It seems like those in cryptocurrency are getting their views validated.
For years, we discussed the global nature of things. The fact that blockchains operate globally means there is no jurisdiction to control them. Certainly if the running of the chain is centralized, there are things governments can do.
However, if we are dealing with something that is operating outside the reach of a legal entity like a government, life can get very difficult.
This is what we are seeing with cryptocurrency. These governments can try to make life tough, as we have seen, but are ultimately going to lose in the end.
The latest realization is the U.S. Government's ability to regulate the stablecoin market. Forget about the fact the U.S. Congress cannot get together on a bill, the fact that much of the activity is already shifting away from that nation.
Here is the quandary it finds itself in.
Shift Overseas
Global in nature means transactions can take place anywhere. Even when dealing with centralized entities, one can opt for something that is operating outside the United States.
This is exactly what is happening with the stablecoin market.
According to Chainanalysis, we are dealing with the stablecoin inflows taking place at a greater rate with companies headquartered outside the U.S. This epitomizes the problem for the United States.
According to Chainalysis’ findings, there has been a significant shift in stablecoin inflows away from U.S.-licensed entities towards non-U.S.-licensed ones since the spring of 2023.
Specifically, as of June 2023, approximately 55% of stablecoin inflows into thetop 50 cryptocurrency services were directed to non-U.S.-licensed exchanges.
This shift in stablecoin activity raises concerns about the diminishing ability of the U.S. Government to effectively regulate the stablecoin market.
To me, this is no surprise. We are watching the U.S. Government screw the proverbial pooch on this one, pushing the crypto market outside its borders. Ultimately, this will be like the FOREX market, where the U.S. was slow and London swooped in to become the epicenter.
In short, we are going to see the major crypto hubs forming in nations other than the United States. The stablecoin market simply is evidence of how a portion of the marketplace is already moving.
Algorithmic Stablecoins
For the most part, this report is dealing with the largest stablecoins, which are asset backed. We know Tether and USDC are run by entities that are profiting off them. The backing presents a counterparty risk as the reserve is held by some financial institutions. Coinbase appears to be the preferred choice for the different entities in the industry.
At the moment, these have the overwhelming majority of all transactions. That said, much of the future might be algorithmic stablecoins. These do not present the same risk since the counterparty is actually the blockchain. We are relying upon the network as opposed to some backing agent. Also, there is no financial institution involved since the assets do not require custody.
Instead, we have the market value of the main coin as guaranteeing the value.
Why this is important is because we have something that is truly out of the reach of governments. When dealing with something like the Hive Backed Dollar (HBD), the only requirement is a wallet. As long as someone is holding the keys, this currency can be used as a medium of exchange. With an increase in utility of these, we can see how, over time, they could swallow up more of the market.
Of course, to be an effective currency, a lot more is required than just issuing out a few units. The infrastructure is enormous. With crypto, here is where decentralized Ffnance enters the picture. Since governments will likely legislate away the ability for them to operate on centralized exchanges (CEX) it is the decentralized options that will be selected.
What is ironic is that government will outlaw what could be the growing aspect to the stablecoin industry. In other words, these entities are going to be shooting themselves in the foot by assuring themselves a lack of control over the market.
For those who detest government overreach, this could be seen as very positive.
True Decentralization
When it comes to a truly decentralized system, governments have no control. This is especially true in the digital world.
Our governments are not structured to operate within the digital realm. They were established in an era where things were based primarily on our geographic location. It is why the invisible lines in the dirt were effective.
This is no longer the case. A user in one country can easily access a service that has servers operating within another jurisdiction. As decentralized finance is built out more, we will see people from all over the world accessing financial services outside their home country.
In fact, the basis for those services do not reside in any country.
We got a glimpse into the power of this with the major social media companies. Facebook and YouTube operate on a global scale. The point of vulnerability is they are owned by corporations, which are headquartered somewhere. These entities are also forced to comply to operate in the different jurisdictions.
Decentralized entities do not face this issue. What is interesting is that a truly decentralized entity not only will not comply, it cannot. There is no way for this even to register to get into compliance.
This is the battle we will be facing over the next decade. The centralized establishment is going to keep fighting for control. Eventually, as we are seeing with stablecoins, the financial activity will take place outside their reach.
The only question is how quickly we see the infrastructure built to make this race competitive. For the moment, we are still in the infancy stage.