U.S. Dollar Hegemony in a Web3 World

The global financial system stands at the forefront of a new era, a seismic shift reshaping the foundation of our economic transactions and nature of money.  A transition from the U.S. Dollar-based system formulated in the aftermath of the 1944 Bretton Woods Agreement, to a new era characterized by Bank Deposit Tokens, Central Bank Digital Currencies (CBDCs), and Stablecoins.  What role will the U.S. Dollar play in the Web3 world?

Stablecoins are digital assets designed to maintain a “stable” price relative to another asset such as a commodity or currency.  In 2022, the settlement of stablecoins reached over $11 trillion, approaching Visa’s volume of $11.6 trillion, and dominating the $1.4 trillion processed by PayPal.  The market capitalization of the entire stablecoin sector is $128 billion with Tether (USDT) dominance comprising 69% of market share. USDT and USDC total $113 billion, collectively accounting for 88% of the market capitalization, with 99% of the stablecoin sector denominated in USD and dollar debt instruments.  Tether published its Attestation Report for Q3 2023 reporting 85.7% of reserves held in Cash and Cash equivalents, with U.S. T-Bills accounting for $72.6 billion, and quarterly returns on those investments nearing $1 billion.  Tether is one of the largest holders of U.S. Debt worldwide with the $72.6 billion exposure to U.S. T-Bills placing the company ahead of countries such as Australia, Mexico, and the UAE.  PayPal, the first publicly traded U.S. company to launch a stablecoin (PYUSD), may indicate a proliferation of stablecoins from publicly traded companies in the next decade.  The market capitalization for PYUSD is currently $114 million.  Considering PayPal’s brand recognition and large consumer base, the company may have the opportunity to help export the U.S. Dollar worldwide.

Deposit Tokens are a form of commercial bank money issued on a blockchain by a licensed depository institution such as JP Morgan.  JPM Coin, a Deposit Token issued by JP Morgan, handles $1 billion worth of transactions daily, and projected to reach $10 billion in the next year or two.  Transactions with JPM Coin are currently reserved for institutional clients on JP Morgan’s private permissioned blockchain platform. JP Morgan’s foray is merely the tip of the iceberg for institutional adoption.  Citigroup’s ‘Citi Token Services’ offers institutional clients the ability to tokenize deposits and HSBC’s recent debut of a platform for gold tokenization indicates a profound evolution of the infrastructure underpinning the global financial system. Boston Consulting Group (BCG) forecasts the tokenization of assets could reach $16.1 trillion by 2030 or a “best-case scenario” of $68 trillion.

A Central Bank Digital Currency (CBDC) is a digital currency backed, issued, and regulated by a Central Bank. A total of 130 Countries, representing 98% of global GDP, are currently exploring CBDCs, with deployment in 11 countries, including the Bahamas and Nigeria.  CBDC pilots are active in 21 countries, including China’s e-CNY, which currently reaches over 260 million people.  CBDCs endeavor to update the legacy payment infrastructure worldwide, creating an interoperable, “Universal Ledger” for connecting financial instruments.  In the U.S., the Federal Reserve has collaborated with several partners to research and test CBDCs, including “Project Hamilton” and “Project Cedar”.  Recently the House Financial Services Committee passed the “CBDC Anti-Surveillance State Act” which prevents the Federal Reserve and U.S. Treasury from issuing a CBDC to retail without Congressional authorization.  One concern about CBDCs is the ability for a Central Bank to issue currency directly to the public and bypass commercial banks. Agustín Carstens, General Manager of the Bank for International Settlements (BIS) envisions a “Universal Ledger” including wholesale CBDCs for use among financial institutions and deposit tokens from commercial banks for retail, thus preserving the current two-tiered monetary system.  The interoperability of wholesale CBDCs could reinforce the trend of countries reducing their reliance on USD by using local currencies in cross-border payments.  Global foreign exchange reserves of USD decreased from 70% in 2001 to 59% in 2023.

The convergence of Bank Deposit Tokens, Central Bank Digital Currencies (CBDCs), and Stablecoins represents a democratization of finance. A transition to the “Internet of Value”, a future where anyone can transfer value, as easily and quickly as sending an email, irrespective of location or device. As these technologies continue to mature, their impact on global finance is poised to be nothing short of revolutionary, redefining how we perceive, transact, and secure value in the digital age.