When a “kiss cam” at a Coldplay concert and ongoing fussing about what we might or might not still know about the morbid Jeffrey Epstein saga dominate the news, you know nothing mind blowing is going on.
But that may be only partly true. A couple of weeks ago, President Trump signed the big reconciliation bill which once again demonstrated that no matter what political party is in office, the temptation to spend beyond one’s means is too tantalizing for Congress and the White House to resist. Will future growth and productivity gains allow future deficits to shrink as a percentage of GDP from close to 7% to 3%? Certainly, the White House would like us all to believe that. And maybe that possibility is more than a remote reality. But it is unlikely will see much progress over the next year or two.
Then last week, Congress approved and the President signed two pieces of legislation putting structure and a regulatory framework in place to oversee crypto currencies. Let me start by noting that crypto and bitcoin are not synonyms. Despite the implication in the name bitcoin that it is a currency, it really isn’t. Nor are the bills passed last week likely to enable the use of bitcoin as such. Rather, the focus was on facilitating the use of stablecoins as tomorrow’s preferred method of transaction.
Stablecoins, as the name implies are not intended to be a speculative instrument one owns to trade or to speculate. Rather, they are to be used as the basis for transactions. The laws require stablecoin users to be U.S. based, pegged to a currency, thus eliminating the temptation to speculate on any change in value, and to be fully backed by Treasuries or other equivalent assets 100%. Stablecoin issuers will be audited quarterly. The laws also contain anti-money laundering provisions as added protection. While some fear the worst and want more protections, it will be in the interest of all to maximize protection and minimize any possibility of illegal activity. Remember that today we live in a digital world. Most of us bank online. Our stock certificates are now digital holdings within our preferred brokerage. No one clips coupons anymore. The system may not be 100% perfect but it’s pretty close.
We aren’t all going to suddenly use stablecoins tomorrow. But stablecoin transactions in the trillions already happen in cross-border commerce, particularly in third world countries. Since almost 100% of stablecoins today are pegged to the dollar, the question becomes would you rather transact between two third world currencies or use stablecoin? As time goes by, uses will explode. Stablecoin transactions occur across a blockchain. Assuming the stablecoin at the heart of a transaction is confirmed on the blockchain, the credit worthiness of the parties to the transaction becomes irrelevant. Note the transactions are still recorded and traceable similar to your stock or bank transactions today. Using blockchain and stablecoin, transactions can be completed and clear virtually instantaneously at a reduced transaction cost.
There are clear hurdles still to clear. There will likely be multiple stablecoins in existence. Already companies like Amazon# and Wal-Mart# have been rumored to be considering their own stablecoins. Merchants will decide which stablecoins they will accept just as they decide today which credit card to accept.
Without going further, the crypto legislation passed last week is going to be a real game changer. It won’t happen overnight but it will happen. There are lots of unknows. As noted, stablecoins will have to be backed 100% by Treasuries. As stablecoin volumes grow, or even surge, demand for Treasuries will increase as fast. Just as money market fund balances surged, and led to a shift in Treasury ownership once the Fed Funds rate went from virtually zero to over 4%, we don’t know how stablecoins will fit into that mix other than, like money market funds, that are pegged at $1 per share, the demand increase will be for Treasury bills, not longer dated bonds that fluctuate in value.
Who will the winners be? Stablecoin issuers will earn money on the float outstanding. Part of that will be shared just as credit card issuers use points or some similar mechanism to attract users. Ultimately, only a small handful of stablecoin issues will win. The industry is so new that picking any future winner is a futile task. Given that transactions using stablecoins can be done quicker and at a lower cost, savings will accrue somewhere, again to be determined.
As for bitcoin, it remains what it is, either a speculative instrument or a perceived store of value, digital gold as its proponents believe.
The bottom line is there is no going back. Cryptocurrencies are going to change they way we transact in the future. How is the subject of future innovation. When the iPhone was introduced, we saw it as a phone, a way to get emails, and a gateway to the Internet. Prior to its introduction, social media was a desktop application. Apps we now use everyday like Waze, Open Table, and TikTok were figments of one’s imagination. Camera features were crude. Now virtually no one uses a conventional camera. Clearly the iPhone changed so much of how and what we do today. The same is about to happen as crypto invades the most important aspect of our lives, how we transact. It will change the way banks work, how we buy using credit. The rest I will leave to your imagination. The changes won’t happen overnight but, in the end, they will be profound. They aren’t the be feared but to be embraced. To be sure, there will be bumps along the way. But just as our stock and bond trading is completely digital today, the same will happen to the way we do commerce in the future. Because stablecoins are almost exclusively dollar based, it could well be that the dollar becomes even more of a universal currency in the future than it is today.
One last comment apart from the crypto world. Last week, rumors once again flew regarding President Trump’s wish to fire Jerome Powell. The likelihood of that happening is still small. Undoubtedly, if attempted, it would be challenged in courts. The Fed didn’t always exist and it was never above attempts by Presidents in the past to influence how it acted. But if market participants no longer felt that the Fed was able to act independently, the reaction on Wall Street would be both quick and nasty. President Trump likes to make waves but he is unlikely to do something so self-destructive as to attempt to fire the head of the Federal Reserve. If markets felt any other way, we would not be witnessing new highs in the stock market.
Today Jon Lovitz is 68. Both singer Cat Stevens and cartoonist Gary Trudeau (Doonesbury) turn 77.
James M. Meyer, CFA 610-260-2220