Meganets by David B. Auerbach

Author:David B. Auerbach [B., David Auerbach]
Language: eng
Format: epub
Publisher: PublicAffairs
Published: 2023-03-14T00:00:00+00:00

Bitcoin may be optimally positioned to become the preferred currency for global trade. It is immune from both fiscal and monetary policy, avoids the need for cross-border foreign exchange (FX) transactions, enables near instantaneous payments, and eliminates concerns about defaults or cancellations as the coins must be in the payer’s wallet before the transaction is initiated.33

In other words, Citi GPS saw cryptocurrency as providing an avenue to attaining the deregulated, laissez-faire world that global finance wished for, a means around the obstacles put in its path by uncooperative governments and international organizations like the WTO and the World Bank. In particular, Citi GPS stressed the growth of cryptocurrency in Africa among migrant workers and small businesses, reaching over half a billion dollars in transactions in 2020. The intrinsic security and global reach of cryptocurrency allowed for technology to do an end run around the local, inefficient, and frequently corrupt institutions that controlled flows of money in Africa and other third-world nations.

Citigroup’s optimistic scenario, however, relied on one particular breed of cryptocurrency, called a stablecoin, acting as a dampening force on the wild swings of cryptocurrency meganets. Stablecoins, in theory, act as a bridge between cryptocurrencies and the state-backed money (termed fiat currency) that we use every day. There is an old saying in linguistics that a language is a dialect with an army. Analogously, a currency is an IOU with an army: the validity of the money ultimately depends on the ability of the government to enforce the value of that money—one way or another. The weaker the government’s financial security and clout, the weaker the currency. The absence of any such guarantor in cryptocurrencies is one of the many reasons why they are so volatile and risky, feeling more like an asset than a currency.

The concept behind a stablecoin is that a nongovernmental guarantor provides backing in a traditional currency in order to ensure that the stablecoin cryptocurrency has a fixed exchange rate with that traditional currency, say the US dollar. This was what the third-most popular cryptocurrency Tether promised when it emerged in 2014. Tether was a cryptocurrency with a difference. Though it was built on top of Ethereum and Bitcoin, its owner, Tether Limited (a Hong Kong–based company closely linked with cryptocurrency exchange Bitfinex), architected Tether to be considerably less decentralized, placing itself at the center of the Tether ecosystem. For one, Tether Limited guaranteed from the beginning that any Tether coin (termed a USDT) could be traded in for $1 USD at any time. To control this exchange rate, Tether Limited took control of the supply of USDT. Unlike Bitcoin and Ethereum, Tether was not mined through virtual computational lotteries but minted out of thin air. Only Tether Limited can mint coins, but it can do so with complete freedom. The company can increase the supply to produce inflation or withdraw coins from circulation to create deflation to keep the exchange rate in line with 1 USDT = $1 USD. In effect, Tether Limited set itself up as both the Federal Reserve and the FDIC (Federal Deposit Insurance Corporation) for Tether.

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