The Dollar Is Crumbling. Fiat-Backed Stablecoins Are Next

Stablecoins have had their ups and downs, but it’s clear they’re one of crypto’s biggest success stories so far. While Bitcoin may garner more of the headlines thanks to its constant ups and downs, stablecoins have emerged as the chief workhorse of the decentralized finance ecosystem, helping to shift more than $275 trillion worth of value across the globe.

However, there are signs that the U.S. dollar’s status as the world’s reserve currency is being eroded, and that could lead to some major consequences for the stablecoin economy, given that its top tokens are pegged to its value.

This year, the dollar has experienced a significant decline, losing around 11% in value – its largest decrease in over 50 years. This instability is driven by uncertainty around U.S. economic policies and its rapidly increasing, eye-watering debt, which now stands at a whopping $38 trillion. The U.S. keeps printing dollars, but in the meantime the world’s economic value is being moved elsewhere.

BRICs countries, for instance, have shunned the dollar in favor of blockchain-based payments system that allows them to trade in their own, digitized currencies. Both China and Japan have recently announced plans to use their own currencies rather than the dollar. China, in particular, has been pushing hard for the yuan to become a more prominent international currency, and it is now the fourth most-used in global payments. More than 30% of China’s global trade is settled in yuan, and a digital stablecoin based on its domestic currency has successfully been trialed in Kazakhstan.

The rise in the value of gold and Bitcoin is another symptom of the dollar’s fading prestige. Trust in the U.S. currency is eroding sharply, and that raises the question — what will happen to the stablecoins that use it as a peg? Currently, the stablecoin market is dominated by Tether’s USDT, which is ranked as the third most valuable cryptocurrency overall with a market capitalization of $183.3 billion, more than twice as valuable as Circle’s USDC at $75.9 billion. Together, USDT and USDC account for 93.8% of the total stablecoin market capitalization.

Their reliance on a U.S. dollar that’s rapidly losing its influence could ultimately undermine the stablecoin market’s biggest players, and there are also concerns regarding the wisdom of trusting two private companies with custody of so much stablecoin value. Tether has long been criticized for a lack of transparency into its reserves. While the company claims each USDT in circulation is backed 1:1 by U.S. dollars, it hasn’t yet allowed any reputable accounting firms to conduct a full audit of these holdings, although it is reportedly in discussions with one of the big four auditors over such a possibility.

As for Circle, the issue is whether or not it’s big enough to step up and replace Tether. It lacks the deep pockets of its biggest rival, and it also doesn’t seem to have the same level of appeal within the broader crypto community. Add to this the fact that both companies are so heavily invested in the U.S. dollar, and it’s clear that the stablecoin market needs something stronger.

Time for gold-backed stablecoins to shine

One possible solution is a new kind of stablecoin whose value is pegged to a real-world, physical stockpile of gold, using the old Bretton Woods principles. The world’s biggest nations could easily create such a stablecoin. It’s believed that the total value of physical gold reserves held by central banks exceeds $7.5 trillion, and the U.S. controls only a fraction of it. For instance, Australia and Russia have amassed gold reserves estimated at around $1.68 trillion, while South Africa, Indonesia, Canada and China all sit on stockpiles larger than what’s held by the U.S.

A stablecoin backed by trillions of dollars in gold reserves could easily threaten the U.S. dollar’s hegemony, offering greater stability during periods of economic uncertainty. Gold has always been the favored safe haven of investors, being widely recognized as a resilient store of value. A gold-backed stablecoin could inspire greater confidence among populations, enabling African farmers or businesses in Latin America to pay and receive money that’s backed by real value, rather than being restricted to trading in volatile local currencies that are subject to the whims of unreliable governments. This would give investors more confidence to invest in these undeveloped economies, reassured that their value won’t evaporate in the face of hyperinflation.

The potential value of a gold-backed stablecoin has been recognized by many, not least Tether, but no one company alone possesses enough muscle to create the world’s next reserve currency. Only governments or the world’s richest hedge funds and private banks could pull this off. And it could happen sooner than people think.

In October, the Abu Dhabi-based conglomerate Promax United announced a joint venture between one of its subsidiaries and Burkina Faso SEM, the national promotion and investment center of the Burkina Faso government, to create just such a stablecoin, backed by the African nation’s vast mineral wealth. In a press release, Promax United’s group president Louai Mohamed Ali said the government of Burkina Faso plans to back a national stablecoin with up to $8 trillion in gold and mineral wealth, made up of both physical holdings and vast amounts of proven in-ground reserves. When it launches, it’ll become Africa’s first resource-backed stablecoin, bringing the bulk of the nation’s wealth on-chain as part of an ambitious plan to catalyze economic growth.

Promax and the government of Burkina Faso have both the resources and the connections to make this gold-backed stablecoin a reality, and they’re also keen to get more nations involved. They say they’re holding “advanced discussions” with a number of other African states. The partners said their goal is to reduce Africa’s reliance on the U.S. dollar and unlock trade, infrastructure financing and macroeconomic stability through transparent, asset-backed digital currencies. They’ve timed their move to perfection. With all of the recent chatter around the so-called “debasement trade” adding to the pressure on the U.S. dollar, there really is no time like the present.

The crypto community has dreamed of the death of the U.S. dollar and its replacement by an alternative, blockchain-based financial system for years, but this has always been motivated by idealistic reasons. However, as the U.S. dollar teeters closer to the brink, the shift to a stablecoin-based monetary system backed by real gold is, more than ever, becoming a matter of necessity.