable for Bitcoin that for example Chinese blockchain wallet provider Bixin is planning to launch. Also, exchanges and crypto-banks issuing crypto dollars against liability-free synthetic crypto assets seem only a matter of time until realization.
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