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Author: Christian Hsieh, CEO of Tokenomy
This paper examines some explanations for the continual global market demand for the U.S. dollar, the rise of stablecoins, and the utility and opportunities that crypto dollars can offer to both the cryptocurrency and traditional markets.
The U.S. dollar, dominant in world trade since the establishment of the 1944 Bretton Woods System, is unequivocally the world’s most demanded reserve currency. Today, more than 61% of foreign bank reserves and nearly 40% of the entire world’s debt is denominated in U.S. dollars1.
However, there is a massive supply and demand imbalance in the U.S. dollar market. On the supply side, central banks throughout the world have implemented more than a decade-long accommodative monetary policy since the 2008 global financial crisis. The COVID-19 pandemic further exacerbated the need for central banks to provide necessary liquidity and keep staggering economies moving. While the Federal Reserve leads the effort of “money printing” and stimulus programs, the current money supply still cannot meet the constant high demand for the U.S. dollar2. Let us review some of the reasons for this constant dollar demand from a few economic fundamentals.
Demand for U.S. DollarsFirstly, most of the world’s trade is denominated in U.S. dollars. Chief Economist of the IMF, Gita Gopinath, has compiled data reflecting that the U.S. dollar’s share of invoicing was 4.7 times larger than America’s share of the value of imports, and 3.1 times its share of world exports3. The U.S. dollar is the dominant “invoicing currency” in most developing countries4.
This U.S. dollar preference also directly impacts the world’s debt. According to the Bank of International Settlements, there is over $67 trillion in U.S. dollar denominated debt globally, and borrowing outside of the U.S. accounted for $12.5 trillion in Q1 20205. There is an immense demand for U.S. dollars every year just to service these dollar debts. The annual U.S. dollar buying demand is easily over $1 trillion assuming the borrowing cost is at 1.5% (1 year LIBOR + 1%) per year, a conservative estimate.
Secondly, since the U.S. has a much stronger economy compared to its global peers, a higher return on investments draws U.S. dollar demand from everywhere in the world, to invest in companies both in the public and private markets. The U.S. hosts the largest stock markets in the world with more than $33 trillion in public market capitalization (combined both NYSE and NASDAQ)6. For the private market, North America’s total share is well over 60% of the $6.5 trillion global assets under management across private equity, real assets, and private debt investments7. The demand for higher quality investments extends to the fixed income market as well. As countries like Japan and Switzerland currently have negative-yielding interest rates8, fixed income investors’ quest for yield in the developed economies leads them back to the U.S. debt market. As of July 2020, there are $15 trillion worth of negative-yielding debt securities globally (see chart). In comparison, the positive, low-yielding U.S. debt remains a sound fixed income strategy for conservative investors in uncertain market conditions.
Last, but not least, there are many developing economies experiencing failing monetary policies, where hyperinflation has become a real national disaster. A classic example is Venezuela, where the currency Bolivar became practically worthless as the inflation rate skyrocketed to 10,000,000% in 20199. The recent Beirut port explosion in Lebanon caused a sudden economic meltdown and compounded its already troubled financial market, where inflation has soared to over 112% year on year10. For citizens living in unstable regions such as these, the only reliable store of value is the U.S. dollar. According to the Chainalysis 2020 Geography of Cryptocurrency Report, Venezuela has become one of the most active cryptocurrency trading countries11. The demand for cryptocurrency surges as a flight to safety mentality drives Venezuelans to acquire U.S. dollars to preserve savings that they might otherwise lose. The growth for cryptocurrency activities in those regions is fueled by these desperate citizens using cryptocurrencies as rails to access the U.S. dollar, on top of acquiring actual Bitcoin or other underlying crypto assets.
The Rise of Crypto DollarsDue to the highly volatile nature of cryptocurrencies, USD stablecoin, a crypto-powered blockchain token that pegs its value to the U.S. dollar, was introduced to provide stable dollar exposure in the crypto trading sphere. Tether is the first of its kind. Issued in 2014 on the bitcoin blockchain (Omni layer protocol), under the token symbol USDT, it attempts to provide crypto traders with a stable settlement currency while they trade in and out of various crypto assets. The reason behind the stablecoin creation was to address the inefficient and burdensome aspects of having to move fiat U.S. dollars between the legacy banking system and crypto exchanges. Because one USDT is theoretically backed by one U.S. dollar, traders can use USDT to trade and settle to fiat dollars. It was not until 2017 that the majority of traders seemed to realize Tether’s intended utility and started using it widely. As of April 2019, USDT trading volume started exceeding the trading volume of bitcoina12, and it now dominates the crypto trading sphere with over $50 billion average daily trading volume13.
An interesting aspect of USDT is that although the claimed 1:1 backing with U.S. dollar collateral is in question, and the Tether company is in reality running fractional reserves through a loose offshore corporate structure, Tether’s trading volume and adoption continues to grow rapidly14. Perhaps in comparison to fiat U.S. dollars, which is not really backed by anything, Tether still has cash equivalents in reserves and crypto traders favor its liquidity and convenience over its lack of legitimacy. For those who are concerned about Tether’s solvency, they can now purchase credit default swaps for downside protection15. On the other hand, USDC, the more compliant contender, takes a distant second spot with total coin circulation of $1.8 billion, versus USDT at $14.5 billion (at the time of publication). It is still too early to tell who is the ultimate leader in the stablecoin arena, as more and more stablecoins are launching to offer various functions and supporting mechanisms. There are three main categories of stablecoin: fiat-backed, crypto-collateralized, and non-collateralized algorithm based stablecoins. Most of these are still at an experimental phase, and readers can learn more about them here. With the continuous innovation of stablecoin development, the utility stablecoins provide in the overall crypto market will become more apparent.
Institutional DevelopmentsIn addition to trade settlement, stablecoins can be applied in many other areas. Cross-border payments and remittances is an inefficient market that desperately needs innovation. In 2020, the average cost of sending money across the world is around 7%16, and it takes days to settle. The World Bank aims to reduce remittance fees to 3% by 2030. With the implementation of blockchain technology, this cost could be further reduced close to zero.
J.P. Morgan, the largest bank in the U.S., has created an Interbank Information Network (IIN) with 416 global Institutions to transform the speed of payment flows through its own JPM Coin, another type of crypto dollar17. Although people argue that JPM Coin is not considered a cryptocurrency as it cannot trade openly on a public blockchain, it is by far the largest scale experiment with all the institutional participants trading within the “permissioned” blockchain. It might be more accurate to refer to it as the use of distributed ledger technology (DLT) instead of “blockchain” in this context. Nevertheless, we should keep in mind that as J.P. Morgan currently moves $6 trillion U.S. dollars per day18, the scale of this experiment would create a considerable impact in the international payment and remittance market if it were successful. Potentially the day will come when regulated crypto exchanges become participants of IIN, and the link between public and private crypto assets can be instantly connected, unlocking greater possibilities in blockchain applications.
Many central banks are also in talks about developing their own central bank digital currency (CBDC). Although this idea was not new, the discussion was brought to the forefront due to Facebook’s aggressive Libra project announcement in June 2019 and the public attention that followed. As of July 2020, at least 36 central banks have published some sort of CBDC framework. While each nation has a slightly different motivation behind its currency digitization initiative, ranging from payment safety, transaction efficiency, easy monetary implementation, or financial inclusion, these central banks are committed to deploying a new digital payment infrastructure. When it comes to the technical architectures, research from BIS indicates that most of the current proofs-of-concept tend to be based upon distributed ledger technology (permissioned blockchain)19.
These institutional experiments are laying an essential foundation for an improved global payment infrastructure, where instant and frictionless cross-border settlements can take place with minimal costs. Of course, the interoperability of private DLT tokens and public blockchain stablecoins has yet to be explored, but the innovation with both public and private blockchain efforts could eventually merge. This was highlighted recently by the Governor of the Bank of England who stated that “stablecoins and CBDC could sit alongside each other20”. One thing for certain is that crypto dollars (or other fiat-linked digital currencies) are going to play a significant role in our future economy.
Future OpportunitiesThere is never a dull moment in the crypto sector. The industry narratives constantly shift as innovation continues to evolve. Twelve years since its inception, Bitcoin has evolved from an abstract subject to a familiar concept. Its role as a secured, scarce, decentralized digital store of value has continued to gain acceptance, and it is well on its way to becoming an investable asset class as a portfolio hedge against asset price inflation and fiat currency depreciation. Stablecoins have proven to be useful as proxy dollars in the crypto world, similar to how dollars are essential in the traditional world. It is only a matter of time before stablecoins or private digital tokens dominate the cross-border payments and global remittances industry.
There are no shortages of hypes and experiments that draw new participants into the crypto space, such as smart contracts, new blockchains, ICOs, tokenization of things, or the most recent trends on DeFi tokens. These projects highlight the possibilities for a much more robust digital future, but the market also needs time to test and adopt. A reliable digital payment infrastructure must be built first in order to allow these experiments to flourish.
In this paper we examined the historical background and economic reasons for the U.S. dollar’s dominance in the world, and the probable conclusion is that the demand for U.S. dollars will likely continue, especially in the middle of a global pandemic, accompanied by a worldwide economic slowdown. The current monetary system is far from perfect, but there are no better alternatives for replacement at least in the near term. Incremental improvements are being made in both the public and private sectors, and stablecoins have a definite role to play in both the traditional and the new crypto world.
 How the US dollar became the world’s reserve currency, Investopedia
 The dollar is in high demand, prone to dangerous appreciation, The Economist
 Dollar dominance in trade and finance, Gita Gopinath
 Global trades dependence on dollars, The Economist & IMF working papers
 Total credit to non-bank borrowers by currency of denomination, BIS
 Biggest stock exchanges in the world, Business Insider
 McKinsey Global Private Market Review 2020, McKinsey & Company
 Central banks current interest rates, Global Rates
 Venezuela hyperinflation hits 10 million percent, CNBC
 Lebanon inflation crisis, Reuters
 Venezuela cryptocurrency market, Chainalysis
 The most used cryptocurrency isn’t Bitcoin, Bloomberg
 Trading volume of all crypto assets, coinmarketcap.com
 Tether US dollar peg is no longer credible, Forbes
 New crypto derivatives let you bet on (or against) Tether’s solvency, Coindesk
 Remittance Price Worldwide, The World Bank
 Interbank Information Network, J.P. Morgan
 Jamie Dimon interview, CBS News
 Rise of the central bank digital currency, BIS
 Speech by Andrew Bailey, 3 September 2020, Bank of England
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Behind each achievement at any company are people. Azbit’s success story would not have been possible without the pool of gifted minds - those who are taking the project to a qualitatively new level. The team’s and advisors’ extensive experience, authority, knowledge, and impeccable record are our prime capital (literally crown jewels) and pride.
The following are major achievements of professionals engaged in project’s development:
Roger Ver (Advisor)
“Bitcoin Jesus” is a person who clearly needs no introduction. He is founder & CEO of Bitcoin.com, bitcoin evangelist and angel investor. In 2018 he was ranked number 36 in Fortune’s The Ledger 40 under 40 for transforming business at the leading edge of finance and technology. Since 2011 Roger Ver took part in successful projects, including Bitpay, Ripple, Blockchain.info, Kraken, Coinsetter.
Mate Tokay (Advisor)
Mate Tokay manages the top source in the world of Bitcoin - Bitcoin.com.
Giovanni Lesna Maranetto (Advisor)
Giovanni is a blockchain strategist, entrepreneur, speaker, and, the icing on the cake, a top 30 ICOBench Advisor.
Max Zmitrovich (CEO, co-founder)
His latest projects include participation and directing business development of projects around the world, to include cryptocurrency exchange and international trading companies Veles Limited, Poliphone SIA, largest UK estate agency Connells, manufacturing company EELL, Rivera.
Michael Yermolitski (Co-Founder)
Michael Yermolitski is a holder of a $1,500,000 crypto portfolio. Head of a group of companies in the B2B and B2C sphere.
Prof. Alex Siow (Enterprise Risk Manager)
He has a fundamental 38-year experience in the sphere of Strategic Planning and IT. Alex Siow was at the forefront of the IT sphere development and has become a living legend of the Asian business community. He is a Professor in the National University of Singapore.
Azam Khodzhaev (Chief Communications Officer)
Azam Khodzhaev is Eastern Europe’s No. 1 thought leader in the crypto and mining sphere. He is an independent advisor to the Russian government on blockchain.
Andy Yeo (Blockchain Lawyer, AML-specialist)
An authoritative analytical portal, Global Investigations Review, featured Andy Yeo as one of the leading AML experts. He is a top-pro in the area of securities and banking regulatory compliance.
Elena Certa (Advisor)
She is Director, FSA Direct Access Clients at Bank J. Safra Sarasin Ltd (Switzerland). Elena has over 11 years of experience in trading in capital markets focusing on FX, commodities and interest rates.
Mickey Choi (Advisor)
Mickey Choi is a prominent representative of the Korean private investor community with 11 years of financial experience. He was honored by a special award at 2018 Global 100 and received a merit of recognition in the New Technology Innovation Target category.
Sergei Ermolitski (Head of Operations, co-Founder)
Sergei Ermolitski has extensive experience of cybersecurity for financial IT projects. For a long time, he held the position of CEO at FxCash, the first Forex cashback service in Eastern Europe.
Andrew Rohau (Chief Technology Officer)
Andrew has 17 years’ experience in the development of technical solutions, IT, system architecture, business analysis. Back in the early 2000s, he was at the forefront in designing and implementing computer networks based on technologies of Cisco Systems. Worked with international organizations, including Open Technologies, Huawei Technologies, UNDP, UNICEF, UNHCR.
Stefan Bergström (Business Strategic Advisor)
He invested in nearly two dozen tech start-ups. Stefan Bergström is strategist and business consultant at a number of companies and successful blockchain projects, including CoinAnalyst, MapCoin, Aimedis, Ufity SA, Sidera Blockchain Technologies, NOBAR, Netscouters International, TokenMatch.
Yulia Gushchina (VP of Sales and Partnership)
Yulia has deep knowledge in the sphere of business relations psychology, international and diplomatic relations with top level businesses and State local Government customers. Prior to joining Azbit, she has worked in Strategic Development at Huawei Technologies Co.Ltd.
Pavel Kalashnikau (Advisor)
He is co-Founder and director of FxCash, one of the leading forex cashback services.
Lam Riki Pham (Head of Strategic Planning)
Lam is a highly experienced leader in financial industry with over 10 years’ experience. He has been working with the State Bank of Vietnam as a Government Officer for Strategy planning for the banking industry.
Dmitry Gursky (Chief Business Development Officer)
Independent blockchain consultant to the government of the Russian Federation and the CIS countries. Dmitry Gursky participated in the release of the first projects with Security Tokens
Alex Moroz (Chief Marketing Officer)
Alex developed his own exclusive methodology for ensuring an effective promotion system, which he has successfully applied in several Fintech startups.
Max Seluk (Advisor)
Max Seluk is CEO of KMA.biz, one of the biggest partner networks in the field of banking, finance, retail and e-commerce.
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