The US dollar is still the king of currency, but stablecoins will lead the rise of digital currencies

This article from the Medium , the original author: Mason Nystrom

Translator | Moni

Last week, the US government announced the approval of an economic stimulus bill of up to $ 2 trillion. Many people think that in the face of potential long-term inflation, the issuance of additional dollars will not help, but the reality does not seem to be the case. Perhaps it is to continue to prove that it still has the supremacy of currency status globally. The dollar has been appreciating in the past few weeks. From the perspective of foreign exchange data, this situation may be due to the shock of the global financial system after the outbreak of the New Coronavirus outbreak, which led to the massive sale of other foreign currencies.

The US dollar is still at the top of the "food chain" in the financial world and is also the "number one predator"

The chart below shows the performance of the US dollar against other major fiat currencies in the week of March 13. (Source: Michael Brown)

So why did everyone perform better and better when they thought the US dollar would not work?

In fact, most of the global market is denominated in US dollars, so compared with other fiat currencies, the US dollar has higher liquidity. When the crisis breaks out, liquidity becomes particularly important. In addition, many companies and financial institutions around the world hold mostly US dollar-denominated assets (such as US Treasury bonds) on their balance sheets.

From the chart below, we will find that during the week of March 15 to March 20, the performance of the US dollar relative to other major fiat currencies remained strong. Taking the pound as an example, although the Bank of England, the Bank of England, announced a new round of quantitative easing and interest rate cuts this week, the pound still hit a new low of nearly 35 years. In comparison, the dollar has clearly performed much better.

The chart below shows the performance of the US dollar against other major fiat currencies in the week of March 20. (Source: Michael Brown)

To some extent, the strong performance of the US dollar actually comes from companies that need to sell local currency assets to support more national contracts or US dollar assets. To maintain liquidity, many companies around the world may choose to sell their national currency or sell assets denominated in a relatively weak currency. Although the currency exchange rate is determined by many factors, it should be noted that one of the important factors is the market turmoil. As the impact of the global new coronavirus epidemic intensifies, especially the rising number of diseases in the United States, the performance of the U.S. dollar also seems to start influences.

Concerned about the impact of market fluctuations on the US dollar exchange rate, we can see from the market reaction this week on March 27, because the US dollar has performed poorly against the fiat currencies of other countries, especially the British pound and Australian dollar.

The chart below is the performance of the US dollar against other major fiat currencies in the week of March 27. (Source: Michael Brown)

I know what you want to say-yes, the dollar doesn't look very good in the chart above. That's right, this chart shows the unprecedented fluctuations of currencies in various countries during market turmoil. In fact, if we pay attention to the single-week exchange rate change of the Australian dollar against the US dollar this month, we will find that both the increase and decrease are greater than the fluctuations of the entire 2019.

And should n’t the currency not fluctuate and remain relatively stable? (Of course, we might be able to allow a little inflation in the currency every year.)

This is the performance of the US dollar's dominance. Many people worry that the US government's implementation of trillions of dollars of large-scale economic stimulus plans and other "helicopter money" measures may have an impact on the global economy and dollar strength in the next few years. There is no doubt that such concerns are based on certain grounds, but it should be noted that the fact that the U.S. government is issuing large amounts of dollars is not actually to show its strong national strength. On the contrary, the strength of the dollar depends on other countries, various global enterprises, Organize and stop the desire for the dollar. For the United States, at least for now, it is very lucky, because the dollar is still highly valued globally. Therefore, since most multinational companies still carry out debt financing activities denominated in US dollars, the US dollar can still maintain a very strong state.

The picture above is the global non-bank foreign currency borrowing growth trend launched by the Bank for International Settlements, Ritvik Carvalho and Marc Jones. (Source: REUTERS GRAPHICS)

As you can see from the chart above, because US bonds and US dollar-denominated assets are liquidated, global borrowing levels have reached a new high-it can be said that the US dollar is actually a bit of a "nowhere to go". Although the US dollar is still at the top of the "food chain" in the financial world and is also the "number one predator", as the new coronavirus epidemic continues to expand and triggers a continuous economic recession, the US dollar may also gradually decline.

So, for the cryptocurrency industry, why should we focus on the US dollar? What is the relationship between the US dollar and cryptocurrencies?

Yes, after reading this, someone finally asked this question. In fact, the global macro-economy has a long-term impact on both the US dollar and cryptocurrencies. Of course, we cannot analyze all cryptocurrencies one by one, so this article will discuss some typical cryptocurrencies.

1. The creation of digital dollars and the renaissance of central bank digital currencies

In fact, many governments and central banks around the world are now quietly studying central bank digital currencies. There is no doubt that if the US government uses digital dollars to distribute aid relief, it may be easier. On March 24th, the Democrats of the United States submitted to the Congress the “Protection of Consumers, Small Restaurants, Home Owners and Homelesss Direct Family Economic Stimulation Act” (PROTECTING CONSUMERS, RENTERS, HOMEOWNERS AND PEOPLE EXPERIENCING HOMELESSNESS, SEC. 101. DIRECT STIMULUS PAYMENTS FOR FAMILIES), which states that it hopes to use digital dollars to stimulate the economy and distribute relief to American citizens. But only one day later, on March 25th, the latest version of the bill deleted all digital dollars. We still do n’t know why Congress did this.

Compared with wire transfers and mailing checks, digital dollar transfers are faster and have other advantages. In fact, the relief bill passed by the United States this time only allows the federal government to provide relief funds to qualified U.S. taxpayers with direct deposit bank addresses and recorded in the IRS. Other eligible relief recipients may need to wait for four This money can only be obtained in a month or more, which means that in the next few weeks, only about 70 million people can actually get relief money, and the total population of the United States is 330 million. Not only that, even in developed countries like the United States, there are still many poor people who do not have bank accounts, so they may not be able to obtain government relief or other assistance. However, the vast majority of people have mobile phones, which means that people can access digital currencies without going to a bank to open an account.

Just after removing the "digital dollar" from the relief bill, Sherrod Brown, a member of the US Senate Committee on Banking, Housing, and Urban Affairs, proposed a new draft digital dollar bill to create a free bank account for every American. This can not only improve the efficiency of currency use, but also save a lot of costs (such as check exchange). According to this latest proposed bill, the digital dollar will be operated and maintained by the Federal Reserve, which will maintain digital wallets on behalf of individuals. The member banks of the Federal Reserve will be allowed to create a "straight-through digital dollar wallet". The member bank holding the wallet shall establish and maintain an independent legal entity dedicated to holding all assets and liabilities related to the digital wallet.

It is worth mentioning that digital dollars are not "encrypted dollars", but "digital versions of dollars", and account balances are expressed in dollar values, including digital ledger entries recorded as liabilities in any Federal Reserve Bank account, and related wallets. It will be specially marked with the Fed logo “FedAccounts”.

In addition, the digital dollar will make money supply control more effective. The US government can easily repurchase or issue new currencies without paying expensive labor and printing costs.

From this perspective, the digital dollar is actually a form of central bank digital currency (CBDC), which will represent a demand for claims from the central bank, similar to today's paper currency function. Compared with the controversial cryptocurrency, the central bank's digital currency should not have too many regulatory conflicts, and it can be integrated into the existing financial system faster. In addition to the Federal Reserve, the Bank of England and the Bank of England have announced cooperation with several commercial banks to study the potential benefits of digital currency. Blockchain analysis company ConsenSys also interpreted the central bank's digital currency and currency future in a white paper.

2. Stable currency based on fiat currency is bound to rise

Stablecoins, whether anchored to fiat currencies or other forms of collateral, will become the first "killer" cryptocurrency applications. In this global crisis, more and more people began to understand the importance of currency, because currency is the "last resort" to quell the economic crisis. In January 2020, due to the migration of USDT to Ethereum, the transaction volume of stablecoins exceeded the transaction volume of ETH tokens (as shown in the figure below), this historic event also highlights the value proposition of stablecoins on unlicensed blockchains .

Another event that deserves attention is Maker: On “Black Thursday” on March 12th, the 30% drop in ETH price in 24 hours and the network congestion caused by the surge in fuel costs gave the Maker agreement, community, foundation and the entire ether The Fang DeFi system has brought a huge test, and as a result, some caregivers have won multiple collaterals of 50 ETH (a total of 4.5 million US dollars) at the price of 0 Dai. During the ETH price decline, the Ethereum network congestion led to a delay in the price of Maker's prediction machine feed. Although this was an unexpected delay, many users were objectively given time to replenish insufficient mortgage assets and repay debts, avoiding liquidation . (Planet King o-daily Note: The care machine Keeper is a key part of the Maker system. It is generally an automatic liquidation software or a manual market maker to maintain the health and stability of the Dai system. The Maker Foundation hopes and encourages more care machines in Recently participated in a collateral auction.) Eventually, the Maker Foundation converted the deficit into system debt of the Maker agreement and launched a debt auction.

This incident highlights the disadvantages of stablecoins based on cryptocurrency mortgages, and therefore will also promote more stablecoins based on fiat currencies to appear on the market. It is worth mentioning that during the market turmoil in the past month, the global fiat-based stablecoins have performed very well. (Of course, another reason for this may be that cryptocurrency investors are worried about large losses during the price fluctuations of Bitcoin and Ethereum assets, so they have switched to buy stablecoins.)

Although the attention of stablecoins based on fiat currencies is not as high as other crypto stablecoins with complete autonomy at this stage, the stability of such stablecoins is less volatile. In addition, most crypto stablecoins today are based on the Ethereum blockchain, but the market value of Ethereum is only tens of billions of dollars, so it also limits the development of stablecoins to some extent. In contrast, most fiat currencies are in the "trillion dollar" class, so the future potential of stablecoins will also be greatly improved.

Take the stablecoin anchored with the US dollar as an example. In the past three months, the net capital flow reached an astonishing 2 billion US dollars, the largest increase in demand in history. Among them, the inflow of Tether stablecoins reached 1.55 billion US dollars, and the inflow of USDC was stable The currency is about 170 million US dollars, and the inflow of BUSD stable currency is also 150 million US dollars.

3. The traditional financial system is starting to shake?

The new coronavirus epidemic has had a tremendous impact on many countries around the world, and it has also had an impact on the traditional financial system. In contrast, the financial systems supported by superpowers are tougher, and the world ’s demand for more stable currencies such as the US dollar, the euro, the yen, and the Swiss franc has increased, but some countries with weaker economies will face currency inflation, The economy is increasingly lacking in stability and other risks.

From the perspective of mitigating financial risks, after this epidemic, there may be some "small countries" that will consider storing some other valuable assets, such as gold and Bitcoin. Not only that, due to the offshore nature, some stable currencies have become one of the best ways to achieve dollarization in countries such as Indonesia, Russia, and Brazil. With the implementation of isolation and travel restriction policies due to the New Coronavirus epidemic in various countries, cash transfers have become extremely difficult, and the cash attribute of stablecoins can even partially replace US dollars and other legal currencies.

Digital currency has financial and economic attributes, but fundamentally speaking, digital currency is more like a revolution. After experiencing this financial turmoil that can be recorded in history, have you felt that the traditional financial system has begun to shake?