Stablecoins: Separating Facts From Hype, and Dirty Money
I like stablecoins, but not their dark side.
Stablecoins to the rescue with new economic efficiency? Don’t count on it. This report is a great read, but I warn you that it has a mix of great research, hype, and hopium. I’ll do my best to separate them out below!
First, kudos to the report for adjusting stablecoin volumes. The big $7 tn volume number touted by many is misleading, and I credit the report for adjusting it down to $2.5 tn.
This adjustment acknowledges research by Visa and Allium Labs showing that most stablecoin use was by bots or for large-scale trades. I’m glad they’re honest.
However, this paper's most egregious omission is that it ignores stablecoins’ dark side, their role in organized crime.
This omission is despite reports by the UN that Tether on the Tron network is rife with use by pig butchering scams, drug dealing, and illegal gambling.
👉TAKEAWAYS AND DEBUNKING
🔹Significant volumes: The paper claims that an adjusted volume of $2.5 tn is significant in the context of other major payment networks. According to Statista, PayPal settled $1.5 tn in 2023, and 5 Mastercard reported volumes of $9 tn.
✅ I agree! I credit stablecoins for helping transform payments, and the numbers, while likely still inflated, are significant.
🔹Mitigating the costs of currency volatility: “Emerging markets like Turkey, Thailand, and Brazil are leading the way in stablecoin purchasing as a share of national GDP. Residents in these countries frequently use stablecoins to preserve their savings when the local currency loses value.”
❌ True, but the report ignores that capital flight largely through illegal stablecoin transfers puts further downward pressure on fragile economies. They also create further financial inequality as the rich, with the means and technical skill to convert to USD stablecoins, abandon the poor.
🔹Bridging the dollar gap: As a digital substitute for the US dollar, stablecoins fulfil global demand for a stable currency where access is limited.
❌ Pushing dollarization when the Global South is doing everything possible to dedollarize is absurd! Developing economies strive to dedollarize because converting weak currencies to USD is far more expensive than trading in local currencies.
🔹Releasing capital trapped in payment systems: At any given moment, $11.6 billion of working capital is trapped in-transit between the 4 routes studied. The money is trapped in nostro-vostro accounts, which need to be refunded for use.
✅❌ I agree this is a problem, but stablecoins have a lot of competition in this sector. Banks are well aware of this, with JP Morgan and Citibank already using internal stablecoins to solve it! Banks and central banks are also working on tokenized deposits and CBDCs, which would make third-party stablecoins meaningless for this use. Why on earth would banks surrender this internal reserving issue to stablecoins The authors are clueless if they don’t understand this.
🔹The stablecoin premium: Businesses and consumers in 17 emerging markets studied pay an average premium of 4.7% for access to stablecoins. Peaking to a max of 30% in countries like Argentina. In 2024, it’s estimated these 17 countries will pay $4.7 billion in premium alone to access stablecoins, rising to $25.4bn by 2027.
❌ Paying a premium of 4.7% to buy a USD stablecoin is a very bad deal. How is this efficient? Why should developing nations pay billions to access dollar instruments? How is this a good deal for them? Unless, of course, fraud or illegal activity is the intent. What am I missing?
On average stablecoin users pay a 4.7% premium for the privilege of using them. How can developing nations afford that? Currency flight, as seen with the premiums of 30% and 22% for Argentina and Nigeria, suggests a destabilizing force on the economy. Argentina in July passed a new law treating crypto as foreign currency to reduce laundering.
👊STRAIGHT TALK👊
I like stablecoins, I do! I see them as an important part of our financial future, but I don’t subscribe to the vision that they can solve all of the problems the authors suggest.
The claims that USD stablecoins will help developing nations seem unfounded. Stablecoins mean dollarization at a time when the Global South is looking to dedollarize to save money on trade.
The authors then show that stablecoin users pay an average premium of 4.7% over the dollar value of stablecoin. How can poor nations afford this? How is that “unlocking economic efficiency?”
The paper calls for regulation, and I fully agree that stablecoins need regulatory clarity. What it dares not say, an error of omission, is that even the existing laws do not treat stablecoins equally. A coin from nation X may not be as secure as nation Y’s. Will they have different prices?
I like stablecoins and think they have a role to play in our financial system. That said, spare me from the hype that says they solve so many problems. They won’t and can’t.
That is the reality, not the hype of stablecoins.
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