Stablecoins have had their ups and downs, but it is clear that they are one of the biggest success stories in crypto so far. While Bitcoin may grab more headlines thanks to its constant ups and downs, stablecoins have become the main workhorse of the decentralized finance ecosystem, helping to move more than $275 trillion in value across the world.
However, there are signs that the US dollar’s status as the world’s reserve currency is eroding, which could have major consequences for the stable economy, given that its major tokens are tied to its value.
This year, the dollar has seen a significant decline, losing around 11% of its value – its biggest decline in more than 50 years. This instability is fueled by uncertainty surrounding US economic policies and the rapid and dizzying increase in debt, which now stands at a colossal $38 trillion. The United States continues to print dollars, but in the meantime, global economic value is shifted elsewhere.
The BRIC countries, for example, have abandoned the dollar in favor of a blockchain-based payment system that allows them to trade in their own digitized currencies. China and Japan recently announced plans to use their own currencies rather than the dollar. China, in particular, has pushed hard for the yuan to become a more important international currency, and it is now the fourth most used currency in global payments. More than 30% of China’s global trade is settled in yuan, and a stable digital currency based on its national currency has been successfully tested in Kazakhstan.
The rise in the value of gold and Bitcoin is another symptom of the dollar’s loss of prestige. Confidence in the US currency is eroding sharply, which begs the question: what will happen to stablecoins that use it as an anchor currency? Currently, the stablecoin market is dominated by Tether’s USDT, which is ranked as the third most valuable cryptocurrency with a market capitalization of $183.3 billion, more than twice the value of Circle’s USDC at $75.9 billion. Together, USDT and USDC represent 93.8% of the total stablecoin market capitalization.
Their reliance on a rapidly losing U.S. dollar could ultimately harm the largest players in the stablecoin market, and concerns also exist about the wisdom of entrusting two private companies with custody of such a high value of stablecoins. Tether has long been criticized for the lack of transparency of its reserves. Although the company claims that every USDT in circulation is backed 1:1 by US dollars, it has yet to authorize any reputable accounting firm to conduct a full audit of these holdings, although it is reportedly in discussions with one of the Big Four auditors about such a possibility.
As for Circle, the question is whether it is big enough to take over and replace Tether. It lacks the deep pockets of its larger rival, nor does it appear to have the same level of appeal within the broader crypto community. Add to that the fact that both companies are heavily invested in the US dollar, and it’s clear that the stablecoin market needs something stronger.
It’s time for gold-backed stablecoins to shine
One possible solution is a new type of stable currency whose value is tied to a physical stock of real gold, using the old Bretton Woods principles. The world’s largest nations could easily create such a stable currency. The total value of physical gold reserves held by central banks is estimated to exceed $7.5 trillion, and the United States controls only a fraction of that. For example, Australia and Russia have accumulated gold reserves estimated at around $1.68 trillion, while South Africa, Indonesia, Canada and China all have larger stocks than those held by the United States.
A stablecoin backed by trillions of dollars in gold reserves could easily threaten the hegemony of the US dollar, providing greater stability in times of economic uncertainty. Gold has always been the preferred safe haven for investors, being widely recognized as a resilient store of value. A stable gold-backed currency could inspire greater confidence among populations, allowing African farmers or businesses in Latin America to pay and receive money backed by real value, rather than being limited to trading in volatile local currencies subject to the whims of unreliable governments. This would give investors more confidence to invest in these underdeveloped economies, reassured that their value will not evaporate in the face of hyperinflation.
The potential value of a gold-backed stablecoin has been recognized by many, including Tether, but no single company has enough power to create the next global reserve currency. Only the world’s richest governments, hedge funds and private banks could achieve this. And it could happen sooner than you think.
In October, Abu Dhabi-based conglomerate Promax United announced a joint venture between one of its subsidiaries and Burkina Faso SEM, the national promotion and investment center of the Burkina Faso government, to create such a stable currency, backed by the African nation’s vast mineral wealth. In a press release, Promax United Group Chairman Louai Mohamed Ali said the government of Burkina Faso plans to support a national stablecoin with gold and mineral wealth of up to $8 trillion, comprised of both physical holdings and vast amounts of proven underground reserves. When launched, it will become Africa’s first resource-backed stablecoin, putting most of the country’s wealth on chain as part of an ambitious plan to catalyze economic growth.
Promax and the government of Burkina Faso have both the resources and connections to make this gold-backed stablecoin a reality, and they also want to get more countries involved. They claim to have “advanced discussions” with a number of other African states. The partners said their goal was to reduce Africa’s dependence on the US dollar and unlock trade, infrastructure financing and macroeconomic stability through transparent, asset-backed digital currencies. They timed their move to perfection. With all the recent chatter around the so-called “dump trade” adding to pressure on the U.S. dollar, there really is no time like the present.
The crypto community has been dreaming of the death of the US dollar and its replacement with an alternative blockchain-based financial system for years, but this has always been driven by idealistic reasons. However, as the US dollar moves closer to the brink, moving to a monetary system based on stablecoins and backed by real gold becomes, more than ever, a matter of necessity.
