Stablecoins have had their ups and downs, but it’s clear that they are one of the biggest cryptocurrency success stories 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 transfer more than $275 trillion of value around the world.
However, there are signs that the US dollar’s status as the global reserve currency is eroding, and that could have major consequences for the stablecoin economy, given that its main tokens are pegged to its value.
This year, the dollar has seen a significant drop, losing around 11% in value, its biggest drop in more than 50 years. This instability is driven by uncertainty around the United States’ economic policies and its rapidly increasing and staggering debt, which now stands at a whopping $38 trillion. The United States continues to print dollars, but in the meantime global economic value is shifting elsewhere.
The BRIC countries, for example, have rejected the dollar in favor of a blockchain-based payments system that allows them to trade in their own digitized currencies. Both China and Japan have recently announced plans to use their own currencies instead of the dollar. China, in particular, has been pushing hard for the yuan to become a more prominent international currency, and it is now the fourth most used in global payments. More than 30% of China’s global trade is settled in yuan, and a digital stablecoin 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 fading prestige of the dollar. Confidence in the US currency is eroding dramatically, and that begs the question: what will happen to stablecoins that use it as a peg? Currently, the stablecoin market is dominated by Tether’s USDT, which is ranked as the third most valuable cryptocurrency overall with a market capitalization of $183.3 billion, more than double the value of Circle’s USDC at $75.9 billion. Together, USDT and USDC represent 93.8% of the total stablecoin market capitalization.
Its dependence on a US dollar that is rapidly losing its influence could ultimately undermine major players in the stablecoin market, and there are also concerns about the wisdom of entrusting two private companies with the custody of so much stablecoin value. Tether has long been criticized for a lack of transparency in its reserves. While the company claims that every USDT in circulation is backed 1:1 by US dollars, it has not yet allowed any reputable accounting firm to conduct a full audit of these holdings, although it is reportedly in talks with one of the Big Four auditors about such a possibility.
As for Circle, the question is whether it is big enough to step up and replace Tether. It lacks the deep pockets of its biggest rival and also does not appear to have the same level of appeal within the broader crypto community. Add to this the fact that both companies are heavily invested in the US dollar, and it is 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 stablecoin whose value is pegged to a real-world physical reserve of gold, using ancient Bretton Woods principles. The world’s largest nations could easily create such a stablecoin. The total value of physical gold reserves held by central banks is believed to exceed $7.5 trillion, and the United States controls only a fraction of it. For example, Australia and Russia have accumulated gold reserves estimated at around $1.68 trillion, while South Africa, Indonesia, Canada and China have reserves larger 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, offering greater stability during periods of economic uncertainty. Gold has always been investors’ favorite safe haven and is widely recognized as a resilient store of value. A gold-backed stablecoin 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 volatile local currencies that are subject to the whims of untrustworthy governments. This would give investors more confidence to invest in these underdeveloped economies, safe in the knowledge 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 possesses enough strength to create the world’s next reserve currency. Only governments or the world’s richest hedge funds and private banks could achieve it. And it could happen sooner than people 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 stablecoin, backed by the African nation’s vast mineral wealth. In a press release, Promax United group president Louai Mohamed Ali said the Burkina Faso government plans to back a national stablecoin with up to $8 trillion in gold and mineral wealth, made up of both physical holdings and large amounts of proven underground reserves. When launched, it will become Africa’s first resource-backed stablecoin, bringing most of the country’s wealth onto the chain as part of an ambitious plan to catalyze economic growth.
Promax and the government of Burkina Faso have the resources and connections to make this gold-backed stablecoin a reality, and are also interested in getting more nations involved. They say they are holding “advanced discussions” with several other African states. The partners said they aim to reduce Africa’s dependence on the US dollar and unlock trade, infrastructure financing and macroeconomic stability through transparent asset-backed digital currencies. They have timed their move perfectly. With all the recent rumors about the so-called “downgrade trade” increasing pressure on the US 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 by an alternative blockchain-based financial system for years, but it has always been motivated by idealistic reasons. However, as the US dollar approaches the abyss, the shift to a stablecoin-based monetary system backed by real gold is becoming, more than ever, a matter of necessity.
