We’re All in a Learning Curve: Stablecoins and the Future of Money

It’s a very special person who believes in the power of cryptocurrency. Arguably, these believers are rich venture capitalists, libertarian ideologues—or simply hard-working people who understand the risks of putting all of their cash into centralized institutions. 

Enter stablecoins: a type of crypto coin that’s pegged to the value of an external asset—in most cases a fiat currency like the U.S. dollar or Euro, or a commodity like gold. Stablecoins allow people to exchange value without the volatility associated with Bitcoin and other altcoins while still benefiting from the privacy, transparency and efficiency that blockchain-based currencies provide.

“My perspective is to be ready for any global economic change,” Manuel Cáceres del Castillo, a Spanish language director at an Episcopal school in Ellicott City, Maryland who pays his bills with stablecoins using a prepaid crypto debit card, recently told us. “It’s survival mode. If something happens with the dollar, we need to be ready.”

But depending on who you talk to, stablecoin proponents may be seen as shadowy, shady figures. Even William Quigley, the ex-founder of Tether (USDT)—the most popular stablecoin by market capitalization—has criticized the company’s current leadership, saying on record that stablecoins have the potential to become their “own worst enemy.” While stablecoins are typically backed 1:1 with reserves of the asset they're pegged to, they run the risk of growing too big for their britches and, therefore, sometimes fail to keep sufficient reserve assets.

So what gives? And given that stablecoins have only been around since 2014, how are U.S. regulators responding to this new kid on the block? Let’s dive into the nuance of the stablecoin debate and try to understand the beef.

Interestingly, the people who currently see the biggest benefit in crypto either have a lot of money or they’ve been around the world a few times and know what it’s like to feel stuck. Or maybe both.

Consider Manuel, the elementary school administrator, and his brother David, a public servant for the city of Helsinki, Finland. The two burgeoning crypto enthusiasts immigrated from their native El Salvador to two distinct countries and now live on opposite sides of a major ocean. Manuel, who lives in the U.S., and David, who lives in Finland, have had to solve problems like how to send money to relatives in other countries and how to manage their finances during months-long visits abroad.

Not to mention, they’ve witnessed the invasion of foreign fiat currency. The colón was the currency of El Salvador from 1892 until 2001, when it was replaced by the U.S. dollar following the country’s civil war between 1980 and 1992. For decades, El Salvador was unable to print its own currency, but the country recently made history for being the first government to designate Bitcoin as legal tender. Salvadorans with a valid government ID—even those living abroad as permanent or dual residents in certain countries—can now open up a Bitcoin app and theoretically send money to one another directly, eliminating the need for costly app-based money sending platforms.

“It’s a really easy way to send money,” remarked David. “It’s better than Remitly or PayPal or Venmo, or any of the money sending applications, because it's instant and it has no fees.”

And Quigley, a long-time blockchain investor of over 25 years—who is even credited as one of PayPal’s first institutional investors—told us he couldn’t agree more.

Anything that presents the possibility of great change is scary—even if that change could bring faster, cheaper and less complicated financial transactions that allow the freedom to send money wherever you please.

Crypto mass adoption is therefore a few good years away, at least. Call it a sheltered point of view (Quigley does) but unless you are dealing with a specific, money-related pain point, you could go the rest of your life adequately satisfied by banking at your local Wells Fargo and paying 3% foreign transaction fees during your one-off vacation to Niagara Falls.

“It is such a U.S.-centric mindset,” Quigley says. “People are like, ‘well I can use PayPal, I can use Venmo, I can use my credit card—why would I ever need a Bitcoin, let alone a stablecoin?”

But the WAX co-founder asks: “Have you ever had to wake up five times a week hoping the bank doesn't seize your cash? Hoping the country doesn't devalue your currency or see your country issuing new currency that is worth 1/25 of what it was before?” And while cryptocurrencies like Bitcoin may be just as volatile, stablecoins are designed to hold a stable value over time.

“People have this extraordinary, in my view, misunderstanding of payments,” says Quigley. “For instance, most people believe that when you send a payment through an app or through a bank that the money instantly arrives because they see that it's credited to them. And nothing could be further from the truth.”

In actuality, Quigley explains, it takes at least a day or two of cross-border transactions before that cash actually winds up where you intended for it to go. Along the way, the centralized institutions doing the heavy lifting access our data and take their piece of the pie.

“What payment processors and financial institutions have done is created this fiction, and it makes it look like we're moving money digitally from point A to point B—but that is just not the case.”

Unfortunately, consumers aren’t the only ones who don’t fully grasp how stablecoins could arguably revolutionize our payments.

Legislators, including Elizabeth Warren, have complained that stablecoins prop up shady actors and put consumers at risk. And last July, U.S. Department of the Treasury Secretary Janet Yellen urged legislators to act fast to clamp down on unsupervised stablecoin activity.

“They're concerned,” Quigley says. “I just wish they would get deeper into it.”

One major criticism from legislators in Elizabeth Warren’s camp is the lack of clarity regarding what assets are actually backing stablecoins. When Tether, for instance, was founded, the model was simple: a 1:1 ratio of dollars to stablecoins. However, that’s since changed. Stablecoins can now use computer algorithms to link the value of the cryptocurrency to the value of fiat currency, explains Quigley, which poses a potential problem. Consumers can’t trade $10 of stablecoins for $10 of USD anymore, Warren argued during a December 14 Senate Banking, Housing, and Urban Affairs Committee hearing. And she’s not exactly wrong.

“What Tether has done now is they have a certain quantity of the outstanding Tether held in fiat and then a certain quantity held in liquid marketable securities,” Quigley says. “They periodically disclose the mix.”

This reality makes legislators nervous, and one could argue that using stablecoins is simply transferring our reliance on banks to a reliance on a blockchain-based entity that nobody understands. (Call banks corrupt, but at least we get how they work.)

But crypto enthusiasts in Quigley’s camp consider Warren’s notion of trading in one’s crypto for fiat unrealistic. There’s never going to be a moment when everybody wants to cash out all at once, he says.

“It’s a preposterous notion,” argues Quigley. “Because if everyone who has an iPhone Model 13 wanted to switch back to a rotary dial phone, I assume they would be, what we call in the vernacular, ‘locked in’—they couldn't switch back. But why would we want to go from the internet back to sending mail via the Post Office?”

Moreover, when people want to swap out their Tether, they’re not all going to want USD in return.

Using a crypto exchange, consumers can instantly trade out of Tether or their respective stablecoin and into another crypto of their choice. There’s also the possibility to invest in arguably safer stablecoins like USD Coin (USDC) and Dai (DAI).

And then comes the issue of national security—aka how stablecoins impact the global value of the U.S. dollar.

Countries around the world are starting to create their own government-backed versions of stablecoins, known as central bank digital currencies (CBDCs). Unfortunately, the U.S. is already behind countries such as China, said Conor Carney, legislative director for Rep. Lee Zeldin (R-NY.), in a December panel at DeFiCon, a blockchain event in Brooklyn, N.Y.

“Other countries are developing their own CBDCs at a faster rate than the U.S., which could be an issue for both national security and global trade,” he said in the panel. The U.S. could lose global influence, he argued, if we don’t permit—or even encourage—the private development of stablecoins.

“The United States, given the way we finance our budget every year with a deficit, is very reliant upon the U.S. dollar being the global reserve currency,” Carney said.

You might be wondering, after all this theory, how do people use stablecoins—like, in real life?

One popular method is by signing up for a prepaid crypto debit card through a platform like Gemini.

That’s how the Cáceres brothers use the stablecoin USDC to pay their bills and, consequently, earn rewards in the form of more crypto.

“I get my salary as usual in my bank account like normal,” David explains. “And then from there, I move every month maybe like 500 euros or $600 USD—something like that. I buy stablecoins straight away, so USDC, and then from there move it onto my Crypto.com Visa card.”

So the same way you pay the Netflix bill with a debit or credit card, you can do it with stablecoins via a crypto debit card, without all the volatility associated with Bitcoin. And with the Crypto.com card, you also have the option of staking DeFi coins for the chance to earn higher tiered membership options, like a free Amazon Prime subscription.

It’s a trade-off, for sure: On one hand, you have to learn a new skill and reevaluate your relationship with how money works in order to hop aboard the stablecoin train. But crypto lovers and decentralization evangelists argue that the process of taking ownership over your money leads to more freedom and, at the very least, fewer fees—something most of us can agree on.

No matter how we’re introduced to cryptocurrency, the potential benefits stand to improve consumer lives in a multitude of ways, assuming we can all get over the learning curve and discuss the practical hurdles like grown-ups.