Could a Digital Dollar give Crypto a Run for Its Money?

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digital dollar stablecoin

  • The dollar is entering the crypto age, and the U.S. government is poised to give its clearest signal yet on how that will happen.
  • Dollar-based stablecoins have long filled the need for cryptocurrency pairs that want to trade according to a dollar price, but also have the stability provided by a fiat currency pair.

While China has already rolled out its digital yuan, the U.S. has taken a decidedly more measured approach in determining whether a digital dollar is suited for the country and by extension, the global economy.

Three papers to be released in the coming months will provide an insight into the thinking of Washington.

The U.S. Federal Reserve Board is set to release a paper as soon as this month on the U.S. payments system, as well as provide some guidance on whether the country should issue its own digital currency.

The Federal Bank of Boston will also publish its long-awaited research and open-source software code on technology that could potentially underpin a digital dollar.

Finally, and perhaps most significantly for cryptocurrency traders, the President’s Working Group in Financial Markets is set to issue policy recommendations on how to regulate stablecoins – effectively digital dollars created by private companies.

Although an official digital dollar could take years to create, if it happens at all, a clutch of private companies hasn’t bothered to wait and gone ahead to cater to a gap in the cryptocurrency markets.

Dollar-based stablecoins have long filled the need for cryptocurrency pairs that want to trade according to a dollar price, but also have the stability provided by a fiat currency pair.

In the early days of cryptocurrency trading, stablecoins were also a means for traders to “cash out” of their positions momentarily while waiting to move in on the next opportunity.

Although Bitcoin pairs exist for the bulk of most frequently traded tokens, because Bitcoin’s value fluctuates against the dollar, many traders prefer to use dollar-based stablecoin pairs to trade their positions.

Tether, which is the world’s most traded stablecoin and has a market cap of around US$68 billion is heads and shoulders over other dollar-backed stablecoins, including Circle Internet Financial’s USDC.

The trend of privately-issued stablecoins will likely be addressed by the President’s Working Group on Financial Markets, a gather of the leaders of various three-letter agencies, including the Fed and the Treasury.

Federal officials continue to express concern that the reserves of some stablecoins are invested in assets such as commercial paper (liquid corporate bonds) and other related securities, that could experience severe stress if investors were to lose confidence and attempt to cash in all their stablecoins all at once.

Given Tether’s struggle to find stable banking relationships and its decision to skirt around U.S. regulation, the company has been forced to maintain its dollar-peg via other means, for instance by holding on to commercial paper and other securities.

What that does is essentially make Tether “dollar-based” as opposed to its original stated goal of being “dollar-backed.”

U.S. Federal Reserve Chairman Jerome Powell and U.S. Securities and Exchange Commission Chairman Gary Gensler have both likened stablecoins like Tether to money market funds, which also seek to maintain a value of one dollar, a peg that sometimes slips during periods of financial stress.

Given Tether’s holdings of securities, it’s actually estimated to be the sixth or seventh largest holder of commercial paper, and as that number grows, increases the systemic risk it poses to the financial system.

For now at least, USDT is used for very little outside of cryptocurrency trading and U.S. lawmakers and regulators may be keen to bring that bit of the crypto Wild West under supervision