The US dollar is king.
This is a point that is contested by many. My view is this is done by people who are following either some ideology that isn't based on history or wishful thinking.
Either way, they keep espousing the same thing for decades. I started to hear about this in the early 1990s. We are now closing in on 35 years and the dollar is only asserting more dominance.
Stablecoins are only going to enhance this. We are seeing the overwhelming majority of that market being swallowed up by dollars. It is the USD denomination that is dominating.
This could change of course. In fact, some are hopeful it will. We see articles coming out of the EU that they are accelerating the rollout of the CBDC euro in an effort to fend off the lose of monetary relevance.
The challenge with this view is that I don't think there is much there to begin with. When I look at the euro, it is nothing more than a regional currency. Outside the EU, who has utilized it?
Nevertheless, this is bleeding into the stablecoin world.
Multicurrency Stablecoins: Threat To Dollar Dominance?
China and Japan are right there with the EU with regards to getting into the on-chain game. The yen and yuan are also currencies that many want to enter the marketplace.
There is little doubt we are going to see this move. Actually, China was one of the leaders when it comes to CBDC rollout. Japan was also a country that made some advanced progress, moving to multiple rounds of testing before shelving the idea.
What is central to this discussion if the fact that the market is telling us exactly what is taking place. We can look at FOREX trading to see what is transpiring. Almost 90% of all pairs are USD. That is an overwhelming percentage. Then, if we go one step further, 75% of the FOREX Derivatives (FEDs) are USD denominated.
This is the hill that these other currencies are looking at climbing.
The Network Effects Only Favor The Dollar
One of the keys when discussing currency is the fact that it is digital. We are looking at 99% of all transactions occurring without the use of banknotes. The analog world died decades ago.
Here we have the law of information technology taking over. The same principles that apply to other aspect of the internet also pertain to currency. If we look online, that means network effects.
There is a reason why Facebook, Amazon, and YouTube still dominate. The same is true for Google Search. In spite of many other alternatives and "killers" over the years, they were nothing more than a blip.
Brent Johnson started to talk about his "Milkshake Theory" a few years go. He believes the US dollar will such the value out of other currencies, similar to someone putting a straw in another's milkshake and drinking it.
This makes sense when talking to people from second and third world nations. Once you leave the major economic zones, you have large groups of people who are use to the dollar. Many have dealt in banknotes, or desire to. When looking at the local currencies, the dollar is far superior.
Of course, stablecoins turns this digital. Now, anyone with a smart phone can get a hold of USDT or USDC. This means that dollar denominated assets are available to anyone with a smartphone.
What does this do? Naturally, it only produces greater network effects for the US dollar.
Derivatives
When it comes to financial buildout, infrastructure is crucial. We are already seeing this happening with USD denominated digital assets.
There is another important component to this. When we look at the financial world, another advantage to the dollar is the ability to move into different forms of "money". Since there are different players, we see money change state, similar to water. It can exist as steam, water, or ice.
Money can come in the form of Treasuries, cash, numbers on a screen, or derivatives. It all depends upon what market one is focusing upon. One does not enter the Eurodollar system with cash. It is not accepted there for obvious reasons.
By the same token, one cannot pay for groceries using T-bills. Again, the reasoning is clear.
Nevertheless, T-bills, cash, and numbers on the screen serve the same purpose depending on the arena. This is where the dollar is enjoying another set of network effects.
As we expand the world of DeFi, the path is clear. People will keep building USD denominated products. Interest rates are already being applied to US dollar, on-chain products. It is only a matter of time before swaps are offering allowing for speculation.
Derivatives add to the impact of a currency. As mentioned 75% of the $16 trillion FED market is USD. That is another $12 trillion in assets that are USD denominated, tied directly to currency hedging.
That means the rest of that market, combined, only amounts to 1/3 that of the dollar.
The digital world already spoke. Crypto is simply another step in the evolution of this process. Since the trend is in place, it is hard to go against it.
For half a century people have railed against the dollar. Yet, somehow, in spite of their endless calls for its demise, it only gets more dominant.
A digital euro, yen or yuan is not going to change this.
Posted Using INLEO