John Liu, Chief Product Officer of Fusion Foundation, says stablecoins and the technology underlying them will be the building blocks of a more sustainable global financial system.
Whether we are talking about trade and investment or banking and payments, stablecoins and the technology underlying them will be the building blocks of a more sustainable, inclusive, and resilient global financial system. This will require not only interoperability across blockchains, but also interoperability between fiat cash and digital currencies, and between centralized and decentralized systems.
What is a stablecoin?
A stablecoin is a cryptographically signed digital asset recorded on a blockchain, usually backed by some ‘real-world’ asset such as a fiat currency or commodity. This is intended to provide price stability, so that the stablecoin can be used as a digital store of value and/or medium of exchange.
Global financial imbalance
One of the major ways in which stablecoins could contribute towards a more resilient global economy is by tempering some of the potential threats posed by the US dollar’s (USD) domination of global foreign currency reserves.
Foreign currency reserves are often accumulated by countries through trade and play an important role for central banks in stabilizing the value of their national currency. According to the IMF, the US dollar (USD) accounted for 62% of all foreign reserves held by central banks in the first quarter of 2019, while US GDP accounted for 15% of global GDP.
USD reserves are usually held by central banks in the form of US government bonds, and are thus removed from circulation. This relentless flow of USD into US government bonds has kept US interest rates lower for longer and pushed the country’s debt and GDP to levels not seen since the Second World War. A global scarcity of USD creates major headwinds for US exporters, widening the trade deficit and pressuring economic growth.
As we saw during the 2008 global financial crisis, a major political or economic disturbance can drive investors headlong into USD-denominated ‘safe assets’ and create a global liquidity crunch. Without another massive round of quantitative easing, a flight into USD could quickly drain remaining global liquidity and cause cascading effects across the global financial system.
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