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Ep 43: Are Stablecoins the Future of Money?
153 Plays1 month ago
Join renowned author David Birch in this express podcast, as he unpacks the rise of stablecoins, their transformative impact on global finance, and what they mean for the future of money. From geopolitics to financial inclusion, Birch offers sharp insights into how stablecoins are shaping the digital currency landscape and how they're more than "just digital dollars."
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Transcript
Introduction to Owl Explains Hootenanny
00:00:06
Speaker
Hello and welcome to this Owl Explains Hootenanny, our podcast series where you can wise up on blockchain and web3 as we talk to the people seeking to build a better internet. Owl Explains is powered by Avalabs, a blockchain software company and participant in the avalanche ecosystem.
Meet the Speakers
00:00:24
Speaker
My name is Silvia Sanchez, project manager of Owl Explains and with that I'll hand it over to today's amazing speakers.
00:00:34
Speaker
Okay, welcome to a special edition of OWL Explains, where we bring you quick, impactful insights on blockchain and Web3.
What are Stablecoins?
00:00:41
Speaker
Today, we're honored to have David Birch with us. David is a celebrated author, advisor, and thought leader in the world of digital money and identity.
00:00:49
Speaker
And over the next few minutes, we'll unpack the rise of stablecoins, their role in the global financial system, and what they mean for the future of money. So but without further further ado, let's get straight into it. So good morning, David. Great to have you here with us. Good morning. I'm i'm flattered to be here. Thank you for inviting me.
00:01:07
Speaker
Great. So let's get right into it. So your work focuses a lot on stablecoins, and we have seen that they have captured global attention. So why do you consider it's important to study stablecoins? Why should people care about this? Well, you know, I thought, and and um I wasn't the only person that thought this, but um but I wrote a book a few years ago about digital currency.
00:01:33
Speaker
and I said that I thought in many parts of the world, the demand for cryptocurrency was really a proxy demand for dollars. In other words, when people in, you know for example, Argentina um wanted to be paid in Bitcoin, it wasn't because they really wanted Bitcoin, which is you know speculative and volatile, but what they really wanted was US dollars.
00:01:58
Speaker
And so I suggested that I thought that you know US s dollar state us s dollar in particular stablecoins would gain some traction. And and another course is what's what's happened. And what's interesting to me now is that if you look at some countries, and you know countries like Turkey, I think would be a very good example.
00:02:24
Speaker
What you see is that the premium paid for US dollar stablecoins over and above the price paid for either physical US dollars or US dollars in electronic form suggests that for for a great many people around the world, some form of US dollar stablecoin is actually much more valuable than ah even just once i done more the word for it would be plain US dollars themselves. and and I think that's an interesting phenomenon. and I think it you know i think it's it's worth thinking about and worth thinking about what it means and where it's taking us.
00:03:01
Speaker
That's great. that all sounds That all sounds super interesting. And it definitely is and is is important to dissect what type of crypto people want. Like it's not just this homogeneous asset class and people might demand Bitcoin. And as you mentioned, this rising demand of US s dollars, as we see with dollar-backed stablecoins.
Types of Stablecoins Explained
00:03:20
Speaker
So tying it back to the essence of stablecoins, their name is right there, coins that are stable. So could we say that they can be considered as a go-to solution for financial stability? Why or why not? Well, you're talking to a horrible nerd about this, of course, because to to people like me,
00:03:38
Speaker
um there are There are different definitions, all of which mean different things. so the The generic word stablecoins has come along and taken over. but Originally, what a stablecoin meant was a coin a cryptographic token whose value was maintained algorithmically. and For a time, it seemed like that might be an interesting area to explore, but of course, what we discovered you know through various through various escapades with Luna and so on, was that that doesn't really work um as soon as you start to stray from the mean. It's very difficult for algorithms to to maintain that stability as things sort of blew up. So but by that time, the word stablecoin had expanded from that definition to mean any coin whose value was being externally maintained. And broadly speaking, there were two kinds of those. There were what we in the old days used to call a currency board.
00:04:35
Speaker
which was a currency that had its mainte that had its reserve in another currency. So, you know, Zimbabwe Dolly would be a currency board because the reserve was actually in South African round. And so you have currencies like a Circle, where you have ah the currency maintained by a different currency, in this case, US dollars.
00:04:58
Speaker
The other kind is a stable coin whose value is maintained by some other assets, i.e. not another currency, but some other kind of asset. So gold or oil or something like that, or a basket of currencies. um you know and And I think there we probably haven't seen the full impact yet, because I have a feeling that there are certain kinds. So if you take gold as an example, you know people have tried you know various times to have gold currencies one form or another. And they haven't they haven't really got that much traction. But it's entirely possible that there'd be other kinds of assets in the future where people would want stablecoins against those assets. I and know this all sounds a bit hypothetical, but I keep thinking about energy as the sort of key resource that people want to hedge against in the future. So yeah so you have those three categories. You have you have tokens whose value is maintained algorithmically.
00:05:58
Speaker
tokens whose value is maintained by a reserve in another currency, and tokens whose value is maintained by a reserve in some other assets. and But all three of those now are ah you know lumped together and called stablecoins. And who am I to argue with everyone about this?
00:06:16
Speaker
yeah and Great, thanks thanks for that explanation. yeah Even within that, we have a lot of different different categories, different types and and functions, and essentially. so You have written about the geopolitics of money in currency wars. so How do stablecoins challenge or complement the role of traditional fiat currencies on the global stage?
Stablecoins vs Traditional Fiat Currencies
00:06:37
Speaker
Well, um i mean what I said in the book was that, i and this I think this has turned out to be true, was that um you know American soft power via the dollar is is a really important element of of of the nation's projection of power on the global stage. and you know Generally speaking, I would prefer um I would prefer, ah you know, that... Sorry, I'll start that bit again because it's wandering a bit. I'll say it again.
00:07:10
Speaker
um Well, I said in the book originally that I thought that, in a way, digital currency was a new kind of space race, and that that really the US s should try to win it, because having the dominant digital currency and is a form of soft power. And I think, given the dominance of the US dollar, the US s was well positioned to establish that.
00:07:33
Speaker
And I thought that, I mean, there's there's obviously a ah ah some very different thinking in America because for reasons that are too complicated to go into here, um you know the idea of a federal and digital dollar upsets a lot of people.
00:07:49
Speaker
you know know In reality, ah if if there was a if there was a Federal Reserve stablecoin that people around the world could use, that would become a gigantic interest-free loan to Uncle Sam, even more than the interest-free loan to Uncle Sam that current physical currency is. When you remember that two-thirds of that currency is outside the United States and will probably never be repatriated. so I thought you know it would be an element of American policy to try to win these currency wars. As it happens, um Of course, I couldn't have predicted what was going to happen with with Tether and Circle and so on. But but yes, you yeah i mean you do see US dollar coins dominating, they're just not Federal Reserve coins, they're private coins. But it's important. And if you think what the impact of it could be in other countries, I think it's quite significant. If you live in a country where
00:08:43
Speaker
Generally speaking, you prefer to deal in dollars. and Because of the the ease of use and flexibility of some future and digital dollar, most of the population are doing that, then it does have an impact on the sort of the monetary policy. of i mean What's the point of being the finance minister of of a country somewhere if no one's using your money? i mean No one cares about your interest rates. No one cares about the money supply.
00:09:10
Speaker
So it it clearly does have implications. And I don't want to be you know apocalyptic about it. But of course, if I don't think this will happen, by the way. But if if the dollar was to be um diminished in some way, and everybody started using some other currency instead, but that that would impact american that wouldt that would impact America's ability to to to project power. It really would.
00:09:39
Speaker
Right. That's an important point. And you mentioned that several central banks are arising to develop digital currencies, and it just depends on who's issuing them. But you have also mentioned that stablecoins are already being used at ah at a bigger scale. What can CBDC designers learn from the success of stablecoins?
Central Bank Digital Currencies vs Stablecoins
00:09:58
Speaker
well To be honest, my my thinking on that has changed a bit recently because I've begun to think that the goals of a central bank digital currency and the goals of a central bank digital stablecoin are actually slightly different.
00:10:13
Speaker
So if you imagine ah you know a Federal Reserve stablecoin or a Bank of England stablecoin, which was just a token that was a guaranteed that could you you could redeem it in in central bank money at any time, and people could use that on the internet, begins to cross over into the wholesale space a little bit, but you could sort of see that.
00:10:34
Speaker
But actually, a central bank digital currency, CBDC, would have different goals from that. Because if you're going to have a CBDC, it has goals which are to do with inclusion, innovation, resilience of the infrastructure. um it's It's kind of a different thing. So so I suppose that's where my thinking has been.
00:10:57
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changing and it interesting though I can definitely see that and now let's talk about the the financial inclusion aspect which i think is also very important to highlight how are stable coins making a difference for people without access to traditional banking systems what is like that that impact that they're having.
00:11:15
Speaker
I mean, this this would take um an entire podcast in its own right. but ah But broadly speaking, I think there are people who are underserved by the current financial market infrastructure. yeah And that does not mean they don't have bank accounts. There are people who have bank accounts who are underserved by the infrastructure. And is it plausible that stablecoins would have a role to play in serving those underserved people? I think, broadly speaking, the answer to that is yes.
00:11:42
Speaker
However, it's not as simple as just saying, well, everyone can have a wallet and do what they want with stablecoins. Because you know we live in a society and a society that has rules and laws, and particularly around kind of money laundering and criminal use and all this sort of thing. So I think if you delve into it, what you'll discover is that a lot of the people who are underserved or a lot of the people who can't have access to certain kinds of financial services This is actually more to do with identity and reputation and credit scores and this kind of thing. um you know In the UK, we have what's called basic bank accounts. it's It's mandatory. Anybody can have a bank account. And despite the fact that there are mandatory basic bank accounts, there are a million people that don't have bank accounts. And it's not because there's a shortage of banks. It's because banks don't really do what they want them to do.
00:12:33
Speaker
there's a there's a there's a what What most people need is is ah a way to pay and a way to get paid. ah you know ah ah like some kind of payment account, if you like. A bank account is a very complicated and expensive way of delivering that. so if If we begin to mentally separate what banks do, which is the credit provision from the payments infrastructure, you you can see a slightly different ah different vision of the future emerging. You you really can.
00:13:07
Speaker
I like that, yeah this having that the different vision. And of course, I think it wouldn't be an I Will Explains podcast without talking about regulation and policy for a minute. So regulation has been tightening globally in some places more than others. So what are the biggest challenges that stablecoins issuers face today? And according to you, what would sensible regulation look like? like What could be some good first principles for that?
Regulating Stablecoins
00:13:34
Speaker
Well, to be honest, I think that the i think that the EU electronic money um regulations are actually not a bad model. so Broadly speaking, what they say is, you know you can issue a stable coin to people, um but you have to redeem it at par, and you can't take the float and just gamble with it like banks do. You have to put it into tier one capital.
00:13:58
Speaker
and all this sort of thing. And actually, I think that's not a bad model for this kind of regulation. I think you know the the way the financial system blows up and goes crazy is because of credit. If you're dealing with essentially prepaid instruments like stablecoins, where there's no credit risk, I think you can afford to be more flexible about who can issue them and who can use them. And I personally think that any reasonably well capitalized organization, not even a financial institution, should be allowed to issue stablecoins. Interesting point. and And now my last question for you, since we're almost out of time. If you had to pitch stablecoins to someone who's not so familiar with them, what's the one feature that you would highlight as transformative?
Benefits of Stablecoins
00:14:41
Speaker
Well, um the reason why most people, I think, would use a stablecoin, even if they have a bank account,
00:14:49
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um is because if I send you money right now, like let's say I owed you $50 or something, and I send it to you through the banking system, it may take some time. I mean, we might be on an instant payments network, um but it goes through layers, these non-zero layers. It goes through the bank, and then the switch, and then the network, and then the correspondent bank, and then the target bank, and and all this kind of thing. If I send you a stablecoin, it just goes from me to you over the internet. There are no intermediaries, no layers, no complexities, no delays. And so I think that direct nature of the transaction is is what makes stablecoins really interesting. I like that. i like And I think that's pretty much all the essence of Web3 about giving, I think, the power back to the people and just
00:15:41
Speaker
making it more efficient overall, this transfer of money, this transfer of of value essentially. And this one this has been great. Thank you, David. It's been a pleasure having you on this special mini interview, mini podcast on stablecoins. Well, you made it very interesting for me. Thank you very much. I'm glad, I'm glad. So thank you once again for your time, and thanks for everybody who tuned in to listen. Don't forget to subscribe to AlexPlays for more. Take some big questions shaping web3 and beyond. I'm Silvia, and I'll catch you next time.
00:16:15
Speaker
We hope you enjoyed our Hootenanny. Thank you for listening.
Conclusion and Further Resources
00:16:18
Speaker
For more Hootful and hype-free resources, visit www.owlexplanes.com. There, you will find articles, quizzes, practical explainers, suggested reading materials, and lots more. Also, follow us on Twitter and LinkedIn to continue wising up on blockchain and Web3. That's all for now on Owl Explains. Until next time!