Stablecoins have had their ups and downs, but they are clearly one of the biggest success stories of cryptocurrencies so far. Bitcoin may garner a lot of headlines thanks to its constant ups and downs, but stablecoins have emerged as the workhorses of the decentralized finance ecosystem, helping to transfer more than $275 trillion worth of value around the world.
However, there are signs that the US dollar’s status as the world’s reserve currency is being eroded, with potentially significant implications for the stablecoin economy. This is because the top tokens of stablecoins are fixed in their value.
This year, the dollar has experienced a significant depreciation, losing about 11% in value, the largest decline in more than 50 years. This instability is caused by uncertainty surrounding U.S. economic policy and an eye-popping and rapidly increasing debt that currently stands at a whopping $38 trillion. The US continues to print dollars, while the world’s economic value is transferred elsewhere.
For example, BRIC countries are eschewing the dollar in favor of blockchain-based payment systems that allow transactions in digitized national currencies. China and Japan recently announced plans to use their own currencies instead of the dollar. China, in particular, has been keen to promote the renminbi as a more dominant international currency, and it is now the fourth most used payment system worldwide. More than 30% of China’s global trade is settled in renminbi, and Kazakhstan has successfully piloted a digital stablecoin based on its national currency.
The rise in the value of gold and Bitcoin is another sign of the declining prestige of the dollar. Confidence in the US currency is rapidly eroding, raising questions about what will happen to stablecoins that use it as a peg. The stablecoin market is currently dominated by Tether’s USDT, which ranks 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 account for 93.8% of the stablecoin market capitalization.
Reliance on the US dollar, which is rapidly losing influence, could ultimately weaken the largest players in the stablecoin market, and there are also concerns about the wisdom of entrusting control of so much stablecoin value to two private companies. Tether has long been criticized for a lack of transparency about its reserves. The company claims that each USDT in circulation is backed by US dollars on a 1:1 basis, but it has not yet authorized a reputable accounting firm to fully audit these holdings, although it is reportedly in discussions with one of the Big Four audit firms about the possibility.
As for Circle, the question is whether it’s big enough to replace Tether. It doesn’t have the deep pockets of its biggest rivals, nor does it seem to have the same level of appeal within the broader cryptocurrency community. Add to this the fact that both companies have very large investments in the US dollar, and it’s clear that the stablecoin market needs something more powerful.
It’s time for gold-backed stablecoins to shine
One possible solution is a new kind of stablecoin whose value is pegged to real-world physical gold reserves, using the old Bretton Woods principles. The largest country in the world can easily create such a stablecoin. The total physical gold reserves held by central banks are thought to be more than $7.5 trillion, of which the United States controls only a small portion. For example, Australia and Russia have amassed gold reserves estimated at about $1.68 trillion, and South Africa, Indonesia, Canada, and China all have more gold in stockpiles than the United States has.
Stablecoins, backed by trillions of dollars in gold reserves, could easily threaten the hegemony of the US dollar and provide great stability in times of economic uncertainty. Gold has always been a safe-haven asset preferred by investors and is widely recognized as a resilient store of value. Gold-backed stablecoins could inspire greater trust among people, allowing African farmers and Latin American businesses to pay and receive money backed by real value, rather than being restricted to trading in volatile local currencies subject to the whims of untrustworthy governments. This will give investors more confidence in investing in these underdeveloped economies, giving them peace of mind that their value will not evaporate in the face of hyperinflation.
The potential value of gold-backed stablecoins has been recognized by many companies, including Tether, but no company alone has enough power to create the world’s next reserve currency. Only governments, the world’s richest hedge funds, and private banks can do this. 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 Burkina Faso government’s National Promotion and Investment Center, to create just such a stablecoin backed by the African country’s vast mineral wealth. Luai Mohamed Ali, group president of Promax United, said in a press release that the Burkina Faso government plans to back a national stablecoin containing up to $8 trillion in gold and mineral resources, comprising both physical holdings and vast amounts of proven underground reserves. Once launched, it will become Africa’s first resource-backed stablecoin and bring the bulk of the country’s wealth on-chain as part of an ambitious plan to boost economic growth.
Promax and the Burkina Faso government have both the resources and connections to make this gold-backed stablecoin a reality, and are also keen to bring more countries on board. They say they are in “high-level discussions” with a number of other African countries. The partners said the goal is to reduce Africa’s dependence on the US dollar and unlock trade, infrastructure financing and macroeconomic stability through a transparent asset-backed digital currency. They took action at the perfect time. There’s no better time than now, as recent chatter around so-called “downgrade trades” has added to the pressure on the USD.
For years, the cryptocurrency community has dreamed of abolishing the US dollar and replacing it with an alternative blockchain-based financial system, always motivated by idealistic reasons. However, as the US dollar approaches the brink, the transition to a stablecoin-based monetary system backed by real gold is more imperative than ever.
