WSJ Opinion Why the US Government Should Support Stablecoins? It Can Strengthen the International Status of the US Dollar

Compilation | Wu Shuo blockchain

This article was published in the Wall Street Journal opinion section.

Authors Brian P. Brooks and Charles W. Calomiris

Brian P. Brooks served as Acting Comptroller of the Currency for the United States from 2020-21 and as Chief Legal Officer for Coinbase from 2018-20. Calomiris is the director of the Department of Economics, Politics, and History at the University of Austin. He served as Chief Economist for the Office of the Comptroller of the Currency from 2020-21.

Stablecoins are blockchain-based assets backed by bank deposits and government bonds, and they are at the core of the dollar-based revolution that developing countries are experiencing. Their prices should remain stable, typically at $1. They can be seen as digital versions of prepaid cards and have the potential to become an important tool of U.S. soft power in a world where the role of the dollar is being questioned.

Stablecoins are more than just a more efficient electronic payment method. Some economists and policymakers are concerned about “de-dollarization” – the replacement of the dollar as the world’s reserve currency – and stablecoins may support post-war arrangements where the dominance of the dollar has helped promote global trade and reduce global poverty. But this can only happen with the implementation of robust and stable regulatory frameworks by Congress.

This is why the Stablecoin Regulation Act proposed by LianGuaitrick McHenry, Chairman of the House Financial Services Committee, is crucial. It would establish federal and state regulation for stablecoin issuers, set eligibility criteria for reserve assets, and implement rules regarding redemption and public disclosure. It is hard to argue against what seems like bipartisan goals, as McHenry (a Republican from North Carolina) has been working on this bill with Maxine Waters (a Democrat from California) for over a year. However, in last week’s vote on the measure, Ms. Waters and most of her Democratic colleagues withdrew their support, without a clear reason for this sudden change. Do they suddenly think stablecoins are no longer important?

Any tool that has the potential to enhance the status of the dollar should be considered. Over the past few generations, the share of the dollar in foreign central banks’ foreign exchange reserves has declined. In 2000, the dollar accounted for nearly 73% of global central bank foreign exchange reserves; now that share is about 59%. While many international trade and large commodity transactions are still settled in dollars, this year major countries including Brazil and Argentina have signed bilateral agreements with China, settling trade in renminbi and their local currencies.

There are rumors that next month’s summit, including Brazil, Russia, India, China, and South Africa, will consider creating a new currency arrangement. Although leaders of the so-called BRICS countries deny an imminent currency alliance, Anil Sooklal, South Africa’s special envoy to Asia and BRICS, said the era of a “dollar-centric world” has already “ended” and BRICS countries intend to settle trade in their local currencies in the near future. This year, Saudi Finance Minister Mohammed al-Jadaan said that Riyadh is open to settling oil trades in currencies other than the dollar – something that was once unthinkable.

The US policy has not strengthened global confidence in the US dollar. The freezing of the US dollar assets of the Central Bank of Russia following Russia’s invasion of Ukraine, while politically understandable, still shocked investors and central bankers, who for the first time realized that the US dollar may no longer be as safe as before.

A non-dollarized world is harmful to the United States. The reduced reserve currency status of the US dollar has lowered US borrowing costs, which is crucial in an era of record-high government borrowing and spending that is still escalating. The reserve status also protects the US government, banks, and public from foreign exchange risks. Under equal conditions, the reserve status also allows US consumers to purchase foreign goods at a cheaper price, as foreign producers prefer to hold US dollars rather than other currencies.

The nationalist and anti-colonialist impulses behind the de-dollarization of developing countries are unlikely to benefit the citizens of those countries. Argentina’s decision to price its trade transactions with China in renminbi and pesos may reflect Argentina’s national pride, but the country’s annual inflation rate of 114% means that workers there will still see their purchasing power rapidly decline. This is nothing compared to Zimbabwe’s inflation rate of 175% or Venezuela’s 400%. As of the end of last year, the inflation rates of 17 countries exceeded 20%, and the inflation rates of 57 countries exceeded 10%.

This is where stablecoins come into play. Faced with the bleak prospect of storing wages in local currency in local bank accounts, more citizens of high-inflation countries are choosing to use US dollar-based stablecoins as comprehensive savings accounts. Dozens of startups offer stablecoin savings and payment options in Latin America and Africa – often in countries where leaders have openly and explicitly abandoned the US dollar.

The market value of US dollar-backed stablecoins reaches hundreds of billions of dollars, supporting transaction volumes far exceeding that amount. In these countries, these products are attractive to ordinary people because they do not need to open accounts at local banks, only an internet connection is required. In addition, many stablecoins pay interest and have no minimum balance fees, with low or no transaction fees. Most importantly, they free people from the constraints of authoritarian monetary policies in developing countries, allowing them to store the value of their hard work in a relatively stable form of the US dollar.

When the US attempts to engage with other governments but fails, stablecoins can directly convey US monetary policy to residents of other countries. If stablecoins thrive, citizens of other countries will increase their demand for the US dollar, independent of their government’s political decisions (or even contrary to them). However, for stablecoins to succeed, US politicians need to recognize the importance of global economic re-dollarization.

The McHenry bill is a good start.

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