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The monetary contagion that imperils American liberties

 

In the context of American Democratic Capitalism (ADC), freedom of financial transactions is a core element of the foundation upon which America was built and now thrives. It provides the lifeblood of a Fair Market that propels and nourishes the Great Experiment that is our democratic Republic.

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If Freedom in the American tradition is the absence of restrictions, Liberties are the presence of Compact Rights – those negotiated by and between the government and its people. Fair commerce relies on the enabling and facilitation of exchange between legal parties, subject to the balanced and reasonable regulation by the government. The history of money in the U.S., though, shows a disquieting progression from the fundamental qualities of the Dollar as a standard and store of value to an ephemeral tool subject to governmental manipulation, devaluation and surveillance.

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The Dollar was established as the standard unit of currency by the Coinage Act of 1792 with 24 grams pure silver as the base metal and intrinsic value point, produced by the newly established United States Mint. Three larger denominations were authorized for gold coins up to $10. The first $10 gold “Eagles” were produced in 1795, with 16 grams of pure gold. Spanish, U.S., and Mexican silver dollars circulated side by side in the United States until the Coinage Act of 1857 ended all foreign coins as legal tender. The U.S. Dollar’s path during this period involved its establishment, struggles with inflation, and the adoption of symbols and denominations that shaped its history.

The Founders knew well the dangers of having a currency with no intrinsic value. That lesson was taught by their unfortunate experience with the ‘Continental’ currency notes. Later, a series of national crises, ever expanding governmental bureaucracy, and the perceived need for maximum efficiency in financial transactions, would lead to the complete uncoupling of the Dollar from precious metals. The dictates of the U.S. Constitution notwithstanding.

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President Abraham Lincoln signed the First Legal Tender Act in 1862, authorizing the issuance of United States Notes by the U.S. Treasury, and redeemable for silver or gold, as legal tender. These “Greenbacks” were the first paper currency to circulate widely, starting around the time of the Civil War.

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Following the Silver standard in the 1700’s, the U.S. Dollar was tied to Gold during most of the 1800’s (except for a government-imposed hiatus around the War of 1812 and Civil War). At the dawn of the Republic, when a Dollar was worth a Dollar, it was also valued at nearly an ounce (85%) of Silver. By the 1830’s, the standard had shifted to Gold at about 1.5 grams to the Dollar. This was made official in 1900 by the Gold Standard Act.

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A key milestone in our history of money was the Federal Reserve Act of 1913 making the Federal Reserve (Fed) the U.S. Central Bank. Ostensibly, the primary purpose of the Fed was to enhance the stability of the American banking system. Prior to its establishment, banking panics were common, characterized by widespread bank runs and failures. These crises were often blamed on the nation’s “inelastic currency.” The national banking acts of the 1860s resulted in most of the nation’s currency being issued by national banks. However, the supply of these banknotes was deemed unresponsive to changes in demand. Reformers sought a more “elastic” currency that could rapidly expand to meet that public demand, unencumbered by the anchor of precious metals and the vagaries of multiple bank-sponsored currencies. The Federal Reserve achieved this through the creation of Federal Reserve Notes in 1914, which are now the predominant form of U.S. currency. The Pittman Act of 1918 took silver coins out of circulation, replaced by these new Federal Reserve Notes. Beyond currency, the Federal Reserve System aimed to improve the flow of money and credit throughout the United States. It was meant to ensure that banks have the resources to meet customer needs across the country - an expanding national economy, thirsty for efficient money and credit. Good intentions that would ultimately produce serious unintended consequences.

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The stage was being set to make the U.S. Dollar a true “fiat currency”- having value because the government decrees it has value but with no tie to a physical commodity. People’s trust in the government determines the currency’s value and stability. Only the Fed has the authority to print and regulate our fiat currency and control other non-cash financial instruments and policy mechanisms. Once disconnected from any tangible commodity, the fiat currency can be printed at will, unchecked. Enter the specter of inflation and its evil cousin – hyperinflation.

 

Into the 1920’s paper money was still “Redeemable in Gold on Demand at the United States Treasury, or in Gold or Lawful Money at any Federal Reserve Bank”. Then came 1933. Newly elected President Roosevelt, to address the chronic effects of the Great Depression, took the currency off the Gold standard and made private ownership of gold illegal by Executive order. Violation of this order was punishable by a $10,000 fine or 10 years in prison, making it a felony to own gold. Later, gold coins from 1933 and earlier were exempted from this rule, ostensibly so coin collectors could avoid prosecution. The Emergency Banking Act and a series of other acts and executive orders that year would prove to be the beginning of the end for the intrinsic currency.  The following year, The Gold Reserve Act of 1934 transferred the Fed’s gold inventory to the Treasury causing the Fed’s reserves to be held in gold certificates, not actual gold. Ownership of all monetary gold, including that held by individuals and institutions, was thus transferred to the U.S. Treasury. In return for their gold, individuals and institutions received currency at a fixed rate of $35 per ounce. This effectively devalued the dollar, reducing its gold value to 59% of the previous standard set by the Gold Act of 1900. No longer would paper currency be redeemable for gold coins. With the stated aim to stabilize the U.S. money supply, the punitive regulations contained in this Act would serve to transition the currency to an “elastic” form and remove individual ownership of the commodity-based currency in favor of a promise of value.

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Two decades later, Congress required “In God We Trust” to be placed on all U.S. currency, literally passing the endorsement buck to the Deity.

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Except for a brief period from 1957-1968 when Silver Certificates were issued and redeemable, U.S. bank notes have not since been convertible by its citizens to precious metals, though President Ford did lift the gold ownership ban at the end of 1974. The Coinage Act of 1965 removed all silver from quarters and dimes, which were 90% silver prior to the act. The final tether that our currency had to any tangible value was cut in 1971. In that year, President Nixon deemed the gold supply insufficient and unilaterally cancelled the direct international convertibility of the United States Dollar to gold. Our Dollar was irrevocably cast as a Fiat Currency. The new bank notes now read “This Note is Legal Tender for all Debts, Public and Private.” It has value because we say so.

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While the Dollar was slowly becoming just another government promise, a period of crisis would set the scene in a different theatre for the transformation of the Dollar on the World stage. At the end of World War II, under the Bretton Woods Agreement, the U.S. Dollar became the world’s reserve currency, based largely on our dominance in the war and factors such as domestic budget surpluses, trade relationships and other economic influences. Quaint attributes by current standards.

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Through the rest of the 1900s the share of global reserves in U.S. Dollars grew steadily, peaking in 2000 at over 70%. That same year, the U.S. National Debt began an inexorable rise, climbing from about $5.5 trillion and just over 50% of the Gross Domestic Product (GDP), to $17 trillion and 100% of GDP by 2013. During this same period, the international faith in the Dollar began to erode, accelerated by the emergence of the European Union Euro as an alternate reserve currency in 1999-2002 under the European Central Bank. A growing China and other restive central banks diversified away from the Dollar, with China reducing its Dollar reserves by 15% in a five-year period ending in 2005. Aggregated foreign reserves in U.S. Dollars fell steadily to about 58% by 2022. Emerging countries are increasingly decoupling from the Dollar, favoring currencies like the Chinese yuan, and China is aggressively courting that opportunity. It is no coincidence that the U.S. National Debt grew during this time to record heights and hit $35 trillion and 130% of GDP in 2024.

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The Dollar remains, for now, the most influential currency due to our legacy position in global trade and political presence. More countries are exploring the reserve and transaction options beyond the Dollar and the weight of the U.S. National Debt causes some to fear the potential collapse of the Dollar.

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The rise of digital money began two decades before the time of the Dollar’s descent to fiat status and has been a transformative journey revolutionizing the way we conduct financial transactions.

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Credit cards, the precursors to modern digital money, emerged in the 1950s. The Diners Club Card, introduced in 1950, was the first multipurpose charge card, followed by American Express, the first plastic credit card, in 1959. The 1960s saw rapid growth in credit card use, with Bank of America's BankAmericard (later Visa) and the Interbank Card Association (later Mastercard) expanding nationwide. These new forms of money were sponsored by financial intermediaries and carried a new convenience, even status, beyond the static, physical form of currency, in the form of sponsored credit for the consumer. Convenience, status, buying power, everything that a consumer economy could want. Further developments in credit card technology, including electronic Point of Sale (POS) terminals, and contactless payment cards, significantly sped up transaction processing. Debit cards emerged in the 1970s, just about the time that the Dollar became a confirmed fiat currency. They offered a direct link to consumers' bank accounts without relying on credit. The introduction of magnetic stripe technology in the early 1970s marked a significant advancement in card evolution. After the turn of the century, digital and mobile payments were added to the box of toys that is the electronic financial system.

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This shiny new technology came with a darker side. For the first time, financial transactions between individuals and businesses created a digital record that was available, directly or indirectly, to outside parties – financial intermediaries, platform vendors, sellers and a multitude of data harvesters could acquire an individual’s detailed personal information and transaction history. The addition of more technology appliances such as laptop computers and smart phones accelerated and expanded the collection of previously private information. Surveillance and tracking of consumers evolved from somewhat benign efforts, to enhance marketing and customer outreach, to more nefarious use by bad actors, service providers and governmental agencies.

Law enforcement was the beneficiary of this new third-party data, often without warranted searches. Such was the price of monetary innovation.  

 

More recent evolution of digital finance has introduced competing concepts of money, most notably: Central Bank Digital Currency (CBDC), Crypto Currency (Crypto) and a hybrid version, Stablecoins. Each represents digital forms of exchange, but they differ fundamentally in their design, governance, and intended purpose. The movement to instant digital transactions appears to be inexorable but the primary vehicle for those transactions is yet undecided. The varied entrants to this Miss Digital Dollar Pageant promise to further obfuscate the promise and the peril of the U.S financial systems used by all Americans. The public can ill-afford to be passive or ignorant of this transition to a ubiquitous platform.

   

CBDC, issued, directed and regulated by governmental central banks, aims to modernize traditional fiat currencies through digital infrastructure, purportedly offering stable, state-backed legitimacy. Consider that government stability, legitimacy and wealth can be shifting and ephemeral.

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Unlike physical banknotes or commercial bank deposits, CBDCs exist on electronic ledgers kept by central sovereign authorities. This enables direct transactions between individuals and institutions without the traditional bank intermediaries. The value of CBDC is on par with the sponsoring sovereign currency, sharing the relative stability and perceived value of that host government. The CBDC landscape is rapidly evolving, with many countries in various stages of research, development, and implementation.

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As of Q1 2025, CBDC has been deployed, or in advanced testing, in nearly a dozen countries, most notably on the ‘BRICS’ platform:

1. Brazil: Actively developing a CBDC project called the Digital Real,

2. Russia: Developing the digital Ruble,

3. India: Currently piloting both wholesale and retail CBDC.

4. China: The e-CNY (digital Yuan) is in an advanced pilot stage and widely used,

5. South Africa: as a BRICS member, it's likely exploring CBDC options.

 

Led by China, The BRICS alliance is intent on displacing the US Dollar as the world reserve currency. This maligned effort will likely press the adoption by western nations, especially the US, of some form of competing CBDC as a bulwark against that offensive and its implications for global security and culture. What form that takes will be a watershed event with implications far beyond the economic landscape.

The Euro Area is in advanced development of the Digital Euro, but persistent technical difficulties have raised skepticism that the project will ripen before an expected vote to officially launch the Digital Euro by the European Commission in October 2025. Other efforts of note:

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• Singapore: Exploring wholesale CBDC,

• mBridge  project with Hong Kong, UAE, Thailand, and China for cross-border transactions,

• The central banks of France, Japan, Spain, among others, are also testing wholesale CBDCs.

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It helps to parse the difference between Retail and Wholesale CBDC. Retail CBDCs (RCBDC) are designed to be held and exchanged between individuals and businesses, whereas wholesale CBDCs (WCBDC) are primarily for financial institutions, especially those operating internationally. Competition on the global stage between the top powers may well compel the adoption of some version of a WCBDC by the US and aligned countries. The U.S. need to remain the world’s reserve currency will certainly drive the adoption of a derivative version of WCBDC by the Fed. RCBDC is quite another matter. With its very real potential for heightened surveillance and granular control of individuals by an overreaching bureaucracy, RCBDC in the U.S. is as pernicious as it is alluring.  Splitting the baby by adoption of a WCBDC or similar vehicle and eschewing a retail version may well be the optimal balance of economic compliance and individual liberty domestically.

 

RCBDCs are intended to be accessible directly to the general public, individuals, and businesses. They are digital forms of currency that mimic traditional cash and provide individuals with a direct claim on the issuing central bank. RCBDCs will enable peer-to-peer transactions, online purchases, and in-store payments, offering an alternative to traditional payment methods.

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Proponents cite the numerous benefits of RCBDC, often glossing over the perils:

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• RCBDCs aim to ensure broad accessibility, enabling individuals with limited access to traditional banking services to participate in the digital economy. The role of intermediaries such as banks may be co-opted or marginalized, further limiting their function as a conduit and buffer between the government and their constituent businesses and consumers. The scale which a new digital dollar must achieve, in order to realize the dream of the digital progressives, is daunting. Choosing the new tools to provide the users, enticing and educating them in their use, and on-boarding both users and businesses is no small task.

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Financial Identity: RCBDCs can decrease the cost of transactions, eliminate barriers to lending, and power microfinance initiatives while establishing financial identities. The digital wallet should allow people using RCBDCs to build credit, establish a lending track record, and access more traditional financial instruments with the history they gain using government currencies. An individual’s RCBDC profile could be shared with lending platforms, supplementing traditional credit markers like income history, debt load, and repayment record data.

Privacy and anonymity: RCBDCs may provide users with varying levels of privacy, seeking to strike a balance between transaction transparency and maintaining user anonymity. The level of privacy will be determined by the sponsoring central bank and subject to political desires of the moment.

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Financial inclusion: RCBDCs have the potential to enhance financial inclusion by enabling seamless and cost-effective financial services for the unbanked and underbanked populations.   This democratized approach to money requires digital financial literacy, interoperability with other systems and acceptance by the end users, none of which is in abundant supply currently.

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Consumer protection: RCBDCs can incorporate built-in safeguards, such as fraud protection mechanisms, dispute resolution frameworks, and transactional transparency, to protect consumers. Those same elements provide the tools for the central bank to surveil and control the consumers when they deem necessary.

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Because CBDCs are inherently centralized, with central banks retaining full control over issuance, supply, and transaction validation, it allows governments to implement monetary policies directly, such as adjusting interest rates or injecting liquidity during economic crises. A RCBDC could be programed to expire if not spent within a certain period, incentivizing consumer spending during recessions. The centralized model also demands regulatory compliance, as all transactions are recorded on permissioned ledgers accessible to authorities. The temptation for authoritarian control is manifest. During the Covid pandemic, our neighbors to the North showed how quickly and easily the levers of financial control can be turned against political opposition.

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The Liberal-led Canadian government froze the bank accounts of truckers demonstrating against Covid restrictions through several steps. Prime Minister Justin Trudeau invoked the Emergencies Act in February 2022 to address the ongoing "Freedom Convoy" protests. Under this act, the government gained the power to freeze bank accounts of people and companies linked to the protests without requiring a court order. Banks were authorized to suspend or freeze accounts of anyone connected to the protests. The government expanded anti-money laundering and terrorist financing rules to include cryptocurrencies and crowdfunding platforms, aiming to cut off financial support for the protesters. By February 19, 2022, at least 76 bank accounts linked to the protests, totaling CA$3.2 million, were frozen under the Emergencies Act. The Royal Canadian Mounted Police (RCMP) provided financial institutions with the names of "influencers" in the protests and vehicle owners who refused to leave the affected areas. Beyond the names provided by the RCMP for the banks to discipline, additional accounts not identified were frozen by the banks under “risk-based” reviews sanctioned by the government. This deputization of the intermediary banks offers a preview of the approach that might well be taken in the U.S. under the guise of an emergency. Though the Emergencies Act was rescinded just weeks after it was enacted, the bureaucratic injury lingered. Two years after the protests, a federal court ruled that Trudeau’s use of the Emergencies Act was unconstitutional. Over a year after that ruling though, protest leaders were convicted on mischief charges stemming from the blockade. The speed and severity that authoritarian governments can move against their domestic political opposition can be measured in hours. The rightful defense and remedy for a country’s citizens unjustly accused is often measured in years.

 

 “In any society, people should not be called upon to pay for their convictions with the price of their lives or their freedoms. But tyranny is jealous of its power and prestige and fearful of dissent.”

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CBDCs inherit the stability (or lack thereof) of their underlying fiat currencies, making them suitable for everyday transactions but subject to the devaluation and instability of that underlying currency. Central banks can mitigate volatility by pegging CBDC units to existing monetary reserves, promising some modicum of predictability for consumers and businesses. This sense of stability is critical for maintaining public trust, particularly in economies prone to hyperinflation or currency devaluation.

 

Fun facts:

• The U.S. National Debt is 50 X larger than the country’s gold reserves.

• All forms of U.S. Dollars (M3) combined are 30 X larger than gold reserves.

• Dollar-denominated financial assets are 100+ X larger than gold reserves.

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In an economic crisis, it will be difficult for the U.S. Dollar to escape the gravity of the national debt.   The distance between the perceived value of a Dollar and its intrinsic, albeit untethered, anchor in precious metals can be measured in the same terms as a pocket full of mumbles. Such are promises. CBDC puts a glossy veneer on the fiat Dollar but would only accelerate its collapse if the house of cards should be shaken.

      

CBDC designs vary in their approach to privacy. Some models, like the European Central Bank’s proposed digital euro, prioritize transaction confidentiality by limiting data visibility to central banks. Others incorporate audit trails to prevent illicit activities, requiring user identification for large transactions. This balance between privacy and regulatory oversight contrasts sharply with cryptocurrencies, where pseudonymity often complicates law enforcement efforts.

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CBDCs leverage centralized infrastructure to achieve near-instant settlement times and high throughput. For example, China’s digital yuan (e-CNY) processes over 300,000 transactions per second, surpassing Bitcoin’s 7 TPS and Ethereum’s 30 TPS. Centralized control also enables offline transaction capabilities, a critical feature for regions with unreliable internet access.

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CBDCs operate within existing legal frameworks, requiring adherence to anti-money laundering (AML) and know-your-customer (KYC) regulations. The U.S. Executive Order 14067 (2022) mandates federal agencies to assess CBDC risks and benefits, emphasizing consumer protection and financial stability. Recent legislative proposals, such as the 2025 U.S. ban on CBDC issuance, reflect ongoing debates over central bank overreach and digital surveillance.

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WCBDCs share much of the DNA of RCBDCs but with very different impacts on the individual level. Unlike RCBDCs, they are intended for use by financial institutions and for interbank settlements. They can facilitate international transfers, securities settlement, and cross-currency payments, with an emphasis on fewer, high-value transactions among wholesale institutions and sovereign nations. WCBDCs raise fewer personal privacy concerns as they are primarily for institutional use. Transaction transparency and monitoring lends itself to fraud protection and money laundering prevention. Unlike RCBDCs, WCBDCs have limited impact on the established intermediation model. Both types of digital currency can be used for monetary policy implementation, but RCBDCs may provide more direct and immediate effects on the real economy, for better or for worse. Globally, WCBDC projects are generally further along in research and development compared to RCBDCs.

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• Crypto, such as Bitcoin, operates on decentralized networks using blockchain technology, prioritizing user autonomy and resistance to centralized control. They are not issued or backed by any central authority, relying instead on cryptographic protocols and consensus mechanisms (e.g., proof-of-work or proof-of-stake) to validate transactions. Bitcoin, the first cryptocurrency, introduced a peer-to-peer electronic cash system designed to bypass traditional financial intermediaries. Cryptocurrencies derive value from market demand, scarcity, and utility, often leading to significant price volatility.

 

Cryptocurrencies operate on platforms where no single entity holds control. Transaction validation is distributed across nodes, which collectively maintain the blockchain’s integrity through consensus algorithms. This design eliminates reliance on trusted intermediaries but introduces challenges in governance. For example, Bitcoin’s protocol changes require majority consensus among miners, developers, and users, often leading to contentious debates. Decentralization also complicates regulatory oversight, as seen in the pseudonymous nature of blockchain addresses.

 

Cryptocurrencies exhibit high price volatility due to speculative trading, market sentiment, and limited adoption as mediums of exchange. Such volatility undermines their utility for daily transactions but attracts investors seeking high-risk, high-reward opportunities. Subsets of cryptocurrencies like Stablecoins, pegged to assets like the U.S. dollar, attempt to address this issue but remain distinct from CBDCs due to their private-sector origins.

 

Cryptocurrencies offer pseudonymous transactions, where users interact via blockchain addresses rather than personal identifiers. While this enhances privacy, blockchain analysis tools can de-anonymize users by tracing transaction patterns. Privacy-focused coins that employ advanced cryptographic techniques to obscure transaction details, offer some level of anonymity, but their adoption remains limited compared to mainstream cryptocurrencies.

 

Public blockchains face scalability challenges due to their decentralized nature and capacity, resulting in delays and higher fees during peak usage. Emerging solutions aim to address these issues but introduce complexity and liquidity fragmentation. In contrast, permissioned CBDC networks avoid these trade-offs by optimizing for speed and regulatory compliance.

Cryptocurrencies exist in a regulatory gray area, with jurisdictions adopting varied approaches.Some early regulations by first-adopter countries impose strict Anti-Money Laundering (AML) requirements on crypto firms. Regulatory uncertainty persists, particularly for decentralized finance (DeFi) platforms, which resist traditional oversight mechanisms.

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• Stablecoins occupy the space between CBDC and the original cryptocurrencies. They are privately issued by companies or foundations and often pegged to fiat currencies or commodities. They maintain stability through collaterals such as cash (fiat) reserves or crypto assets. Some, like their older Crypto siblings, project value through algorithms. Collateralized stablecoins are more common, while algorithmic variants have faced more instability. Control lies with private entities, offering varying levels of anonymity. Privacy depends on regulatory compliance like Know Your Customer (KYC) requirements. Stablecoins are becoming dominant in crypto trading, cross-border remittances, and decentralized finance.

 

Stablecoins have quietly become a tour de force in the global cryptocurrency market, representing more than two-thirds of the trillions of dollars’ worth of cryptocurrency transactions recorded in the last four years. Unlike most cryptocurrencies, which can often be subject to dramatic price swings, stablecoins are pegged 1:1 to less volatile assets such as fiat currencies or commodities in order to maintain a consistent, predictable value. Globally, stablecoins are gaining momentum as both a medium of exchange and a store of value, addressing gaps left by traditional currencies — particularly in regions with monetary instability and/or limited access to the U.S. dollar (USD). Businesses, financial institutions, and individuals are leveraging stablecoins for use ranging from international payments to liquidity management, to protection against currency fluctuations. The ability to facilitate swifter, more cost-effective transactions compared to those of traditional financial systems has accelerated the adoption of stablecoins across the world. As regulatory momentum surrounding cryptocurrency continues to gain headway, stablecoins are becoming a focal point in discussions examining technologies shaping the future of finance.

 

Primarily issued on networks like Ethereum and Tron, stablecoins have combined the power of blockchain technology with the financial stability necessary for practical use of cryptocurrencies.

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The launch of Bitcoin In 2009 revolutionized the financial infrastructure of the world by introducing a decentralized, peer-to-peer transaction system that eliminated the need for intermediaries. However, its limited supply and speculative trading dynamics resulted in extreme price volatility, making its native token bitcoin (BTC) challenging to use as a medium of exchange. Similarly, when Ethereum emerged a few years later, it built upon Bitcoin’s foundation, expanding the capabilities of cryptocurrencies to programmability with smart contracts. This innovation spurred the rise of decentralized finance (DeFi), but like bitcoin, Ethereum’s native token Ether (ETH) also suffered from significant price volatility.

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Stablecoins, which first appeared in 2014 combines the technological benefits of blockchain — such as transparency, efficiency, and programmability — with the financial stability needed for widespread adoption. By solving the issue of crypto price volatility, stablecoins have unlocked new use beyond trading and speculation, appealing to a broad range of crypto users, both retail and institutional.

 

Stablecoins maintain their value through various mechanisms designed to ensure price stability.

• Fiat-pegged stablecoins

Fiat-pegged stablecoins — by far the most popular type of stablecoin — are tied 1:1 to the value of traditional fiat currencies, with the USD and euro (EUR) being the most common benchmarks. These stablecoins derive their stability from reserves held in currency or equivalent assets, which act as collateral. Examples include the USD-pegged Tether (USDT) and USD Coin (USDC).

• Commodity-pegged stablecoins

Commodity-backed stablecoins are tied to the value of physical assets like gold, silver, or other tangible commodities. These stablecoins offer users the ability to gain exposure to commodities without directly owning them. PAX Gold (PAXG) is a stablecoin backed by gold reserves, where each token represents one troy ounce of gold stored in a secure vault. Another example is Tether Gold (XAUT).

• Crypto-backed stablecoins

Crypto-backed stablecoins are backed by reserves of other cryptocurrencies. These stablecoins often use overcollateralization — meaning that the value of assets held in reserves is greater than the pegged value — to mitigate the inherent volatility of their underlying assets.

• U.S. Treasury-backed stablecoins

U.S. Treasury-backed stablecoins are different from traditional fiat backed stablecoins that are backed by cash reserves or liquid assets. Supported by U.S. treasuries and repurchase agreements, they offer yield directly to holders essentially functioning as tokenized money market funds and appealing to investors seeking secure, passive income with regulatory alignment.

• Algorithmic stablecoins

Algorithmic stablecoins maintain their value through programmed mechanisms that adjust supply based on market demand, without relying on direct collateral. Some versions adjust supply dynamically to stabilize price or combine collateralization with algorithmic adjustments. While these models are innovative, they face challenges in maintaining long-term stability, as seen with the collapse of TerraUSD in 2022, highlighting risks associated with purely algorithmic stabilizing mechanisms.

 

Stablecoins in the crypto market

Outside the arena of speculation, stablecoins play an essential role in the cryptocurrency market by providing a reliable medium of exchange, a store of value, and a bridge between traditional finance and crypto. As a liquidity provider, stablecoins underpin much of the activity within decentralized finance, centralized exchanges, and cross-border payments. The stablecoin market has matured significantly throughout the world, overtaking BTC as a preferred asset for everyday transactions.

 

Stablecoin policy and regulation across the world

Stablecoins have become a priority for regulators worldwide due to their rapid adoption and growing role in the global financial system in a variety of cases. Governments and regulatory bodies are grappling with the challenge of creating frameworks that encourage innovation while ensuring consumer protection, financial stability, and compliance with anti-money laundering and counter-terrorism financing (AML/CFT) standards.

Stablecoin regulation in the United States remains a work in progress, marked by significant uncertainty and debate. While stablecoins like USDC and USDT have seen widespread adoption for payments and financial services, the lack of a comprehensive regulatory framework has created challenges for issuers and users alike.

 

Major stablecoin issuers

While there are hundreds of stablecoins in circulation, the majority are issued by Tether, followed by Circle. Other issuers, while smaller in market share, are actively changing the landscape of stablecoins.

• Tether (UDST)

Tether (USDT) is the largest stablecoin by market cap, and accounts for the majority of stablecoin supply, offering liquidity across numerous blockchains. Tether has faced scrutiny over its reserves and financial transparency, but the company points to audits and market stress tests to demonstrate its robust position. Tether holds nearly $100 billion in US Treasury bills, with most of its assets managed by Cantor Fitzgerald, making it comparable to major countries in terms of reserve assets.

• Circle (USDC)

Circle issues USDC, which is the second-largest stablecoin by market cap. USDC is known for its transparency, with weekly attestations of its reserves. The reserves are held in cash and short-duration U.S. government treasuries, providing a high level of transparency and assurance to users.

• Paxos

Paxos issues Pax Dollar (USDP) and provides the infrastructure for PayPal’s stablecoin, PayPal USD (PYUSD) and other stablecoin projects across the world. Paxos emphasizes transparency and trust, adhering to guidelines for portfolio management and publishing monthly reports to verify reserves.

• PayPal (PYUSD)

PayPal has entered the stablecoin market with PayPal USD (PYUSD), issued in collaboration with Paxos. PYUSD is designed for payments and is backed by reserves managed by Paxos.

 

Once used primarily for crypto trading, stablecoins have become a versatile tool for everyday use, powering a broad range of utility for the crypto native ecosystem and traditional finance alike. Stablecoins also enable global access to financial services, empowering users in economically unstable regions to participate in decentralized finance markets without exposure to local currency volatility. Stablecoins are increasingly used for everyday payments and person to person transfers. Their ability to process transactions quickly and cost-effectively, often with minimal fees compared to traditional banking systems, makes them an attractive option for users.

 

Cross-border payments and remittances are among the most transformative use cases for stablecoins. They provide a faster and cheaper alternative to traditional remittance services, which often involve high fees and slow processing times. The unbanked and underbanked populations use stablecoins to send money to their families offshore, and businesses are using them to settle international invoices. Stablecoins provide a solution that bypasses the inefficiencies of legacy financial systems, bolstering financial inclusion and reducing friction in cross-border transactions.  

 

For foreign exchange and trade finance, stablecoins enable businesses to transact in a globally accepted digital currency, reducing reliance on intermediaries and mitigating risks associated with fluctuating exchange rates. Stablecoins simplify transactions for importers and exporters, providing a stable and transparent medium for international trade, particularly in regions with limited access to foreign currency.

 

Stablecoins have become a preferred store of value in regions facing economic instability or high inflation. By pegging their value to assets like the USD, stablecoins offer individuals and businesses a way to preserve purchasing power and shield their assets from the volatility of local currencies.

 

While stablecoins have gained significant traction for their legitimate use, they have also been exploited by high-risk and illicit actors for various illegal activities. Their stability and global accessibility make them attractive tools for bad actors seeking to bypass financial controls and avoid detection — although the inherent transparency and traceability of blockchain often makes this a poor choice.

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Although it is estimated that less than 1% of on-chain transactions are illicit, stablecoins have been used in activities such as money laundering, fraud, and sanctions evasion. Due to their relatively high liquidity and acceptance across cryptocurrency exchanges, stablecoins can be used to transfer value quickly across borders without relying on traditional financial institutions.

 

Sanctions evasion through stablecoins and other cryptocurrencies has gained prominence as countries like Russia explore alternatives to bypass Western financial restrictions. Entities in sanctioned regions might turn stablecoins to facilitate international trade or transfer funds to entities in non-sanctioned jurisdictions. These activities exploit the pseudonymous nature of blockchain transactions to obscure the origins of funds, often through complex networks of wallets and exchanges. While large-scale sanctions evasion remains challenging due to crypto market liquidity constraints and the transparency of blockchain transactions, smaller-scale activities, such as fund transfers by sanctioned entities and politically exposed people, pose security and compliance risks.

 

Stablecoin issuers have stepped up their efforts to fight financial crime, supporting global law enforcement and regulatory investigations. Issuers like Tether work closely with global law enforcement agencies, financial crime units, and regulators like the Financial Crimes Enforcement Network (FinCEN)  to monitor transactions in real-time and identify suspicious activity. Most centralized stablecoin issuers also have the power to freeze or permanently delete or “burn” tokens in wallets linked to confirmed criminal activities, stopping illegal transactions and helping recover stolen funds.

 

Stablecoins issued by a centralized service like Circle and Tether can be frozen or burned by their issuers to comply with regulations or prevent illicit activities. In contrast, decentralized stablecoins are managed by protocols and smart contracts, making them resistant to freezing or burning by any centralized authority. The balance between compliance and user autonomy is an important consideration for decentralized technologies.

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Stablecoins not only represent a critical intersection between blockchain and legacy financial systems but also open up new avenues for economic participation. Adoption continues to grow across regions and industries, supported by regulatory advancements that aim to provide clarity and build trust among users and institutions. The future of stablecoins is not without challenges. Regulatory uncertainty in key markets, exploitation by illicit actors, and questions around reserve transparency are always pertinent, which could undermine market confidence and hinder broader adoption if not addressed effectively. The role of stablecoins in creating new financial products and streamlining cross-border commerce further speaks to their transformative potential. With ongoing advancements in regulation and technology, stablecoins have the potential to unlock new opportunities, bridging gaps between economies and enabling greater global financial connectivity. Their continued evolution will play a central role in defining the future of crypto and traditional finance alike.

 

Each flavor of the digital currencies has its positive and negative aspects and collectively represent divergent visions for the future of money. CBDCs offer stability, regulatory compliance, and seamless integration with existing financial systems, positioning them as digital extensions of sovereign currencies, along with the weaknesses inherent in those fiat currencies. Cryptocurrencies prioritize decentralization, user autonomy, and innovation, albeit with trade-offs in volatility and scalability.

As nations explore CBDC pilots and grapple with crypto regulation, the interplay between these digital assets will shape financial inclusion, privacy norms, and global economic power dynamics. Policymakers must balance innovation with risk mitigation to harness the transformative potential of both technologies.

 

RCBDCs present the most treacherous potential, especially from a Libertarian perspective, due to severe privacy concerns and the clear potential for government control and multiple rights invasions. Cybersecurity risks, and the disintermediation of commercial banks are formative challenges to their adoption but will likely only serve to bolster the RCBDC armor once these hurdles are defeated or accommodated. If allowed to permeate into the financial system in the U.S., $RCBDCs will be intractable and pose an irresistible tool for a malign bureaucracy to control and punish its citizenry who might stand in opposition, once the political pendulum swings away from its center, as it surely will. It always does. Once adopted, the exorcism of this malignant spirit from the fabric of the U.S. financial system would be painful and destructive. We may come to wish we had smothered that gollum in the crib when we had the chance.

 

The Crypto birth defects, cited above, will cause it to be held outside the granular transaction arena. Whether or not regulators will allow crypto to exist in its current decentralized form remains to be seen. 

 

Stablecoins have their own limitations. Regulatory uncertainty, collateral mismanagement, and scalability might be difficult to overcome in the short-term but some basket of these may ultimately emerge as the lesser of all the digital currency evils, with one stablecoin emerging as the default choice.

If allowed to develop as a viable alternative to $RCBDC, stablecoins may provide the antidote to the insidious unhappiness that is Retail Central Bank Digital Currency.

 

The above pros and cons of the various digital dollar options only address the relative strengths and weaknesses of this gang of candy-coated miseries. With only a few exceptions, they all share one or both fundamental flaws: tie to fiat currency and reliance on a fragile electrical grid system to function and deliver their value. Relying on fiat digital currency is akin to having your bankrupt uncle guarantee a loan for your electric sweater start-up company. Worse, when the electricity goes out, accessing any form of digital currency will be impossible for as long as the power failure persists.

 

To complete the trifecta of digital currency disfavor, there is the more pedestrian issue of transactional security of electric money. Apart from the ability of the central issuers and servicers to manipulate or extinguish the contents of a digital wallet, security best practices must be vigilantly employed to navigate through the minefield of on-line fraud, software vulnerabilities, phishing and user-error, to name but a few of the most dangerous suspects. Each measure comes with its own trade-offs between security and accessibility:

 

• Cold Storage:
  High security / Low to medium accessibility. Hardware wallets and paper wallets keep private keys offline, significantly reducing hacking risks. Physical loss, theft or destruction is a concern, so backups are essential. Best used for large holdings held for the long term.

• Hot (On-line) Wallets:
  Low security / High accessibility. Exposure to hacking and malware. Suitable for small amounts and frequent transactions. Need to limit the amount stored in hot wallets to what is needed for daily use.

• Exchange Storage:
  Low security / High accessibility. Storing assets on exchanges is convenient but risky. Exchanges can be hacked, and users may lose funds. Custodial risk overhangs the entire platform. Best to use exchanges primarily for trading, not long-term storage. In the case of $RCBDC, the “exchange” will likely be the bureaucracy of the Federal Reserve or their proxy. In the absence of a local, quasi-independent financial intermediary to settle discrepancies and disputes, one would be left to the mercy of an artificial intelligence agent to plead their case for recovery. Ask anyone who has wrestled with the Federal bureaucracy to change an error or adjust a fraud how well that worked.

 

Multiple layers of authentication, network structuring and recovery protocols may make one opine for the good ol’ days of greenbacks and leather wallets.   

 

History has shown us that a hot national crisis is the best catalyst for currency and monetary controls. The bureaucratic “cure” for an impending collapse of the Dollar and the resulting inflation, or hyper-inflation, may well be the imposition of a U.S. $RCBDC. The temptation by a future administration to usher in this tool of authoritarian control may be irresistible. They never let a good crisis go to waste.

 

The roadmap to the imposition of a $RCBDC in the U.S. has already been drawn for us. Expect a two-pronged approach, both paths relying on the dependency and complacency already present in the American cultural fabric:

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• The Federal government will set $RCBDC as the default method of payment of monies flowing to the population from the government coffers – payroll. entitlements, transfer payments, grants and others. The sales pitch will likely include security, stability, convenience and, depending on the gateway crisis, might include: specific access by disaster victims (Natural calamity), sanitary features (Pandemic) or good old-fashioned patriotism (Foreign enemy threat). The pretense will be compelling, and resistance will be futile for those without the means of resilience and self-reliance.

•  Financial intermediaries and businesses will be coerced into adoption and facilitation of the $RCBDC through the threat of the existing levers of compliance, licensing, taxation and other regulatory tools. These intermediaries will be “deputized” to report and enforce the mandatory use of the approved $RCBDC to the exclusion of all others. The Federal posse will ride to the rescue of the American population and deliver a monetary solution to all that ails us to fight the evil foe (fill in the blank) for the common good.

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Previous governmental remedies and machinations in the financial space have proven to be neither common nor good. Surely it will be different this time.

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Once a critical mass of $RCBDC registration and use by the population is reached, alternative forms of currency will be disabled or made illegal. Outlawing the ownership of gold and silver coins will signal that the populace frog has been completely boiled. Many will happily vie for a role on the new national gameshow ‘Survivor DC’. Download the app on your phone today! Let the social scoring begin! Bonus points for informing on your neighbors!

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The price America paid for rapid national growth and economic success since our founding was the gradual dependence on a fiat currency and its bloated mothership bureaucracy. The price we may well pay for the resulting runaway spending and political largess could be a loss of principal liberties.

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The Seven Enemies of Freedom that our Founders fought to abolish could be re-animated by the imposition of $RCBDC and should be strongly resisted as if our freedoms and fortunes depend on it.

 

“Of all tyrannies, a tyranny sincerely exercised for the good of its victim may be the most oppressive.” C.S. Lewis.

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