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Consumers Will Shape the Future of Stablecoins, Here’s How

4 mins
Updated by Leila Stein
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In Brief

  • Stablecoins have expanded significantly arriving in 2014.
  • In the future, there could be even more from personal coins to legal tender.
  • Consumer choice will drive this stablecoin development.
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Stablecoins exploded onto the scene in 2014. As stablecoins develop, there is one factor beind their growth we have not yet explored: consumer choice.

The rise of these coins began with BitUSD (BITUSD) and Tether (USDT). Then it continued to grow with USDC, Dai (DAI), and others.

We have discussed the best backing for stablecoins (commodity, fiat, crypto, algorithmic, basket), types of stablecoins (retail and wholesale), and the legal status of stablecoins (current money or payment mechanism).

The idea of consumer choice underlies stablecoin development to date, but it has not received the attention it deserves. Especially since it will drive the expansion of the stablecoin universe.

Consumer choice is not new

Consumer preference in the development of money is not a new idea.  

In the early 1800s, a United States consumer could choose which private banknote they wanted to use based on their preferences.

They could use money issued by a big, distant bank because of its security and widespread acceptance of its notes. However, they could also use the notes issued by their local bank because they wanted to support their community.

After the 1860s, when the US government had monopolized money issuance, a consumer could still pick between the notes issued by their local or national bank, notes backed by silver, or notes backed by gold. It depended on what qualities most appealed to them as all the notes traded at par.

How could this force of consumer preference in monetary matters shape the expanding stablecoin universe?  What types of stablecoins might appear?  Here are some ideas.

Proprietary stablecoins

These are stablecoins run by private companies and are the only stablecoins that currently exist. These coins have various types of backing and can be retail or wholesale in design.

Retail proprietary stablecoins, like Tether, USDC, DAI, and Diem, are widely used but, importantly, are not considered current money or legal tender.  The US Office of the Comptroller of the Currency defines them as payment mechanisms.

Wholesale proprietary stablecoins are similar. These stablecoins, like Utility Settlement Coin (Fnality) and JPM Coin, work in closed systems, facilitating transfers on an institutional level.  

Regional stablecoins

Proprietary stablecoins are really a form of scrip. In the US, scrip is non-dollar-denominated private money that only operates in an enclosed or geographically limited system. It also can’t be directly substituted for US dollars. There are several physical scrips in the US and the UK.

It is not much of a step for an existing scrip to convert into a regional stablecoin. For example, a city could establish a stablecoin for use throughout the city at local businesses and even pay city taxes. This is totally legal.  

City residents could choose this regional stablecoin to support local businesses. They might receive discounts for paying in city stablecoin. The proceeds the city earns from issuing the stablecoin could be used for local parks or schools.

Nations could also issue stablecoins with full legal tender status. This allows for the use of the stablecoin in official transactions, including the payment of taxes.

Having multiple forms of legal tender is not a new idea. In the early years of the US, payments to the government could be made using some foreign coins. For example, the US Congress declared the Spanish Real legal tender in 1827. 

A nation might even declare a private, proprietary stablecoin a legal tender. Consumers may choose to use their nation’s stablecoin rather than one operated by a private firm.

However, it is more likely that a nation would issue a central bank digital currency (CBDC) than a legal tender stablecoin. A CBDC would yield more control and higher seigniorage.

Yet, such a legal tender stablecoin would allow a nation, perhaps an emerging nation, to exploit its sovereign debt. 

The US actually provides a model of sorts for this usage. In 1863, Congress created national banknotes to be issued by national banks. The main reason for this was to create a captive market for government debt as note issuance required 100% backing in US treasury bonds.

An emerging state could create a stablecoin backed entirely or partly by its sovereign debt, boosting its value.

Flavored stablecoins

Further out in the future of stablecoins could be what I call “flavored” stablecoins. 

Imagine if a stablecoin got part of its backing from low-risk stocks or bonds connected to an economic sector. For example, green energy or other green initiatives, with part of the stablecoin’s seigniorage going to fund green projects.

Perhaps, a stablecoin is focused on spaceflight and space technology—again in a low-risk way—with profits going to science education. We would have Green stablecoins or Space stablecoins.

The examples of such flavored stablecoins could go on and on. 

Personal stablecoins

In the remote reaches of the stablecoin universe would be personal stablecoins. 

An individual issues these with the help of a company that would custody the backing assets, handle regulatory issues, launch a coin on a blockchain, and oversee redemption and other logistical matters.

With a personal stablecoin, individuals would monetize their assets. This is nothing new, but it has not been seen in the US since the early 1800s.

The first banks in the US were basically wealthy individuals monetizing their gold, stock, and other assets. Following state regulations, they would set up a shop in a town, have some banknotes printed, and then start issuing them.  Their wealth backed the dollar-denominated notes.

While their backing assets appreciated or paid dividends, individuals (bankers) would spend their dollars in the community, receiving, in effect, 0% loans from the public who accepted the banknotes. These dollars could also buy other assets. Otherwise, they could, in turn, be loaned out to others at interest. 

Similarly, personal stablecoins would work the same way. With a personal stablecoin, a person can be their own banker.

Consumers will decide the future

In this new, expanding universe of stablecoins, regulation and clear, open information would be critical. 

Controversies like those surrounding Tether need to be avoided. In addition, consumers need complete knowledge of the available stablecoins to make good decisions. Consumer choice will shape the future of stablecoins.

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Franklin Noll
Franklin Noll, PhD is a recognized authority on the history of money, including banknotes and cryptocurrency. He has extensively written and spoken upon these topics, including making film and radio appearances and writing blogs for the US Treasury and Bloomberg News. He is the President of Noll Historical Consulting.