The Trump Effect on Digital Assets and Stablecoins - Olaf Ransome

In his first week back in office, the Donald has been signing Executive Orders (EOs) like Mo Salah scores goals for Liverpool; one after another. Executive Orders have various flavours; banning things, stopping things and shaping things. The interesting one for those of us in finance is from Jan 23rd titled: “Strengthening American Leadership in Digital Financial Technology”, which is intended to “shape things”.

Why is this an important topic?

The clue is in the title of the order. To misquote the 1992 Clinton campaign: “It’s the dollar, stupid.”

My sense is that that you can break down the intent of the incoming administration into three component parts:

1) Assuming digital assets will happen.

2) Ensuring that the US dollar’s role as the world’s major currency is not diminished by the change in the technology.

3) Focussing on building the foundations and the guard rails whilst letting the private sector figure out what product offerings there should be.

What’s new or changing?

The Administration wants to be pro-Digital Assets and the technology which underpins them. And it wants both retail and institutional access to be enabled, up to and including self-custody. 

This resonates with me; my belief is that going forward our “banking assets”, cash, securities, funds, end up in individual Web 3 wallets which are sponsored by a Financial Institution (FI). The FI will sort out all the must do compliance stuff of KYC, sanctions screening, transaction monitoring etc., but in the background. Services will look like mobile phones; I have my number, you call me, and you don’t care whether my provider is Swisscom, Sunrise or Salt. If I change provider, you don’t need to know. Compare this to the problems of moving a securities depot of say 25 securities from one bank or broker to another. It sucks and it is odds-on certain to go wrong over month end. Or in the wholesale / institutional space, having to tell everybody your new SSIs, Standing Settlement Instructions; maintaining all that so-called reference data is a resource sink.

Next on the to do list is: “promote the development and growth of lawful and legitimate dollar-backed stablecoins worldwide”.

This gets us right back to my point #2 above. It’s a derivative of MAGA: KAG, Keep America Great, i.e. make sure the US dollar is Top Dog. I have done a lot of thinking on Stablecoins and new means of payment in the last 8 years or so, adapting my thinking as I learn more. The well known FinTech guru Simon Taylor captured the spirit of the opportunity in one of his recent Blog posts: “Stablecoins aren't cheaper; They're better.” If we can have programmability and interoperability we can do things with the new technology which we cannot do today. 

How might this look? First, for my thinking, there are just two flavours of how to solve for a digital means of payment that is not issued by a central bank (more on CBDC after this). You can create a vehicle that collects cash and invests it, i.e. holds more than just cash at a central bank. This is what Tether and Circle do. That is a Money Market Fund by any other name. Investor protection is important; we want to be sure about the investments. Tether has been opaque on its holdings where Circle hasn’t. Transparency is good. The other way to solve for this is to create a “settlement asset”; something which has the credit quality of central bank money without necessarily only being issued by a central bank.

“Central bank money” is important and underlies the way we settle trades and make payments in the institutional space today. When Goldman Sachs pays UBS some USD, that money moves at the Fed; UBS then has a balance at the Fed and not an IOU from Goldman Sachs. The folks at Fnality International are building a network to offer digtal settlement in a new payment system, with a new settlement asset based on funds held at a central bank. With currency balances in Fnality systems, institutions would have a SpooL, a single pool of funds with which to make payments, settle trades DvP, delivery versus payment, or settle FX, payment vs. payment. A capability to instantly exchange “what they have now for what they need now”.

So that’s the techicalities part. What about the politics?
At least in theory an entity in any country could create a USD denominated Stablecoin and make any kind of promise about offering redemption at par, i.e. 100 cents on the US dollar. If that fund, think Facebook / Libra / Diem, were to get big, it would be systemic and, if something went wrong, as much as a threat to the world as a leak of a virus from a laboratory in China.

As a first step, if some entity in some far off country wants to issue something it labels as a “USD denominated Stablecoin”, if local laws permit, it could. And there would not be anything Uncle Sam could do about that. But at the next level, it does have the power of the US dollar and the US securities markets. A possible outcome of this Executive Order is that the US sets things up so that any non-US entity issuing anything that looks like a USD Stablecoin, a derivative of the “Howey test” if you will, will be subject to US regulation. And they can do this easily enough; they can simply put non-compliers on the sanctions list, which will make it impossible to operate a USD bank or brokerage account. With no access to USD or US securities, any Stablecoin denominated in USD will be dead.

The third part which is of interest is that the Donald has been clear he does not want his Administration to create and or operate a CBDC, a central bank digital currency. For me, this makes sense for any central bank; their remit should end at setting the rules. Those rules should allow for competition and take bureaucrats out of any role involved in running a day-to-day business.

Why might these new things matter?

With the Executive Order comes a “homework mandate” or some “marching orders”: the bureaucrats have 30 days to identify where any form of rule, regulation or order touches or might touch digital assets, 60 days to recommend changes, including nota bene rescinding rules, and new rules. They have 180 days to come up with a list of proposals to make the future great. 

In conclusion

For the digital asset sector this is “what do you want for Christmas?” or to use a term from our learned friends in legal, it is “an invitation to treat”: “Give me your wish list, I am not guaranteeing to fulfil any or all of it, but if you don’t ask, you won’t get”.

Financial services today is generally effective, but far from efficient. In wholesale banking, we have a once in a generation opportunity to get the rules right to enable tomorrow’s infrastructure. Infrastructure and foundations aka the plumbing are the enablers of both effectiveness and efficiency. Carpe diem.

Thanks for reading. Please do let me know what you think of these notes. Feedback via the comments would be great.

Please feel free to get in contact via LiquidityFinder here.

Author

Olaf Ransome is a liquidity and financial services expert. He is the founder of 3C Advisory You can message Olaf directly here.