Although there are supporters of stablecoins, an experienced strategist claims that the buzz around them is exaggerated.
Despite the fervor around stablecoins, a seasoned financial markets strategist claims that tokenization has the potential to transform the financial industry.
Stablecoins, which are effectively money-market funds for the cryptocurrency community, have been hailed as a way to streamline financial networks, send instantaneous cross-border payments, act as collateral in wholesale financial settlements, and act as a store of value. Their ability to generate demand for government assets at a time when it needs to sell more of them has recently piqued the White House’s interest.
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Ed Butchart, a strategist, believes that the excitement around stablecoins has been exaggerated. Butchart is currently creating his own research product after serving as the head of Merril Lynch’s emerging markets strategy team, trading for the hedge fund of Moore Capital, and most recently serving as the chief investment officer at Kepler Partners and Sloane Robinson Investment Management.
In an interview with MarketWatch, he explained how risks have been minimized and some of their shortcomings have gone uncontested. Instead, he contends that tokenized bank deposits—transferable digital tokens on a single ledger—have a much higher chance of taking the place of cash as the preferred method of payment in many nations.
For example, stablecoin bulls like Citi and Standard Chartered have predicted that within a few years, market valuation will increase from the current $290 billion to over $2 trillion. They anticipate that stablecoins will be used more frequently for a range of payments and transactions in the real world. However, Butchart takes a stand and looks at some of the dangers that have been disregarded up to this point.
Butchart argues that stablecoins have less ability to create demand for US Treasuries than supporters and US Treasury officials believe.
Market capitalization of Stablecoin
What Butchart refers to as “geoeconomic risks”—the intersection of economics and geopolitics—are at the heart of his argument. Increased reliance on stablecoins backed by US dollars DXY could jeopardize the authority of any national government over its economy, particularly at a time when many nations are concerned about the shift in U.S. trade, economic, and foreign policies. Increased use of dollar-backed stablecoins will be seen as risky.
Critics of stablecoins point to the perceived “weaponization” of the dollar in recent years as evidence of their concern that it will solidify dollar dominance. Currently, 99 percent of stablecoins are denominated in dollars. Butchart believes that uncontested U.S. financial hegemony is opposed by the rest of the globe, either overtly or covertly.
Furthermore, Butchart expresses worries in a LinkedIn post that stablecoins can steal deposits from commercial banks, particularly if they begin to pay out rewards in place of interest, as Coinbase (COIN), a well-known cryptocurrency exchange, now does. Commercial bank deposits are heavily regulated, subject to national regulations, and an important component of a central bank’s monetary policy transmission process.
As Butchart notes, commercial banks will undoubtedly lend less if they lose a sizable portion of their deposits, which might impede economic growth. Butchart argues that disintermediation of the banks would also facilitate bank runs.
Commercial banks aren’t the only ones that would notice a danger to their funding. The rivalry would also hurt money-market funds. If one is effectively withdrawing cash from money-market funds instead of stablecoins, the advantages to the US Treasury market are exaggerated.
Increased attention to short-term debt issuance is another factor that could make a stablecoin vulnerable. Since the average length of U.S. debt is already 71 months, increasing the amount of short-term debt raises the risk of short-term borrowing, restricts flexibility, and drives up interest rates. Stablecoin issuers already hold $180 billion in short-maturity Treasuries, but according to predictions, that amount may rise to almost $1 trillion by 2030, placing them alongside the Japanese, who currently hold $1.3 trillion in U.S. debt, according to Butchart.
However, Butchart believes that “if you ultimately want to send fiat currency, you’d still incur cost and friction in the on- and off-ramps and forex conversion.” Stablecoins may make cross-border payments easier.
Stablecoins are viewed as ready to disintermediate credit card corporations like Mastercard (MA) and Visa (V), but Butchart may see an advantage the incumbent networks provide in terms of arbitration and client protection laws.
Although still in its infancy, Butchart does see some potential benefits, such as the potential for a tokenized bank deposit, which “can offer some important benefits when considered through the geoeconomic prism: a digital representation of a real world bank deposit.” Many stablecoins have advantages, but they sit within the current banking infrastructure, reside on centralized ledgers, and offer interoperability by wholesale settlement of interbank liabilities.
There aren’t any clear publicly traded vehicles available right now to take use of the potential for tokenized bank deposits. Though Butchart sees possibilities for tokenized stocks, bonds, real estate, collectibles, and even hedge funds, the idea of fractionalizing real-world assets—where investors might purchase small portions of vast or illiquid assets—will prove alluring.
Robinhood Markets (HOOD) has already taken a step in this approach by providing European clients with tokenized U.S. stocks.
Butchart imagines a future in which exposure to real-world assets, such as a wind farm or a work of fine art, that were previously unattainable through a tokenized securities portfolio. According to him, this appears more likely than stablecoins backing the US national debt in the coming years.
