To get a sense of how widespread the interest is, Fed Governor Lael Brainard said in August the Boston Fed was teaming up with MIT to explore the infrastructure that might underpin digital currencies. Brainard said in a speech that digital greenbacks have the potential “to deliver greater value and convenience at lower cost.”
Minting dollars — digitally.
As Jeremy Allaire, CEO of financial technology firm Circle, told Karen Webster in a recent video interview, digital currencies are ready to make the leap from speculation (from futurism) to becoming a broadly adopted payments instrument across P2P, C2B and B2B commerce.
Facebook’s Libra, of course, will not be the only game in town.
It’s been a long time coming, said Allaire, who noted that the general concept of a stablecoin emerged several years ago in relation to other cryptocurrencies, which of course, were anything but price stable.
“The biggest problem was they are highly volatile and really still are,” said Allaire, “because they are more like commodities that people are trading.” The initial use case for stablecoins, then, was providing the digital asset exchange and markets a price-stable digital currency for trading and liquidity.
Fast forward to today, and the Fed — and any number of central banks queried by the Bank of International Settlements — have shown the stablecoin concept has evolved to be, conceivably, fully reserved and backed by a dollar but to function as an everyday currency.
Circle’s own efforts, he said, have focused on taking what he called the benefits of the public blockchain — where anyone can connect and immutable transactions between parties move at the speed of the internet across devices — can be used to make digital dollar stablecoins a mainstream reality. This has been driven by Circle’s launch, in partnership with Coinbase, of USD Coin, or USDC, which is rapidly grown to become the largest and most widely adopted regulated and fully reserved digital dollar stablecoin.
One tailwind that is bringing stablecoins in general and digital dollars in particular to the mainstream, according to Allaire, “is that regulators are getting their arms around them … the digital asset market is now moving, more and more, into the mainstream of finance, FinTech payments and banking world.”
There are any number of analogies that serve to illustrate the shift. Consider the evolution of streaming media, where not all that long ago, online video was confined to postage-stamp-sized displays, only with the aids of plugins and browsers ... and proved an awful experience for users. Then, of course, internet infrastructure made a broadband quantum leap, and we can now watch "Downton Abbey" on our phones.
We may be on the precipice of such scalability, he said, with USDC and public blockchains, where people and firms transact the same way that we exchange content and data on the internet.
No matter the type of transaction or the parties involved, he said, “If you can trade with someone as a counterparty anywhere in the world with final settlement in as little as 500 milliseconds, in a way that’s irreversible and secure, that’s better than relying on SWIFT to execute those trades.” That value proposition extends across borders.
Welcome, then, to a digital age concept: the programmability of money.
With innovations such as DeFi (Dcentralized Finance), protocols and software, explained Allaire, combined with the internet can create online lending markets that are not necessarily run by banks. Peer-to-peer (P2P) transactions need only digital wallets and a means of direct communication in order to transact.
“What makes the World Wide Web so great is that there is not a lone company that runs it. It’s a public thing and anyone can plug into it,” said Allaire. “By building on the open internet there are incredible, inherent network effects.” To date, he told Webster, more than 500 companies have built apps and services that connect over the internet to and integrate with USDC for transactions — and meet money laundering and regulatory requirements in the process.
Through the use of digital wallets, “I could send USDC to someone in Korea and they have a way to convert it instantly into Korean Won,” he said. “Or I could send money to someone in Argentina and they could covert it instantly to Mercado Pago, digital cash — and they could send it along to someone else. These nodes are growing quickly.”
To get critical mass, though, he said it’s important for the large consumer FinTech firms to embrace USDC — which would increase the network effect significantly.
The Rising Volumes
The pandemic economy, with increased counterparty risk and increasing volatility of reserve currencies, has supercharged the global appetite for digital dollars. In addition, the meteoric rise of internet lending markets has added rocket fuel to the trend, with Allaire estimating that there is as much as $10 billion in funds that are locked up in those lending contracts that are, in turn, growing at triple-digit percentage rates. And in just the past two months, USDC has grown from to more than 1.8 billion market cap representing a more than 430 percent growth since the start of 2020.
Digital currencies such as USDC represent an attractive store of value (just as the dollar is an attractive store of value), said Allaire, that may be attractive to people and companies internationally in an age where governments globally are printing money and debt is rising.
“The money-printing machine is going at record rates,” said Allaire. “And not everyone has the full faith and credit of the United States economy and government behind them. Instead, it may be the full faith and credit of the South African government — pick your country or government around the world — and, essentially digital dollars can be an alternative to local currency.”
The Use Cases
Delving into the use cases, it is useful, as Allaire said, to think of USDC as a “base layer of digital money on the internet, and it can play a lot of roles.”
Among those roles: USDC can support market infrastructure for traders; USDC can facilitate P2P payments for people in emerging markets who want to transact in dollars; it can be a new way to complete cross-border settlements. Right now, activity is concentrated in a few spheres — amid B2B, said Allaire, and consumers who are looking for yield on dollars (and to grow their savings, too).
Looking ahead, he said, within the next year, “we’re going to see a significant inflection point.” One driver may be the introduction of Facebook’s Libra offering, which may spur more businesses to accept stablecoins as payment.
Major tech, FinTech and internet payments firms are not likely to sit by the sidelines, and are likely to embrace stablecoin standards in the coming year, including USDC.
Allaire emphasized that the public internet infrastructure to support internet-scale payments activity is just now arriving, noting that “You’ll start to see the ability to handle transaction throughput in the tens of thousands of transactions per second, on these public networks. I think that's going to be really critical to being able to support retail scale payment activities,” he predicted.