How crypto helps the dollar

With help from Derek Robertson

The rise of the dollar in global currency markets — it’s up between 20 and 30 percent against the euro, yen and pound over the past year — is forcing crypto enthusiasts to rethink the idea that cryptocurrencies will undermine the hegemony of the dollar. Instead, it now appears that for the foreseeable future blockchain technology is poised to help the dollar at the expense of weaker sovereign currencies.

That’s because stablecoins make digital dollars available in parts of the world with high inflation and unmet dollar demand, at a time when unbacked cryptocurrencies like bitcoin and ether are down to a third of their peak values.

Although estimated total market capitalization of all stablecoins is less than 1 percent of the US money supply, their persistence in the face of cratering crypto markets and the collapse of luna, a so-called “algorithmic stablecoin” shows that at least some businesses and people in many parts of the world are eager after obtaining blockchain-based dollar equivalents.

“It’s a fairly nascent market now, but it’s growing bigger and bigger every day,” said Chinedu Okpala, the US-Nigeria-based founder of Oval Finance, which launched last year to offer crypto services to businesses in Africa.

Given the rapid weakening of some African currencies, such as the pretty cedi and the Nigerian naira – which hit 34 percent and 21 percent inflation rates respectively in August – Okpala said dollar-backed stablecoins could pose a significant threat to the continent’s monetary order.

“Long term, unless these currencies stabilize, they are going to continue to lose ground,” he said.

Okpala said efforts by Nigeria’s central bank to fight back have been largely ineffective. After it disconnected crypto exchanges from the banking system last year, users quickly switched to peer-to-peer trading.

If stablecoin adoption grows further, it is likely to provoke a more sustained pushback from monetary authorities, according to Josh Lipsky, director of the Atlantic Council’s Geoeconomics Center, which tracks the development of central bank digital currencies.

“Central banks around the world are already thinking about it,” he said. If dollar demand proves unquenchable, Lipsky said, central bankers will prefer an official U.S. central bank digital currency to today’s private stablecoins because they are used to dealing with the Federal Reserve.

While the original intention of Bitcoin’s early adopters was to undermine state-backed currencies like the dollar, even some advocates of the original cryptocurrency welcome the use of dollar-stable coins in economically troubled countries like Turkey, Lebanon and Argentina. Alex Gladstein, chief strategy officer for the Human Rights Foundation, which advocates Bitcoin adoption for people facing authoritarian governments or high inflation, called it “a very good thing.”

Like many crypto advocates, Gladstein sees blockchain-enabled dollar adoption as a transitional phenomenon before Bitcoin eventually wins out, but he admits that such an outcome is a matter of speculation and could be decades away.

Meanwhile, even the most ardent Bitcoin supporters acknowledge the dollar’s strength.

Alexander, a hardcore crypto adapter (and resident of El Salvador’s Bitcoin Beach) shares his thoughts in a private chat group on messaging app Telegram. (He included me in the chat on the condition that I not use his last name.)

He said the dollar has gained new respect in the past week: “I usually say cash is trash, but,” he wrote Friday. “Cash is (at the moment) king.“

At POLITICO AI & Tech Summit today a group of regulators and industry watchers gathered to ask what happens when the “Crypto revolution meets Washington”?

A big question, as many crypto-related bills appear in various congressional committees, was what the outcome of the upcoming midterm elections might mean for the still unclear legal and regulatory framework surrounding crypto.

Perianne Boring, founder and CEO of the pro-crypto interest group Chamber of Digital Commerce, quoted one poll published this morning by a pro-crypto venture fund that claimed that one in five voters in four swing states hold cryptocurrency — more than have union membership in those states. She predicted that as adoption increases, more candidates will make crypto politics a prominent part of their campaigns.

Delicia Hand, a consumer advocate at the nonprofit Consumer Reports, pointed out that the speed and scale of crypto adoption has made creating regulatory clarity a bipartisan urgency.

“We need to have a high-level conversation about the current moment socially, politically and economically, and if not, consumers will find a solution for themselves,” Hand said. “They are going to capitalize on the moment of DeFi [decentralized finance, or crypto banking and lending] and figure it out, and regulators and policymakers could find themselves out of a job” — that is, voted out and replaced by new lawmakers, and a new regulatory regime that will protect consumers from crypto-related fraud. — Derek Robertson

Artificial intelligence causes the government to reconsider the market’s rules as well.

At MIT Policy forum for artificial intelligence yesterday, SEC chief Gary Gensler said the SEC is looking at creating new rules around predictive analytics in finance, saying algorithms could prompt traders to engage in more — and riskier — types of trades, such as the investment news website Seeking Alpha reported.

Gensler said technologies such as robo-advisors or sentiment analysis risk creating domino effects, with unregulated software at the heart of a massive framework for economic decision-making.

“If someone relies on open AI, that’s a concentrated risk, and a lot of fintech companies can build on top of that,” Gensler said. “Then you have a node that is as systemically relevant as perhaps a stock exchange.” — Derek Robertson

Stay in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Konstantin Kakaes ([email protected]); and Heidi Vogt ([email protected]). follow us @DigitalFuture on Twitter.

Ben Schreckinger covers technology, finance and politics for POLITICO; he is a cryptocurrency investor.

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