There is good reason to be sceptical about volatile private digital currencies. But with legislative and regulatory developments underway in the world’s largest economy, digital currencies (in the form of US Dollar backed “stablecoins”) have now gone mainstream. Stablecoins are a less volatile version of crypto currency – not just because of the clever name; but because a stablecoin (in theory) has a reference value. US stablecoins will need to be backed one to one by USD or other high-quality assets. The new framework opens up the use of digital (stable) coins in a vast range of day-to-day applications.
The recent legitimization of private US dollar backed stablecoins by the US Government coupled with the determination of the US Securities and Exchange Commission to pass clear rules for crypto asset distribution is bad news for the Canadian dollar. But smart, offensive strategies could open up new opportunities for the Loonie in a brave new world.
US Treasury Secretary Bessent has told Congress that he sees the existing small stablecoin market (about $250bn) expanding to $2tn in the coming years. Since digital tokens will be required to be backed by high quality securities, he sees the crypto industry becoming an important buyer of US Treasuries (aka “US Debt). This comes conveniently at a time when some traditional investors are hesitant about buying and holding US debt because of the deteriorating finances in the US. Bessent believes that crypto issuers clamoring to issue crypto in the form of a stablecoin will step in where some official lenders step out.
China may be considering yuan-backed stablecoins to increase use of its currency internationally as part of a broader strategy to undermine the US dollar. There has always been a geo-political angle to money.
Stablecoins are not so new. I was at the IMF when we created the Standard Drawing Right (“SDR”), a new liquidity issued by the International Monetary Fund in the 1980s. The SDR was the same as a stablecoin – a new currency backed by a basket of currencies which gave the SDR its value. But it was an old-fashioned paper-based ledger system where a digital stablecoin is on a decentralized digital ledger-blockchain.
The legitimization of stablecoins has several merits from the perspective of the US Government – a source of financing for US spending and keeping the US in a leadership role in the digital finance revolution.
Where does all this leave Canada and why should we care?
We have always been concerned about “dollarization:” the flight of Canadian dollars into USD. With the legitimatization of digital stablecoins south of the border, one can almost hear the sucking sound as (younger) Canadians get curious about converting their Loonies into this “new, new thing” which holds the promise of cutting out the middleman (the hated banks). Friendly fintech applications available to any reasonably tech savvy person, make it easy to move into US dollars and with that into and out of stablecoins. The result could be increasing irrelevance for the Canadian Dollar.
Canadians played important roles in shaping the early days of digital assets from bitcoin development to the creation a highly programmable blockchain (Ethereum). Early key collaborations in the field took place in Toronto and Waterloo. If we do nothing, tech forward thinking talent will continue to migrate south and with them investment opportunities in fintech. Canada need not cede the field to the US.
The Canadian Dollar could never aspire to be a major global reserve asset. Unexpectedly, however, some investors – souring on the US because of debt, political instability and unreliability – are looking around for sources of stability other than the US dollar. China certainly hopes so and relentlessly promotes its currency as reserve asset. The question is: will the Canadian Dollar be one of those stable assets worth holding or will our Dollar become increasingly irrelevant because it doesn’t answer the challenge from developments south of the border?
We need to urgently ask what new policies can be put in place and what new technology can be embraced to increase the exposure and relevance of the Canadian dollar internationally?
This and other questions need to be put urgently to a “wise-persons committee” charged with: developing a digital roadmap; clarifying supportive tax, securities and financial services policy; and thinking about positioning the Canadian Dollar for the world that is coming. Canada has smart people in and out of government who have been thinking about these issues. They need to be harnessed.
Resiliency of the Canadian economy depends as much on smart financial sector and technology policy as it does on industrial policy.