WEEKLY - The case against stablecoins
I'm pro-stablecoins, but the critiques should be acknowledged!
Hello everyone! I hope you’re all doing well, and get to touch grass this weekend.
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In this newsletter:
The case against stablecoins
Assorted links: gambling, knowledge, shipwrecks, AI, ‘60s music and more…
Weekend stuff
🌻Hey all! I’m thinking about taking on sponsors, to help keep this newsletter going. If you have a webinar, report or event you’d like me to feature, let me know! Reach out at noelle@cryptoismacro.com and I’ll send you more information.🌻
Some of the topics discussed in this week’s premium dailies:
Coming up: what to keep an eye on this week
Sideways for now
Macro-Crypto Bits: jobs, markets, China, tariffs
DeFi Day
A South Korean inflection point
Macro-Crypto Bits: market mood, inflation expectations
The case against stablecoins
Macro-Crypto Bits: vibe shift, market mood, tariff progress
Stripe’s stablecoin strides
More bank stablecoins
Macro-Crypto Bits: CPI, market ennui, Middle East tension, tariff disappointment
Wages of war and market hegemony
Institutional stablecoins everywhere
Macro-Crypto Bits: markets and macro
The case against stablecoins
To set the stage, I am pro-stablecoins. Enthusiastically so. It’s one of the few areas of crypto in which I think the hype is almost deserved. But that doesn’t mean there aren’t risks, and one of them is not addressing potential issues, be they systemic, technological or even ideological.
Given the flurry of stablecoin-related headlines, it’s natural that sceptics are getting more vocal and more numerous. In part, it’s because of the surge in institutional interest, with businesses, banks and officials around the world voicing excitement. What’s more, the expectations are accompanied by hefty price tags: Stripe’s $1.1 billion purchase of stablecoin platform Bridge and Circle’s blowout IPO and current $25 billion market cap are just two recent examples. Money talks, and sometimes yells.
Put differently, more people are paying attention, which widens the pool of perennial doomsters. Also, fear sells, and the “beware!” storyline is great for clicks and engagement. I’ve written before on the Financial Times’ astonishing insistence on spreading misinformation on the topic. Reuters, Bloomberg and many others have also focused on the negative aspects, even outside the often frothy opinion columns.
And this week I was listening to the latest episode of The Jacob Shapiro Show, one of my favourite podcasts for geopolitics/macro commentary, in which the hosts ooze disdain for the concept. To give them credit, they did try to look at both sides of the debate, and they made some good points – but they missed many, and jumped to some simplistic conclusions sprinkled with a disappointing amount of Trump Derangement Syndrome (I’m still a fan, though).
Regular readers will know I love to lean into the “why?” of crypto criticism, because it outlines many of the considerable barriers that builders and advocates often overlook – it’s not just entrenched financial interests, it’s also basic human nature. Change is scary, and fear is associated with survival, especially in times of deep uncertainty. Plus, simplicity works in telling a story, be it positive or negative, so facts are secondary. There’s not much we can do about that, other than offer as much explanation as possible while gently navigating the urgency – stablecoin use will continue to grow, and fast, whether mainstream is happy with the idea or not. And speed plus fear can lead to counterproductive overreactions. Put differently, the stablecoin conversation needs to be front and centre, now.
And a big part of that is taking the criticisms seriously. Many of them are valid, and should be addressed. Some are tenuous at best. Others are nonsensical.
In that spirit, here are some of the main anti-stablecoin arguments I’ve seen:
Stablecoins are used for crime. This is not just silly, it’s disturbingly sinister. Yes, stablecoins are used for crime, but so is cash, so are guns and cars. Those insisting stablecoins be banned because of potential criminal use are assuming that anything they are nervous about could be suppressed for that reason. True, you could argue that stablecoins might weaken the power of sanctions. Then again, you could also argue that sanctions weaken the influence of the dollar, while stablecoins help maintain it. And blockchains can help trace the flow of illicit funds much more efficiently and thoroughly than traditional rails.
Stablecoins make it easier to lose money in crypto. Um, yes, just as fiat makes it easier to lose money on equities. One of the dumbest critiques.
Stablecoins are not needed, therefore the only people/entities who would want to use them must be up to something bad. This is often said by those unfamiliar with the struggles of those outside western economies to access relatively stable dollars that can move on reliable transaction rails.
There’s a lack of transparency as to the reserves, which is a financial risk users are most likely unaware of. This one is true but fixable, and is a key part of stablecoin legislation, whatever the jurisdiction. Reserve guidelines and disclosure requirements matter.
Stablecoins don’t always hold their peg. This one is also true, as issues at a bank that services a stablecoin issuer can trigger a rapid exodus – we saw this with USDC during the 2023 US banking crisis. With greater institutional interest, issuers will have a wider choice of banking partners, and operational resilience best practices mandate diversification of key service providers. Still, this risk has to be acknowledged.
They are not as safe as central bank money, so they should not be treated as such. This is also true. Commercial bank money is technically not as safe as central bank money, but commercial banks do have recourse to a central bank backstop. Stablecoins, not necessarily, especially when issued by non-banks. Yes, they’re backed by “safe” assets such as government bonds and money market funds, but these are not central bank money. The lower-quality “moneyness” of stablecoins should be emphasized.
A run on a stablecoin could destabilize the treasury market. This pushes the ultimate institutional fear button, which is a disorderly market for US government debt, the world’s “safe asset”. If a large dollar-backed stablecoin issuer were to face sizeable redemptions, it would have to sell its reserve assets, which (hopefully) would largely be US treasuries. The logic is sound, but not the underlying assumption that stablecoins shouldn’t exist because the issuers might sell treasuries – so might foreign investors or even private US funds, should their holdings be capped? And this overlooks the potential benefit of new US treasury buyers in the form of global dollar-backed stablecoin issuers if the expected demand materializes. Plus, if there were to be a run on a large dollar stablecoin, chances are that would be the least of the treasury market’s problems at that particular turbulent time.
Strong stablecoin demand could change the US debt term structure, which has implications for fiscal policy. Yes, should stablecoin reserves get big enough, it probably would. The US proposed stablecoin bill limits reserves to “cash-like” instruments, basically deposits, money market funds and short-term treasuries. This implies more demand for short-term government debt than for bonds at the long end, which makes the budget deficit more vulnerable to interest rate fluctuations.
Non-interest-bearing stablecoins steal from taxpayers. Extreme, perhaps, but a fair criticism. Issuers hold reserves in yield-bearing instruments which provides them with a handsome income stream. This yield is paid by the government, whose funding comes from taxpayers. Denying the distribution of this yield to stablecoin holders essentially passes the public-funded income stream to a corporation that either holds onto it or distributes it to shareholders, some of which are taxpayers but many of which are not even based in the US. Unfortunately, there is unlikely to be a short-term fix here as the banking industry will block the existential threat of “deposits” that earn a higher yield than they can offer. But medium-term, both market forces and structural banking evolution will encourage a rethink of this limitation.
The Trump family stablecoin initiative proves the whole idea is about grift. I mean, yes it’s a bad look that gives sceptics high-octane fuel without furthering the crypto narrative at all. And, sure, stablecoin initiatives tend to come from for-profit enterprises. But that’s how private investment in new technologies works – fund development and, if the idea catches on, reap the reward. I get the instinctive recoil, though, as the innovation in this case wasn’t funded by any one risk-taker, if you see public blockchains as the main building block. It does feel like rent capture to see even traditional institutions get excited about hefty margins from trapped interest income, and to see brands want to further monetize communities by muscling in to what they use as money. But perhaps the main “innovation” here is not so much the underlying rails as it is new types of marketplaces, payment rails and engagement tools. If so, then all stablecoin-related businesses are still throwing spaghetti at the wall. Users will flow to what works. There may be some grift, as in any fast-growing sector – but there is also a ton of transformational work going on.
There are probably many more I’ve missed, but I’ll keep watching out for pushback (whether reasonable or not) and may update this at some stage.
I’ll end with the one I most enjoy:
Stablecoins are changing what we understand as money, which will create confusion. Yes indeed they are. And I’m totally here for that. If people are confused as to what money is, then that shows they are finally starting to understand how much control financial authorities have over our lives.
✨ NOTE: I’m working on a deep dive into bank stablecoins - if you or any colleagues or friends are working on this, please reach out! I’m at noelle@cryptoismacro.com. I’d love to chat, either on background or for attribution.
ASSORTED LINKS
(A selection of reads outside of crypto and macro, although these may find their way in anyway. I try to choose links without a paywall, but when I feel it’s worth making an exception, I specify.)
Kyla Scanlon shares a thoughtful and eye-opening take on the whitewashing of online gambling with the proliferation of sports betting apps and the growth of prediction markets. How does a society decide what kinds of human weaknesses are acceptable to monetize? (Gamblemerica: How Sports Betting Apps Rewired a Generation's Relationship to Risk, Kyla’s Newsletter)
Ted Gioia argues we have entered a “collapse of the knowledge system” in which the familiar hierarchy of truth and authority gets discredited and replaced by new values. Similar phases heralded the emergence of Romanticism in the nineteenth century, and the early Renaissance with the rebirth of humanistic thinking. The symptoms he lists include: a loss of trust in “white collar” experts, the disappearance of funding for scientific research, no clear career path for knowledge workers, a loss of prestige for academic institutions, tolerance for plagiarism and lies, growing resentment of manipulative technology and more. The big question is, what comes next? (The Ten Warning Signs, The Honest Broker)
Something for history buffs and those of you obsessed with cross-border payments, Peter Frankopan – author of the excellent Silk Roads book on the history of Asian trade – dives into (not literally) the 1708 wreck of the Spanish galleon San José, other missing bullion shipments, and the damage done by unnecessary bureaucracy. (The Riches at the Bottom of the Sea: The Wrecks That Helped Bankrupt an Empire, Global Threads by Peter Frankopan),
I get asked a lot about the intersection of AI and crypto, especially by those who like to follow hot trends – that used to be crypto, then it was AI, so surely the next will be the crossover? Anyway, this a16z report lists some use cases for the two technologies working together, which includes proof-of-personhood, revenue-sharing micropayments, cross-application data persistence and more. (Special edition: 11 AI x crypto crossovers, a16z crypto)
Scott Sumner takes us on a romp through 1965-6, which he argues was an inflection point for pop music, producing such enduring legends as The Beach Boys, The Rolling Stones, The Beatles, Bob Dylan, Simon & Garfunkel, The Byrds, The Who, The Supremes and SO many more. Grab your headphones and your Spotify or whatever, and get nostalgic even if you weren’t around back then. (Good vibrations, The Pursuit of Happiness)
James Lucas takes us on a beautiful exploration of the magic and majesty of astonishing libraries. (The Most Beautiful Libraries on Earth, Beauty is Truth)
HAVE A GREAT WEEKEND!
(in this section, I share stuff that has NOTHING to do with macro or crypto, ‘cos it’s the weekend and life is interesting)
A departure from my usual music/series/film/photography recommendations today: YouTube gaming videos. Wait, hear me out, these are not gameplays or even reviews – they’re samples of work from three video essayists that put an original spin on videogame commentary, ranging from deep philosophical insight and literary comment to a detail-obsessed exploration of the landscape.
I’m not a gamer, no interest in playing whatsoever – but I do confess to a fascination with the art, the story and the design decisions in worlds that aren’t real and that don’t have to conform to expectations. These samples don’t disappoint, and give a glimpse of just how much work each puts into his output, which is not always about videogames. Check out also, for example, Jacob Geller’s “Fear of the Cold”, about a Jack London short story, which has clocked up more than 7.6 million views – not bad at all for a serious literary critique that ends up being about human nature and the plight of man.
Jacob Geller
Noah Caldwell-Gervais
Any Austin
DISCLAIMER: I never give trading ideas, and NOTHING I say is investment advice! I hold a small amount of BTC and ETH, but they’re long-term holdings – I don’t trade.