Background on Bitcoin
The appeal around Bitcoin and other floating cryptocurrencies is undeniable. A $10,000 investment in Bitcoin on January 1, 2017 grew to over $400,000 by March 20, 2022. One reason Bitcoin is so valuable is because there’s a limited supply—the last coins are expected to be mined in 2140. Miners must compete to solve a complex math problem and processors required consume enormous amounts of electricity. It’s a difficult and expensive process. Demand is driven by the prospect of profitable trades but also, I believe, by the appeal of immediate peer-to-peer, global transactions with no fees and almost absolute privacy. This privacy does not mean that transactions are not traceable—they are easier to trace than cash fiat transactions. Tracing technology used by the IRS and other government agencies is improving and many experts believe that targeting the Bitcoin market is a poor choice for fraudsters.
Why do we need a cryptocurrency that’s more stable than Bitcoin?
With the global proliferation of Bitcoin, why have a cryptocurrency that is structured differently—for example, tied to a fiat currency, such as the U.S. dollar? There are several reasons for a U.S. dollar-backed stablecoin, which extend crypto’s reach beyond speculative investment and trading. In fact, I’d argue a stablecoin would further cryptocurrency’s intent to “democratize” money systems.
- Value for “underbanked” communities—A U.S.-regulated stablecoin could have substantial value for underbanked communities throughout the country, where people have difficulty opening and maintaining bank accounts. The U.S. government could cryptographically mint and algorithmically control the supply of a U.S. dollar stablecoin that could be held in a cryptocurrency wallet accessed via a laptop or a smart phone. For those who have no internet access, “cold” stablecoin wallets could be distributed by the U.S. government, providing a way for those in need to access funds, goods or services through ATMs or POS terminals. Transactions on the blockchain are immutable and not readily susceptible to fraud, making funds delivery through blockchain a secure method of funds distribution. Bitcoin, on the other hand, would not be an attractive way to assist underbanked individuals, as it has behaved like a speculative investment and trading vehicle, and the inherent volatility of Bitcoin makes it impractical as stable method of payment.
- Distribution of funds during crisis events—During hurricanes, tornadoes, floods, etc., distribution of needed funds could be accomplished faster and more efficiently than is the case through the current banking funds transfer systems. Funds needed to see victims through difficult times when they are cut off from essential resources could help save lives. The ability to accomplish immediate funds distribution would also have global implications, as access to smart phones and laptops in underdeveloped nations, hopefully, improves in the coming years.
- Continue to stop fraud— Blockchain is proving to be a secure method for distributed transactions and evolving technology is making it more difficult for nefarious players to perpetrate cryptocurrency fraud, and the development of a U.S. stablecoin could further these efforts.
U.S. government involvement in developing stablecoin
On March 9, 2022, President Biden signed an executive order requiring various government agencies to work together to develop policy approaches for and recommend legislation regarding a U.S. dollar cryptocurrency. (There are currently stablecoins that reflect the value of the U.S. dollar, but these instruments are not issued—cryptographically minted—or fully backed by the U.S. government.) The studies requested by the President will take six to nine months to complete and a legislative proposal from the White House is not likely until the back-half of 2023. However, in my opinion, this is a first step in the right direction.
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