Stablecoins backed by national currencies

This post was originally published on August 28, 2019, and sent to Messari Pro subscribers.

Stablecoins backed by national currencies, i.e. “fiatcoins,” are the least interesting thing in this space. From the users’ perspective, digital representations of the dollar, euro, yuan, etc. aren’t much different than using Venmo or WeChat pay. However, the more attention they receive, the more convinced I become of their impact. I’ve started viewing them through the lens of the international financial system rather than the individual end-user.

In the past few weeks, we’ve seen Binance announce Venus, a plan to create multi-currency stablecoin, Tether issuing CNHT pegged to the Yuan, and Bank of England Governor Mark Carney suggesting a “synthetic hegemonic currency”. With dominant crypto companies (Binance, Bitfinex), multinational corporations (Facebook and LIbra Association), regulators, and central bankers from across the world all looking into these digital alternatives, there is a certain sense of inevitability to a world dominated by fiatcoins. What this will look like is unknown, and will differ depending on the breed of fiatcoin. This makes it important to delineate between single currency and mixed basket as well as private vs. public sector entities issuing the currency.

Single Currency - Private

In the mid 19th century, private currencies were common in what was known as the “Free Banking Era.” States, municipalities, banks and even large corporations printed money backed by government bonds. Over time, consolidation occurred to a single currency system as the Federal government-regulated private money out of existence. In the last decade, we have seen a resurgence of private money as Bitcoin eliminated the need of a central issuer by effectively solving the Byzantine Generals Problem. Since then, private companies have issued hybrid currencies that exist as digital bearer instruments but are backed by government-issued fiat.

There are currently around $5 billion outstanding, with Tether ($USDT) comprising around 80% of the market. Many of these tokens are backed 1:1 with their respective fiat currency making them very similar to the dollars in a bank account. The only substantial difference is their use in digital economies such as decentralized exchanges or lending platforms.