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Stable Cryptocurrencies
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STABLE CRYPTOCURRENCIES # STABLE CRYPTOCURRENCIES Craig Calcaterra,* Wulf A. Kaal,** and Vadhindran Rao *** # Abstract The authors examine the emergence and proliferation of stable cryptocurrencies and their uses. After evaluating the core shortcomings associated with fiat currencies, the authors highlight the benefits of stable cryptocurrencies for monetary policy making, overall market stability, and their bilateral impact on the emergence of decentralized commerce. The transition to digital currencies has already started. It is a matter of time until the use cases and applications of stable cryptocurrencies become more mainstream. **_Key Words_** _:_ Stable Cryptocurrencies, liquidity, Corruption, Cost, Speculation, Inflation, Price Stability, Transparency, Feedback Effects, Market Stability, Stability Mechanisms, Monetary Policy, Emerging Technology, Crypto Economics, Token Models, Incentive Design, Velocity, Supply, Demand, Tokens, Initial Coin Offerings, Blockchain, Distributed Ledger Technology **_JEL Categories_** _:_ K20, K23, K32, L43, L5, O31, O32 > * Professor of Mathematics, Metropolitan State University (Minneapolis, USA) > ** Professor of Law, University of St. Thomas School of Law (Minneapolis, USA) > *** Professor of Finance, Metropolitan State University (Minneapolis, USA) # Table of Contents |I.|INTRODUCTION.................................................................................. 2| |---|---| |II.|FIATCURRENCIES.............................................................................. 3| |_1._|_Arbitrary Policy Outcomes ............................................................ 4_| |_2._|_Cost .............................................................................................. 5_| |_3._|_Capital Controls ......................................................................... 11_| |III.|TRANSITION TODIGITALCURRENCIESSTARTED........................... 12| |_1._|_Technological and Monetary Co-Evolution .................................. 13_| |_2._|_Early Experimentation ................................................................ 17_| |IV.|STABLECRYPTOCURRENCIES....................................................... 21| |_1._|_Growth ....................................................................................... 24_| |_2._|_Cost Reduction ............................................................................ 25_| |_3._|_Equity ......................................................................................... 28_| |_4._|_Counteracting Corruption ........................................................... 30_| |_5._|_Transforming Cryptocurrency Market Structure .......................... 31_| |_6._|_Fighting Inflation ........................................................................ 33_| |_7._|_Price Stability ............................................................................. 34_| |_8._|_Interoperability ........................................................................... 38_| |_9._|_Enabling Global Decentralized Commerce .................................. 40_| |_10_|_._<br>_Market Stability ...................................................................... 44_| |_11_|_._<br>_Supporting Mass Adoption ...................................................... 47_| |V.|CONCLUSION ANDOUTLOOK............................................................ 49| STABLE CRYPTOCURRENCIES # **I.** Introduction Contemporary society is expeditiously embracing decentralized solutions for human interaction. Increasingly complex frameworks, theories and models are needed to understand the issues facing contemporary societies.<sup>1</sup> Stable cryptocurrencies offer the public the prospect of access to the crypto ecosystem built on the stability and endurance of the existing financial system. Stable cryptocurrencies offer investors the prospect of a safe haven when markets are volatile. They also address the costly fiat-to-cryptoconversion (and vice versa) for those investors who wish to avoid conversion from crypto to fiat currency but require price stability. In drawing comparisons between central banks’ monetary policy making and decentralized monetary policy attempts, it is important to note that such comparisons are inaccurate and incomplete with regards to the industrialized world. Rather, any monetary policy solution comparisons need to be made on a global scale. Taking into account countries with monetary policies that fall short of the objectives outlined by the western world, allows for a comparison of stable cryptocurrencies’ policy means and features that can actually add value in countries afflicted by instability and lacking government policies. For instance, most comparisons of stable cryptocurrencies with fiat currencies, such as the United States Dollar, fall short because the complexities of policy making in a fully operational system do not yet exist in nascent technology emulation of monetary policy making. Yet, conceptually, the technological solutions provided by stable cryptocurrencies can underscore what technology driven optimization of policy making is possible, even in fully operational and complex systems. > 1 “The market was seen as the optimal institution for the production and exchange of private goods. For non-private goods, on the other hand, one needed the government to impose rules and taxes to force self-interested individuals to contribute necessary resources and refrain from self-seeking activities … Scholars are slowly shifting from positing simple systems to using more complex frameworks, theories, and models to understand the diversity of puzzles and problems facing humans interacting in contemporary societies.” Elinor Ostrom, _Beyond Markets and States: Polycentric Governance of Complex Economic Systems_ , Nobel Prize Lecture at 408 (Dec. 8, 2009), _in_ LEX PRIX NOBEL, 2009, at 408, 409. The transition to stable currencies in the private sector has already started. For example, IBM’ s blockchain-powered payments network, “World Wire” has already attracted several international banks who will issue their own stable cryptocurrencies, backed by the national fiat currencies in their home jurisdictions.<sup>2</sup> Moreover, various central banks and governments are experimenting with cryptocurrency solutions. # **II.** Fiat Currencies A growing body of evidence suggests that fiat currencies and associated monetary policies are subject to significant shortcomings. Existing government-sponsored fiat currencies are not tied to a physical commodity that provide a valuation basis.<sup>3</sup> In 2018, the IMF estimated that 11 countries are at 20% or higher inflation.<sup>4</sup> Using black market exchange rates measured weekly, the Cato Institute’s Troubled Currencies Project estimates that the real rates are significantly higher than the IMF estimates.<sup>5</sup> Currency devaluation is rampant in many countries, e.g. Venezuela (2018: - > 2 Marie Huillet, _Six Global Banks Sign Up to Issue Stablecoins on IBMs NowLive Blockchain Network,_ COINTELEGRAPH (March 18, 2019), https://cointelegraph.com/news/six-global-banks-sign-up-to-issue-stablecoinson-ibms-now-live-blockchain-network. > 3 Sandra Kollen Ghizoni, _Nixon Ends Convertibility of US Dollars to Gold and Announces Wage/Price Controls_ , FEDERAL RESERVE HISTORY (Nov. 22, 2013), https://www.federalreservehistory.org/essays/gold_convertibility_ends. Nixon in 1971, separated the value of the US dollar from the Gold standard, in part because a growing consensus among policy makers acknowledged the weakening of the gold-tied Dollar in comparison to enterprises that were not tied to the price of gold. > 4 International Monetary Fund, _Inflation Rate, Average Consumer Prices Annual Percent Change_ , IMF DATA MAPPER, https://www.imf.org/external/datamapper/PCPIPCH@WEO/OEMDC/ADVEC/ WEOWORLD > 5 Steve Hanke & Hal Boger, _Inflation by the Decades: Full Dataset_ , CATO, (2018), https://object.cato.org/sites/cato.org/files/troubled-currencies-projectsite/inflation-by-the-decades-full-data-set.xlsx. According to the Troubled Currencies Project, which is a joint project with Johns Hopkins University, six countries are experiencing over 100% annual inflation. _Id._ STABLE CRYPTOCURRENCIES 99%), Argentina (2018: -53.2%), Turkey (2018: -38.4%), and Brazil (2018: -20.6%).<sup>6</sup> Government-controlled fiat currencies are as dependent on the faith of the people in the implicit or explicit government guarantees as any other form of currency not yet fully adopted.<sup>7</sup> # _1. Arbitrary Policy Outcomes_ The unfettered discretion of policy makers can lead to arbitrary outcomes.<sup>8</sup> The overall value and stability of any fiat currency is contingent on fluctuations and successes of a country’s economy.<sup>9</sup> Policy makers in any given country have the ability to unilaterally decide to devalue assets in a country. The supply of goods and services in any given economy can be changed through arbitrary decisions by policy makers or a central bank. Central bankers’ ability to determine when to print money as monetary policy can significantly affect inflation.<sup>10</sup> Government-controlled fiat currencies are as dependent on the faith of the people in the implicit or explicit government guarantees as they pertain to the currency the people use as any other form of currency not yet fully adopted.<sup>11</sup> > 6 Brian Ellsworth & Girish Gupta, _Venezuela Announce 99.6 Percent Devaluation of Official Forex Rate_ , REUTERS (Feb. 5, 2018, 5:25 PM), https://www.reuters.com/article/us-venezuela-economy/venezuela-announces99-6-percent-devaluation-of-official-forex-rate-idUSKBN1FP2WK; Sam Meredith, _Argentina’s Peso has Now Fallen 52% Against the Dollar this Year_ , CNBC (Aug. 31, 2018), https://www.cnbc.com/2018/08/31/argentinas-peso-hasfallen-108percent-against-the-dollar-so-far-this-year.html; Roger Aitken, _Turkish Lira ‘Currency Crisis’ Not Over, Could Hit 8 Against U.S. Dollar_ , FORBES (Aug 16, 2018), https://www.forbes.com/sites/rogeraitken/2018/08/16/turkish-lira-currencycrisis-not-over-could-hit-8-against-u-s-dollar/#472187cd2301; Lise Alves, _With Depreciation of Currency, Brazilians Spend Less Abroad_ , THE RIO TIMES (Dec. 24, 2018), https://riotimesonline.com/brazil-news/rio-business/withdepreciation-of-currency-brazilians-spend-less-abroad. > 7 N. GREGORY MANKIW, PRINCIPLES OF ECONOMICS 220 (Cengage Learning, 7th ed. 2014). > 8 Giandomenico Majone, _From the Positive to the Regulatory State: Causes and Consequences of Changes in the Mode of Governance_ , 17 JOURNAL OF PUBLIC POLICY, 141-43, (1997). > 9 _Id_ . > 10 _Id_ . > 11 _Id_ . Lastly, monetary policy making for fiat currencies is largely lacking transparency. The lacking transparency of monetary policy making does not allow for anticipatory market action based on policy indicators.<sup>12</sup> # _2. Cost_ Cash-based economies are subject to cost.<sup>13</sup> In the United States, transacting in cash costs the consumer around 200 billion dollars annually - about $637 per person.<sup>14</sup> In the United States only about one third of all transactions in the economy are conducted using cash payments.<sup>15</sup> Many countries represent economies primarily conducted in cash. Several studies demonstrate that the poor and those with less access to institutions bear a disproportionate share of these costs of using cash.<sup>16</sup> In the U.S., for example, cash usage imposes a regressive tax on consumers, with the highest impact on people who do not have an account with a bank.<sup>17</sup> Such impact is higher in countries that have a higher rate of cash usage. The cost of cash transactions and the use of bank notes is associated with several factors. The cost of cash is primarily associated with counting, managing, storing, transporting, guarding, and accounting for bank notes.<sup>18</sup> The cost increases further because the use of bank notes is inherently insecure. The theft of cash alone costs U.S. retail > 12 _Id_ . > 13 Bhaskar Chakravorti, _The Hidden Cost of Cash_ , HARVARD BUSINESS REVIEW, (June 2014), https://hbr.org/2014/06/the-hidden-costs-of-cash. > 14 Jonathan Brugge, Olivier Denecker, Hamza Jawaid, Andras Kovacs, & Ibrahim Shami, _Attacking the Cost of Cash_ , MCKINSEY & COMPANY (Aug. 2018), https://www.mckinsey.com/industries/financial-services/our-insights/attackingthe-cost-of-cash. > 15 _See_ Chakravorti, _supra_ note 14. > 16 _Id_ . > 17 _Id_ . > 18 Aleksander Berentsen and Fabian Schar, _The Case for Central Bank Electronic Money and the Non-case for Central Bank Cryptocurrencies_ , Federal Reserve Bank of St. Louis _Review_ , Second Quarter 2018, pp. 97-106. https://doi.org/10.20955/r.2018.97-106. STABLE CRYPTOCURRENCIES businesses lose around $40 billion annually.<sup>19</sup> Because small businesses cannot afford sophisticated security and cash transportation services, the cost associated with bank notes’ inherent insecurity is born mostly by smaller businesses in poorer neighborhoods and rural areas. The cost of printing paper notes is quite substantial and creates a burden on the economy. To make $1 and $2 bills costs 5.6 cents per note, while $5 cost 11.4 cents, $10 cost 11.1 cents, both $20 and $50 bills cost 11.5 cents, and $100 bills cost 14.2 cents.<sup>20</sup> In other words, the more it is worth, the more it costs to produce. In 2014, the United States government created 6.9 billion paper notes, with a total value of $130.1 billion, which adds up to about 24.8 million notes a day.<sup>21</sup> More than 90% of the notes are used to replace ones already in circulation (or recently taken out).<sup>22</sup> What makes matters worse, the printing can never stop and continues to increase. In 2018, the United States government planed on making 7.2 billion notes, valued at $188.7 billion, a 20 percent increase from the previous year.<sup>23</sup> Counterfeiting of bank notes has been an ongoing phenomenon for centuries. The respective currency that is subject to counterfeiting and the people’s belief in the government becomes devalued each time counterfeit money gets disseminated into the market. The government is therefore tasked with protecting the currency’s > 19 Will Yaowicz, _Cash Costs U.S. Businesses $40 Billion a Year_ , https://www.inc.com/will-yakowicz/dealing-with-cash-costs-americanbusinesses-55-billion.html (last visited April 24, 2019). > 20 _Currency and Coin_ , BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, https://www.federalreserve.gov/faqs/currency_12771.htm (last accessed on April 24, 2019). > 21 _Currency and Coin Services_ , BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, https://www.federalreserve.gov/paymentsystems/coin_data.htm (last visited Apr. 2019). > 22 _How Much U.S. Currency is in Circulation_ , BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, https://www.federalreserve.gov/faqs/currency_12773.htm (last updated Apr. 02, 2019). > 23 _2019 Currency Budget_ , BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM (2019), https://www.federalreserve.gov/foia/files/2019currency.pdf. integrity.<sup>24</sup> Federal law prohibits the possession of counterfeit notes,<sup>25</sup> as well as passing on, uttering (making something fake look as if it is genuine), and dealing with money that is either domestic or foreign with the intention of defrauding.<sup>26</sup> About 1 out of 10,000 notes produced by the people of North Korea are circulating in the U.S.<sup>27</sup> The ‘super notes’ are believed to have been developed in order to fund their weapon buying program.<sup>28</sup> The cost of counterfeit response is significant. According to one study, one in every $12,400 of cash notes printed may be counterfeit.<sup>29</sup> In an effort to stay ahead of attacks on the paper notes by counterfeiters, the federal government spends around $390 million on currency redesigns.<sup>30</sup> These costs are largely associated with upgrades to cash-processing equipment.<sup>31</sup> Even in countries with low levels of counterfeit interference, the social cost of 24 The founders of America put a clause in the constitution that stated that any person found counterfeiting money would be punished. U.S. CONST. art. I, § 8, cl. 6. In 1865, the Secret Service was established to go after money counterfeiters. At that time, one-third of the U.S currency was fake. > 25 18 U.S.C. §§ 470-514 (2012). > 26 _Id_ . > 27 _See generally_ , Dick K. Nanto, _North Korean Counterfeiting of U.S. Currency_ , CONGRESSIONAL RESEARCH SERVICE, 7-12 (June 12, 2009), https://fas.org/sgp/crs/row/RL33324.pdf. > 28 Stephen Mihm, _No Ordinary Counterfeit_ , , NEW YORK TIMES MAGAZINE, (July 23, 2006), https://www.nytimes.com/2006/07/23/magazine/23counterfeit.html. > 29 _Costs of Keeping Ahead of Counterfeiters_ , FEDERAL RESERVE BANK OF RICHMOND, (December 2009), https://www.richmondfed.org//media/richmondfedorg/banking/payments_services/understanding_payments/p df/costs_counterfeiters.pdf ; Ruth Judson and Richard Porter, _Estimating the Worldwide Volume of Counterfeit U.S. Currency: Data and Extrapolation_ ,” DIVISION OF MONETARY AFFAIRS, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, (2003), http://www.federalreserve.gov/pubs/FEDS/2003/200352/200352pap.pdf. > 30 _Study to Assess Options for Enabling the Blind and Visually Impaired Community to Denominate_ _U.S. Currency_ , DEPARTMENT OF THE TREASURY, BUREAU OF ENGRAVING AND PRINTING, (July 2009), (http://www.moneyfactory.gov/images/ARINC_Final_Report_7-26-09.pdf 31 _Id_ . STABLE CRYPTOCURRENCIES counterfeits is substantial.<sup>32</sup> Some evidence exists that demand for bank notes declines after a counterfeiting shock in a given system.<sup>33</sup> Stock prices of credit card and bank deposit entities increases after counterfeit incidents. Such findings are consistent with a loss of confidence in the currency and the public’s substituting cash after a counterfeit incident. Physical bank notes result in untraceable transactions that facilitate corruption and exert a significant cost on the global economy. Corruption has well documented negative economic effects.<sup>34</sup> > 32 Nathan Viles, Alexandra Rush & Thomas Rohling, _The Social Costs of Currency Counterfeiting,_ RDP 2015-5, RESERVE BANK OF AUSTRALIA, (May 2015), https://www.rba.gov.au/publications/rdp/2015/2015-05/. > 33 _Id_ . > 34 J. Edgardo Campos, Donald Lien & Sanjay Pradhan, _The Impact of Corruption on Investment: Predictability Matters_ , WORLD DEVELOPMENT, June 1999, vol. 27(6) at 1059-1067; Rafael Ditella and Ernesto Chargrodsky, _The Role of Wages and Auditing During a Crackdown on Corruption in the City of Buenos Aires_ , JOURNAL OF LAW AND ECONOMICS, 46(1) (2003) at 269-292; Axel Dreher, _IMF and Economic Growth: The Effects of Programs, Loans, and Compliance with Conditionality,_ WORLD DEVELOPMENT, vol. 34(5) 2006, at 769788; GUNNAR MYRDAL, ASIAN DRAMA: AN INQUIRY INTO THE POVERTY OF NATIONS, (Pantheon Books, 1<sup>st</sup> ed., 1971); Zvika Neeman, Daniele Paserman & Avi Simhon, _Corruption and Openness_ , The Hebrew University of Jerusalem, (Discussion Paper No. 8.03, August 2003), https://ageconsearch.umn.edu/record/14977/files/dp030008.pdf; Lorenzo Pellegrini & Reyer Gerlagh, _Corruption's Effect on Growth and its Transmission Channels_ , KYKLOS, vol 57(3)(2004) at 429-456, https://ssrn.com/abstract=591558; Helene Poirson Ward, _Economic Security, Private Investment, and Growth in Developing Countries_ , (International Monetary Fund, IMF Working Paper 98/4, 1998), https://www.imf.org/en/Publications/WP/Issues/2016/12/30/EconomicSecurity-Private-Investment-and-Growth-in-Developing-Countries-2456; Carmen M. Reinhart & Kenneth S. Rogoff, _The Modern History of Exchange Rate Arrangements: A Reinterpretation_ , QUARTERLY JOURNAL OF ECONOMICS, Febr. 2004, at 1-48; Binyam Reja & Antti Talvitie, _The Industiral Organizaiton of Corruption: What is the Difference in Corruption between Asia and Africa_ , INTERNATIONAL SOCIETY FOR NEW INSTITUTIONAL ECONOMICS, 2000, at 22-24; Michael T. Rock & Heidi Bonnett, _The Comparative Politics of Corruption: Accounting for the East Asian Paradox in Empirical Studies of Corruption, Growth and Investment_ , WORLD DEVELOPMENT, June 2004, at 999-1017; Andrei Shleifer & Robert W. Vishny _, Corruption_ , QUARTERLY JOURNAL OF ECONOMICS, August 1993, at 599-61; Shang-Jin Wei, _How Taxing is Corruption on International Investors?_ , REVIEW OF ECONOMICS AND STATISTICS, Feb. 2000, According to some studies, the annual cost of corruption on the global economy is 3.6 billion.<sup>35</sup> Economic growth is negatively affected by corruption in terms of gross domestic product per capita in a given country, price stability and international trade, and bias in the composition of government expenditures.<sup>36</sup> The World Bank suggests that corruption is the single greatest threat to social and economic development.<sup>37</sup> Countries that address corruption can increase per capita incomes of their citizens by up to [400%].<sup>38</sup> The social cost associated with corruption is holding humanity back in development and affects the poor disproportionately.<sup>39</sup> The effect of corruption on economic welfare is significant.<sup>40</sup> Most studies capture the negative impact of corruption on economic development by focusing on the gross domestic product and per capita growth of countries relative to the degree of corruption, e.g. at 1-11; Shang-Jin Wei & Andrei Sleifer, _Local Corruption and Global Capital Flows_ , BROOKING PAPERS ON ECONOMIC ACTIVITY, 2000, at 303-354; Shang-Jin Wei, _Negative Alchemy? Corruption and Composition of Capital Flows_ , (National Bureau of Economic Research, Working Paper No. 8187, 2001), https://www.nber.org/papers/w8187; Heinz Welsch, _Corruption, Growth, and the Environment: a Cross-Country Analysis_ , 9 ENVIRONMENT AND DEVELOPMENT ECONOMICS, 663–693 (2004); Arnold Zellner & Henri Theil, _Three-Stage Least Squares: Simultaneous Estimation of Simultaneous Equations_ , ECONOMETRICA, Jan. 1962, at 54-78; Axel Dreher & Thomas Herzfeld, _The Economic Costs of Corruption: A Survey and New Evidence_ ; Available at SSRN: Dreher, Axel and Herzfeld, Thomas, _The Economic Costs of Corruption: A Survey and New Evidence_ (June 2005); available at SSRN: https://ssrn.com/abstract=734184 or http://dx.doi.org/10.2139/ssrn.734184; Michael Keating _, Counting the Cost of the Culture of Corruption: A Perspective from the Field_ , 20 PAC.MCGEORGE GLOBAL BUS. & DEV. L.J. 317 (2007). 35 Stephen Johnson, _Corruption is Costing the Global Economy $3.6 Billion Dollars Every Year_ , WORLD ECONOMIC FORUM (Dec. 13, 2018), https://www.weforum.org/agenda/2018/12/the-global-economy-loses-3-6trillion-to-corruption-each-year-says-u-n. 36 _See_ Dreher & Herzfeld, _supra_ note 35. 37 World Bank, Anticorruption index 2015, 2016, 2017, 2018. Worldbank.com 38 WORLD BANK, _The Costs of Corruption_ (Apr. 8, 2004), http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:20190 187~menuPK:34457~pagePK:34370~piPK:34424~theSitePK:4607,00.html. 39 _The Costs of Corruption: Values, Economic Develop Under Assault, Trillions Lost, says Guterres_ , UN NEWS, (Dec. 9, 2018), https://news.un.org/en/story/2018/12/1027971 40 _See_ Shleifer & Vishny, _supra_ note 35. STABLE CRYPTOCURRENCIES more corrupt countries experience statistically significant lower GDP and investment rates.<sup>41</sup> Similarly, more corrupt countries also experience significantly lower rates of investment in the respective country.<sup>42</sup> Corrupt countries are also subject to a significantly higher inflation rate.<sup>43</sup> Finally, the cost of bank notes in the economy is born by society at large. In the United States, for instance, the annual value of under- > 41 _See_ Paulo Mauro, _Corruption and Growth_ , 110 THE QUARTERLY JOURNAL OF ECONOMICS 681, 681-712 (1995); Aymo Brunetti, _Political Variables in CrossCountry Growth Analysis_ , 11 JOURNAL OF ECONOMIC SURVEYS 163, 163-90 (1997); Poirson, supra note 35; Hongyi Li, Lixin Colin Xu & Heng-fu Zou, _Corruption, Income Distribution, and Growth_ , 12 ECONOMICS AND POLITICS 155, 155-82 (2000); Pak-Hung Mo, _Corruption and Economic Growth_ , 29 JOURNAL OF COMPARATIVE ECONOMICS 66, 66-79 (2001); George T. Abed & Hamid R. Davoodi, _Corruption, Structural Reforms, and Economic Performance in the Transition Economies_ (International Monetary Fund, Working Paper No. 00/132, 2000), https://www.imf.org/en/Publications/WP/Issues/2016/12/30/CorruptionStructural-Reforms-and-Economic-Performance-in-the-Transition-Economies3697; Kwabena Gyimah-Brempong, _Corruption, Economic Growth, and Income Inequality in Africa_ , 3 ECONOMICS OF GOVERNANCE 183, 183-209 (2002); PierreGuillaume Meon & Khalid Sekkat, _Does Corruption Grease or Sand the Wheels of Growth?,_ 122 PUBLIC CHOICE 69, 69-97 (2005); Isaac Ehrlich & Francis Lui, _Bureaucratic Corruption and Endogenous Economic Growth_ , 107 JOURNAL OF POLITICAL ECONOMY 270, 270-93 (1999); Daniel Kaufmann, Aart Kraay & Pablo Zoido, _Governance Matters_ (World Bank Policy Research Working Paper No. 2196, 1999); Zvika Neeman, M. Daniele Paserman & Simhon Avi, _Corruption and Openness_ , 8 THE B.E. JOURNAL OF ECONOMIC ANALYSIS & POLICY 1, 1-40 (2008). _Contra_ Lorenzo Pellegrini & Reyer Gerlagh, _Corruption’s Effect on Growth and its Transmission Channels_ , 57 KYKLOS 429, 429-56 (2004); Raul Barreto, _Endogenous Corruption, Inequality and Growth: Econometric Evidence_ (University of Adelaide School of Economics Working Paper No. 2001-02, 2001). > 42 Mauro _supra_ note 42; Aymo Brunetti, Greogory Kisunko & Beatrice Weder di Mauro, _Credibility of Rules and Economic Growth: Evidence from a Worldwide Survey of the Private Sector_ , 12 WORLD BANK ECONOMIC REVIEW 353, 353-84 (1998); Aymo Brunetti & Beatrice Weder di Mauro, _Investment and Institutional Uncertainty: A Comparative Study of Different Uncertainty Measures_ , 134 REVIEW OF WORLD ECONOMICS 513, 513-33 (1998); Campos, Lien & Pradhan _supra_ note 35; Mo supra note 42; Johann Graf Lambsdorff, _How Corruption Affects Productivity_ , 56 KYKLOS 457, 457-74 (2003); Pelligrini & Gerlagh _supra_ note 42. > 43 Fahim Al-Marhubi, _Export Diversivication and Growh: An Empirical Investigation_ ; 7 APPLIED ECONOMICS LETTERS 559, 559-62 (2000). reported taxes is somewhere between $400 billion to $600 billion.<sup>44</sup> Under-reporting by self-employed taxpayers who engage predominantly in cash transactions accounts for around 52% of this gap.<sup>45</sup> The U.S. Treasury loses at least $100 billion annually because of the cash economy, assuming that only half of this underreporting can be traced back to cash. # _3. Capital Controls_ Fiat currencies can be subject to capital controls. While the majority of the western developed world does not impose capital controls, leaving economic movement of capital to the markets, a wide variety of capital controls are used in emerging economies. Capital controls are instituted by some governments to restrict the inflow and outflow of capital into the respective economy in an attempt to ensure that their economies and currencies stay relatively stable in the long run and to prevent currency volatility and inflationary swings. Countries that employ capital controls may be categorized as:<sup>46</sup> 1.) Walled: Long-term capital control measures; 2.) Gated: Systems in place to be turned on/off episodically; 3. Open: No system of control. The types of capital controls range include minimum stay requirements, e.g. a lock in period for capital investment, limitations on how much money entities can remit out of the country, caps on asset sales to foreigners, and limitations on currency trading to maintain currency pegs.<sup>47</sup> Capital controls are controversial in economics. Some economists believe that implementing capital controls can help make economies more stable as only investors that see long term potential > 44 _See_ Chakravorti, _supra_ note 14. > 45 According to the national taxpayer advocate’s estimates. INTERNAL REVENUE SERVICE, FS-2006-20, BUSINESS INCOME AND THE TAX GAP, (June 2006), https://www.irs.gov/pub/irs-news/fs-06-20.pdf. > 46 Andrés Fernández, Michael W. Klein, Alessandro Rebucci, Martin Schindler, & Martín Uribe, _Capital Control Measures: A New Dataset_ (IMF Working Paper 2015). > 47 Gurnain Kaur Pasricha, _Policy Rule for Capital Controls_ , BANK FOR INTERNATIONAL SETTLEMENTS (Nov. 2017). STABLE CRYPTOCURRENCIES in a country will invest in a country that employs capital controls.<sup>48</sup> This creates a smaller inflow of funds that stay for a longer duration and the outflow is almost negligible, making it impossible for investors to pump and dump an economy and preventing overheating in economies.<sup>49</sup> Other economists see capital controls as antithetical to the functioning of a market economy, leading to evasion and corruption on a large scale.<sup>50</sup> # **III.** Transition to Digital Currencies Started The transition of concepts of money from the existing bank notes, e.g. paper money, to digital currencies has already commenced. In the public sector, central banks and governments around the world have been experimenting with digital and cryptocurrencies since 2015.<sup>51</sup> Several of those projects are in the proof of concept phase, others are near launch. In the private sector, the launch of successful and failing stable cryptocurrency projects suggests an increasing need for such solutions that help decentralized technologies emerge and evolve over time. Increasing evidence suggests that cash and bank notes are gradually losing ground to other payment systems.<sup>52</sup> Whereas the overwhelming majority of humans live in cash economies where at least 90% of transactions are conducted in cash, consumers in wealthier economies tend to favor noncash alternatives.<sup>53</sup> Just to illustrate this emerging trend, cash usage in the United States, the > 48 Thomas Kostigen, _Capital Controls Can Stabilize Developing Nations_ , MARKETWATCH (Jun. 22, 2012), https://www.marketwatch.com/story/capitalcontrols-can-stabilize-developing-nations-2012-06-22. > 49 _Id_ . > 50 _The Pros and Cons of Capital Controls_ , FEDERAL RESERVE BANK OF ATLANTA (Sept 2011), https://www.frbatlanta.org/podcasts/transcripts/econsouthnow/110929-pros-cons-of-capital-controls.aspx. > 51 Dr. Garrick Hileman & Michel Rauchs, Global Cryptocurrency Benchmarking Study, (2017), https://www.jbs.cam.ac.uk/faculty-research/centres/alternativefinance/publications/global-cryptocurrency/#.XMHF_xNKhTY. > 52 KENNETH S. ROGOFF, THE CURSE OF CASH, (Princeton University Press, 2016); Brugge, Denecker, Jawaid, Dovacs & Shami, supra note 15 _._ > 53 _Id_ . United Kingdom, the Netherlands, Sweden, Finland, Canada, France, among other industrialized nations, has fallen well below 50% of total transaction volume.<sup>54</sup> Most significantly, in Northern Europe as few as one in every five transactions are made in cash.<sup>55</sup> # _1. Technological and Monetary Co-Evolution_ The technological evolution is tied to the evolution of money. While technology had been evolving at an unprecedented rate for over a century,<sup>56</sup> concepts of money evolve much slower. Even deeply rooted cultural constraints pertaining to money and finance are unable to restrain technological progress in the long term.<sup>57</sup> Money evolved from barter trade with life stock to coinage to bank notes.<sup>58</sup> For example, starting over three thousand years ago, cowry shells, 54 “Germany, Japan, and Austria stand apart as wealthy countries where consumers maintain a strong preference for cash at the point of sale, despite universal availability of electronic payments instruments and the broad adoption of electronic transfers for recurring payments.” _Id_ . > 55 _Id_ . > 56 _See_ Fenwick & Vermeulen, infra Fn. 67. 57 Other examples of technological evolution despite deep cultural constraints include Japan’s slow removal of individual seals dating pack to the shogun era. _Personal Seals Lose Ground as Big Japanese Banks stop Using 1800s Technology_ , THE JAPAN TIMES, (March 9, 2019), https://www.japantimes.co.jp/news/2019/03/09/business/corporatebusiness/personal-seals-lose-ground-big-japanese-banks-stop-using-1800stechnology/#.XIaxmtlOl-F. > 58 Andrew Beattie, _The History of Money: From Barter to Banknotes_ , INVESTOPEDIA (Feb 7, 2019), https://www.investopedia.com/articles/07/roots_of_money.asp. STABLE CRYPTOCURRENCIES or copies of the shells, were used as Chinese currency.<sup>59</sup> Yet, bank notes are over 300 years old<sup>60</sup> and started to disappear.<sup>61</sup> For the last decade, Technology has been evolving at an unprecedented rate.<sup>62</sup> Some core examples include artificial intelligence (“AI”), robotics, big data, and machine learning, among several others. The rapid advances of AI have already affected many of the sectors of the economy during the past decade.<sup>63</sup> Big data in combination with AI and machine learning is a significant driver of disruptive innovation.<sup>64</sup> Big data in the form of digitized > 59 Peter Boomgaard, _Early Globalization Cowries as Currency_ , _600 BCE -1900_ , in LINKING DESTINIES: TRADE, TOWNS AND KIN IN ASIAN HISTORY 13-28 (Peter Boomgaard, Dick Kooiman & Henk Schulte Nordholt eds. 2008). The Classical Chinese character for "money/currency", 貝, originated as a pictograph of a cowrie shell. _Id_ . Cowries were also formerly used as means of exchange in India. The Lydian state minted coins, most of the coins mentioning king Alyattes of Lydia. > 60 Andrew Beattie, _The History of Money: From Barter to Banknotes_ , INVESTOPEDIA (Feb 7, 2019), https://www.investopedia.com/articles/07/roots_of_money.asp with details on history. > 61 _Denominations_ , U.S. DEPARTMENT OF THE TREASURY, https://www.treasury.gov/resource- center/faqs/Currency/Pages/denominations.aspx. In the United States, the $100 bill is the largest denomination that has been printed and circulated since July 13, 1969, when the denominations of $500, $1,000, $5,000, and $10,000 were retired. _Id_ . > 62 _See_ Fenwick & Vermeulen, infra Fn. 67. > 63 _See_ Craig E. Karl, _The Three Breakthroughs That Have Finally Unleashed AI on the World_ , WIRED (Oct. 27, 2014, 6:30AM), http://www.wired.com/2014/10/future-of-artificial-intelligence/ (“Over the past five years, cheap computing, novel algorithms, and mountains of data have enabled new AI–based services that were previously the domain of sci–fi and academic white papers.”). > 64 _See_ ERIK BRYNJOLFSSON & ANDREW MCAFEE, THE SECOND MACHINE AGE: WORK, PROGRESS, AND PROSPERITY IN A TIME OF BRILLIANT TECHNOLOGIES 205–28 (2014); Tess Townsend, _Peter Diamandis: A.I. Will Lead to Massive Disruption Across Industries_ , INC. (Sept. 24, 2015), http://www.inc.com/tesstownsend/diamandis-artificial-intelligence.html. _See_ James Canton, _From Big Data to Artificial Intelligence: The Next Digital Disruption_ , THE HUFFINGTON POST (July 5, 2016, 2:23 PM ET), http://www.huffingtonpost.com/james-canton/from-big-data-toartifici_b_10817892.html; Jitendra Waral, Anurag Rana & Sean Handrahan, data that grows at exponential rates and can be captured and manipulated electronically draws on several core sources including the internet of things, public records, social media, and cameras, as well as satellite tracking.<sup>65</sup> The real surge of innovation appears to involve a combined effect of AI, big data, sensors, and blockchain technology.<sup>66</sup> The technological evolution takes place in common phases that may help predict future developments in emerging decentralized technologies. Every major technological innovation since the industrial revolution experienced an initial hype cycle, followed by a burst, as well as a short and a long proliferation cycle.<sup>67</sup> For example, in recent history, the Dotcom bubble in the 2000s created a massive hype cycle pertaining to the business opportunities and possibilities associated with internet technology and their possible use cases.<sup>68</sup> The Dotcom bubble burst in the early 2000s, giving birth to one of the greatest period of consumer innovation in history.<sup>69</sup> As part of the long-term proliferation cycle, _Artificial Intelligence: Disruption Era Begins_ , BLOOMBERG PROFESSIONAL: BLOOMBERG INTELLIGENCE (Sept. 29, 2016), <u>https://www.bloomberg.com/professional/blog/artificial-intelligence-disruptionera-begins/; Rebecca Merrett,</u> _Intelligent Machines Part 1: Big Data, Machine Leaning and the Future_ , CIO (June 4, 2015 14:47), http://www.cio.com.au/article/576664/intelligent-machines-part-1-big-datamachine-learning-future/. > 65 _See_ Townsend, _supra_ note 65; John Podesta et. al., EXEC. OFFICE OF THE PRESIDENT, BIG DATA: SEIZING OPPORTUNITIES, PRESERVING VALUES 53 (2014), https://goo.gl/xtDerj (“Big data technologies, together with the sensors that ride on the ‘Internet of Things,’ pierce many spaces that were previously private. Signals from home WiFi networks reveal how many people are in a room and where they are seated.”); _See generally_ JAMES MANYIKA ET AL., BIG DATA: THE NEXT FRONTIER FOR INNOVATION, COMPETITION, AND PRODUCTIVITY 15 (McKinsey Glob. Inst., 2011). > 66 Mark Fenwick & Erik P.M. Vermeulen, _Technology and Corporate Governance: Blockchain, Crypto, and Artificial Intelligence_ , EUROPEAN CORPORATE GOVERNANCE INSTITUTE (Oct 22, 2018). > 67 Dilantha De Silva, _Is There a Bubble in the Making? The Dotcom Bubble and Today’s Market_ , SEEKING ALPHA (Oct. 16, 2018), https://seekingalpha.com/article/4212027-bubble-making-dotcom-bubbletodays-market. > 68 _Id_ . > 69 _Id_ . STABLE CRYPTOCURRENCIES cryptocurrencies and blockchain technology have the opportunity to expand the innovation and associated opportunities started during the early Internet years. Decentralization protocols are at the very beginning of their evolutionary cycle. Just as the internet boom and Dotcom bubble created Facebooks, Amazons, Googles and Apples,<sup>70</sup> the evolution of decentralization protocols may give birth to the next generation of decentralized internet protocols and associated companies. Blockchain technology enabled a nascent industry with an unclear use case.<sup>71</sup> Despite the initial hype cycle in 2017 and 2018, the industry is still nowhere near the required level of maturity at the beginning of 2020. In order to emerge from the initial hype and boom cycle, decentralization technology has to mature and grow towards an understanding of capability. The amount of decentralized infrastructure projects needed for the evolution cycle to start is significant. Significant decentralization project failures are necessary and useful while appropriate use cases are being explored . The emergence of stable cryptocurrency projects can be seen as an early indicator for the possible co-evolution of decentralized technology and money. For example, the rise of an early stable cryptocurrency design, Tether, in terms of its total market capitalization,<sup>72</sup> its stability around $1 value,<sup>73</sup> and investors’ uses > 70 Eric Jackson, _Cryptocurrency Skeptics Warn of Another Dot-Com Bubble, But Remember: That’s Where Amazon and Google Started_ , CNBC (Aug. 7, 2017), https://www.cnbc.com/2017/08/07/cryptocurrency-boom-just-beginning-commentary.html; Teri Robinson, _Lasting Benefits of the Dot-Com Bubble_ , ECOMMERCE TIMES (Jul. 15, 2002), https://www.ecommercetimes.com/story/18570.html > 71 Febin John James, _Popular Use Cases of Blockchain Technology You Need to Know_ , MEDIUM: HACKERNOON (Jan, 31, 2018), https://hackernoon.com/popularuse-cases-of-blockchain-technology-you-need-to-know-df4e1905d373with text explanations. > 72 COINMARKETCAP: TETHER, https://coinmarketcap.com/currencies/tether (last visited Apr 22, 2019). > 73 Johnson Gitonga, _What is Tether (USDT) and How to Buy It?_ , YAHOO!: FINANCE (Feb. 5, 2018), https://finance.yahoo.com/news/tether-usdt-buy090742535.html to evidence on how stable Tether is at $1 value. of Tether as a temporary safe haven,<sup>74</sup> provides some support for stable cryptocurrencies’ ability to create market stability, even if only temporarily. Like all other stable cryptocurrency projects, Tether is still afflicted with significant design challenges.<sup>75</sup> The emerging role of stable cryptocurrencies in decentralization protocols suggests that part of the evolution of such protocols may involve stability designs. # _2. Early Experimentation_ Governments, central banks, and the private sector have started experimenting with digital- and cryptocurrencies. In the case of central banks, such experimentation is already close to launch<sup>76</sup> or fully operational.<sup>77</sup> Several governments have issued their own digital currencies. Most major tech companies in the private sector have been experimenting with cryptocurrency projects since 2017. Central banks and governments around the world have been experimenting with government-sponsored digital and > 74 Evidence that shows that investors move crypto assets into Tether when the market gets more volatile. 75 Tether’s issue with being pegged against the US$ and with that subject to Centralized monetary policy. Andrea Tan, Eric Lam & Benjamin Robertson, _Crypto Markets Roiled as Traders Question Tether’s Dollar Peg_ , BLOOMBERG, (October 14, 2018, 11:30 PM CDT), https://www.bloomberg.com/news/articles/2018-10-15/dollar-peg-thatunderpins-20-of-crypto-trades-is-under-pressure. 76 The Bank of Canada and bank of England announced in 2016 that the technology was not ready for a central bank sponsored crypto currency. Yet, other central banks, such as in Singapore and Sweden have already launched their e- currency projects. Morten Bech & Rodney Garratt, _Central Bank Cryptocurrencies_ , BIS QUARTERLY REVIEW 66-67, September 2017, available at SSRN: https://ssrn.com/abstract=3041906. > 77 Usman W. Chohan, _Cryptocurrencies as Asset-Backed Instruments: The Venezuelan Petro_ , (February 7, 2018), available at SSRN: https://ssrn.com/abstract=3119606. Venezuela’s oil token. Bruce Zagaris, _U.S. Bans Venezuela’s New Crypto-Currency and Adds 3 Officials to Sanctions List_ , 34 No. 4 INT'L ENFORCEMENT L. REP. 157, 157-161 (2018); Julie Hirschfeld Davis & Nathaniel Popper, _White House Bans Venezuela’s Digital Currency and Expands Sanctions_ , THE NEW YORK TIMES, (March 19, 2018), https://www.nytimes.com/2018/03/19/world/americas/trump-venezuelasanctions-petro.html. STABLE CRYPTOCURRENCIES cryptocurrencies since 2015.<sup>78</sup> Examples include Tunisia (eDinar),<sup>79</sup> Venezuela (Petro),<sup>80</sup> Senegal (eCFA),<sup>81</sup> Sweden (eKrona),<sup>82</sup> Dubai (EmCash),<sup>83</sup> Japan (Jcoin),<sup>84</sup> Estonia (Estcoin),<sup>85</sup> > 78 Yves Mersch, Member of the Executive Board of the European Central Bank, at the Central Bank of Malaysia Monetary Policy Conference (July 24, 2017)(transcript available https://www.bis.org/review/r170807c.htm); _Digital Currency Initiative_ , MIT MEDIA LAB, https://dci.mit.edu/; _Financial Stability Review 2017_ , MONETARY AUTHORITY OF SINGAPORE, http://www.mas.gov.sg/Regulations-and-Financial-Stability/FinancialStability/2017/Financial-Stability-Review-2017.aspx; Bech & Garratt supra note 77; see Hileman & Rauchs, supra note 52; Jack Meaning, Ben Dyson, James Barker & Emily Clayton, _Broadening narrow money: monetary policy with a central bank digital currency_ , (Bank of England, Staff Working Paper No. 724, May 2018); Berentsen & Schar, _supra_ note 19; J.P. Koning, _Fedcoin: A Central Bank-Issued Cryptocurrency_ , R3 REPORT 15 (2016); Sina Motamedi, _Will Bitcoins Ever Become Money? A Path to Decentralized Central Banking_ , TANNUTUVA.ORG (July 21, 2014), https://tannutuva.org/2014/will-bitcoins-everbecome-money-a-path-to-decentralized-central-banking/. > 79 Richard Kastelein, _Tunisia to Replace Its National Digital Currency, eDinar, With Blockchain-Driven Monetas Currency_ , BLOCKCHAIN NEWS (Dec. 28, 2015), https://www.the-blockchain.com/2015/12/28/tunisia-to-replace-itsnational-digital-currency-edinar-with-blockchain-driven-monetas-currency/ > 80 Ryan Browne, _Venezuela About to Pre-Sell ‘Petro’ Cryptocurrency, and Other Countries Could Follow_ , CNBC (Feb. 19, 2018), https://www.cnbc.com/2018/02/19/venezuela-petro-cryptocurrency-pre-salestarts-february-20.html > 81 Samburaj Das, _Senegal Will Introduce a Blockchain-Based National Digital Currency_ , CCN (Nov. 28, 2016), https://www.ccn.com/senegal-will-introduceblockchain-based-national-digital-currency 82 Afraid of a few commercial entities controlling cash supply in Sweden, the Swedish central bank has kicked off its digital currency project e-krona. Amanda Billner, _Now There are Plans for ‘e-Krona’ in Cash-Shy Sweden_ , BLOOMBERG, (Oct. 26, 2018, 2:25 AM CDT), https://www.bloomberg.com/news/articles/2018-10-26/riksbank-to-developpilot-electronic-currency-amid-cash-decline > 83 Jon Buck, _Dubai Will Issue First Ever State Cryptocurreny_ , COIN TELEGRAPH (Oct. 1, 2017), https://cointelegraph.com/news/dubai-will-issue-first-ever-statecryptocurrency. > 84 Arjun Kharpal, _Japanese Banks Are Thinking of Making Their Own Cryptocurrency Called the J-Coin_ , CNBC: TECH TRANSFORMERS (Sep. 27, 2017), https://www.cnbc.com/2017/09/27/japanese-banks-cryptocurrency-jcoin.html. > 85 Kaspar Korjus, _We’re Planning to Launch Estcoin – and That’s Only the Start_ , MEDIUM (Dec. 18, 2017), https://medium.com/e-residency-blog/were-planningto-launch-estcoin-and-that-s-only-the-start-310aba7f3790. and Ecuador,<sup>86</sup> among others.<sup>87</sup> These early attempts suggest that the countries that are most in need may some-day decide to issue their own digital/cryptocurrencies by pegging it to an existing stable cryptocurrency. Several factors explain such early experimentation. Central bankoperated wholesale payment systems are already at the end of their technological life cycle, using database designs and computing languages that are largely obsolete and very expensive to maintain.<sup>88</sup> The shortcomings of the existing system has created considerations in which a central bank would create a token with one-for-one conversion with cash and reserves. Such token designs would allow token minting/destruction if an equivalent amount of cash or reserves were created/destroyed.<sup>89</sup> Emerging trends in payment systems and the end of technological life cycles necessitate central banks’ enhanced examination of cryptocurrency solutions. Central banks in countries with rapidly declining cash usage<sup>90</sup> are subject to the most pressure to find solutions for bank note alternatives. Given these trends in technology and in light of the shortcomings of the existing payment system infrastructure, all central banks sooner or later need to evaluate if and when issuing central bank sponsored cryptocurrencies can create value in their own systems.<sup>91</sup> In implementing central bank sponsored cryptocurrencies, central banks have to consider the tradeoffs between cyber security, > 86 Everett Rosenfeld, _Ecuador Becomes the First County to Roll Out Its Own Digital Cash_ , CNBC: CURRENCIES (Feb. 9, 2015), https://www.cnbc.com/2015/02/06/ecuador-becomes-the-first-country-to-rollout-its-own-digital-durrency.html. > 87 _Cryptocurrencies by Country_ , THOMPSON REUTERS (Oct. 25, 2017), https://blogs.thomsonreuters.com/answerson/world-cryptocurrencies-country > 88 Bech & Garratt, supra note 77. > 89 Bech & Garratt, supra note 77; Koning, supra note 79; Motamedi, supra note 79. > 90 Brugge, Denecker, Jawaid, Dovacs & Shami, _supra_ note 15. > 91 Bech & Garratt supra note 77; Hileman & Rauchs, _supra_ note 52; STABLE CRYPTOCURRENCIES monetary policy,<sup>92</sup> clearing and settlement, payments, consumer preferences, and regulation, among other considerations. The private sector is equally engaged in cryptocurrency experimentation. Most cryptocurrency exchanges are creating their own stable cryptocurrency.<sup>93</sup> On February 14 2019, J.P. Morgan introduced the first prototype of its blockchain settlement product: JPM Coin, a stable cryptocurrency backed one -to-one by JPM’s fiat currency reserves.<sup>94</sup> The close structure of the JPM coin, e.g. JPM makes it only available to existing clients, appears to be an anachronism.<sup>95</sup> Closed ecosystems are unsustainable in the emerging decentralized commerce. Finally, Facebook is developing a stable cryptocurrency in an attempt to break into the financial services business.<sup>96</sup> The emergence of stable cryptocurrencies that are funded by private banking institutions and technology behemoths suggests that, in addition to central banks, established banking and technology institutions are also realizing the benefits and potential of stable cryptocurrencies. > 92 _See_ Michael Bordo & Andrew Levin, _Central Bank Digital Currency and the Future of Monetary Policy_ , VOXEU.ORG (Sept. 23, 2017); https://voxeu.org/article/benefits-central-bank-digital-currency. > 93 Jeff John Roberts, _Cryptocurrency Exchanges Back $32 Million Stable Coin Project_ , FORTUNE (Aug. 29, 2018), http://fortune.com/2018/08/29/cryptocurrency-exchanges-back-32-millionstable-coin-project; Julie Verhage, _Crypto Exchange Coinbase to List Stable Coin Backed by Circle_ , BLOOMBERG (Oct. 23, 2018), https://www.bloomberg.com/news/articles/2018-10-23/crypto-exchangecoinbase-to-list-stable-coin-backed-by-circle. > 94 Michelle Davis & Alastair Marsh, _JPMorgan to Use Digital Coin to Speed Up Corporate Payments_ , BLOOMBERG (Feb. 14, 2019), https://www.bloomberg.com/news/articles/2019-02-14/jpmorgan-to-usecryptocurrency-for-payments-business-cnbc-says. > 95 Brad Garlinghouse (@bgarlinghouse), TWITTER (Feb. 14, 2019, 10:45 AM), https://twitter.com/bgarlinghouse/status/1096118363506434048. > 96 Sarah Frier & Julie Verhage, _Facebook is Developing a Cryptocurrency for WhatsApp Transfers, Sources Say_ , BLOOMBERG (Dec. 20, 2018, 6:35 PM CST),https://www.bloomberg.com/news/articles/2018-12-21/facebook-is-saidto-develop-stablecoin-for-whatsapp-transfers; Nathanial Popper & Mike Isaac, _Facebook and Telegram Are Hoping to Succeed Where Bitcoin Failed_ , THE NEW YORK TIMES, (Feb. 28, 2019),https://www.nytimes.com/2019/02/28/technology/cryptocurrencyfacebook-telegram.html. # **IV.** Stable Cryptocurrencies Stable cryptocurrencies have been defined as: “a type of cryptocurrency that is designed to maintain a stable value, rather than experiencing significant price changes.”<sup>97</sup> Others define it as: “a new class of cryptocurrencies which offer price stability and/or are backed by reserve asset(s), [combining] the instant processing and security of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies.”<sup>98</sup> Since their inception in 2014 with Tether,<sup>99</sup> stable cryptocurrencies have primarily been used as a cash equivalent for cryptocurrency portfolios. In 2019, stable cryptocurrencies have grown substantially in popularity as an answer to the high volatility associated with the cryptocurrency markets.<sup>100</sup> Depending on their design, they can offer additional features such as transparency, privacy, and increased decentralization. Stable cryptocurrencies can also offer lower fees and faster transaction speeds, making them rather useful for international transactions and everyday payments. The evolution of stable cryptocurrencies creates a new opportunity to reexamine earlier decades of monetary policy making and scholarship. In particular, it allows an expansion and reexamination of the quantity theory of money and associated models. In 2014, Robert Sams introduced the first attempt at creating a stability mechanism for cryptocurrencies.<sup>101</sup> Sams’s early academic attempt > 97 _Stablecoin_ , BINANCE ACADEMY, > https://www.binance.vision/glossary/stablecoin (last visited Apr. 24, 2019). > 98 _Stablecoin_ , INVESTOPEDIA (rev’d Shobhit Seth, Sep. 19, 2018), https://www.investopedia.com/terms/s/stablecoin.asp. > 99 Pete Rizzo, _Realcoin Rebrands as ‘Tether’ to Avoid Altcoin Association_ , COINDESK (Nov. 20, 2014, 12:01 PM), https://www.coindesk.com/realcoinrelaunches-tether-avoid-altcoin-association. > 100 _Stablecoin_ , BINANCE ACADEMY, > https://www.binance.vision/glossary/stablecoin (last visited Apr. 24, 2019). > 101 Robert Sams, _A Note on Cryptocurrency Stabilisation: Seigniorage Shares_ , BRAVE NEWCOIN (Apr. 28, 2015), STABLE CRYPTOCURRENCIES was quickly followed by commercial applications and expansions of his earlier vision.<sup>102</sup> In 2019, the leading notable stable cryptocurrency startups and their respective approaches include: Ampleforth,<sup>103</sup> Paxos Standard Token (PAX),<sup>104</sup> Gemini Dollar (GUSD),<sup>105</sup> TrueUsd (TUSD),<sup>106</sup> https://assets.ctfassets.net/sdlntm3tthp6/resource-assetr390/5a940afb21681d19c0b3b76cf69259e1/58ebe9e2-1f28-4a8d-8ce126abef07aedf.pdf. > 102 _See, e.g_ ., Smith + Crown, _The Cryptoeconomics of Seigniorage Shares Stablecoins: Basis and Carbon_ (May 28, 2018), https://www.smithandcrown.com/cryptoeconomics-seignorage-shares-lookbasis-carbon/ (Basis’s design and expansion of Sams 2014). > 103 P.H. Madore, _Crypto Firm Fragments Launches Stablecoin Following ‘Ampleforth’ Rebrand_ , CCN.COM: News (Nov. 12, 2018), https://www.ccn.com/crypto-firm-fragments-launches-stablecoin-followingampleforth-rebrand. > 104 Josiah Wilmoth, _Paxos Standard: Why the Stablecoin You’ve Never Heard of Just Might Take Down Tether_ , CCN.COM: ALTCOIN NEWS (Feb. 12, 2018), https://www.ccn.com/paxos-standard-why-the-stablecoin-youve-never-heardof-just-might-take-down-tether. > 105 Jack Mathis, _Gemini’s New USD Cryptocurrency Stablecoin: A Whitepaper Deep Dive_ , CCN.COM: ALTCOIN NEWS (Dec. 09, 2018), https://www.ccn.com/geminis-new-usd-cryptocurrency-stablecoin-awhitepaper-deep-dive; _see also_ Jeff Kauflin et al., _The Most Innovative Fintech Companies in 2019_ , FORBES.COM (Feb. 4, 2019, 10:00 AM), https://www.forbes.com/fintech/2019/#4da63f0f2b4c. > 106 COINTOPPER, _Tether(USDT) Vs TrueUSD(TUSD): Which Stablecoin is Better?_ (Sep. 5, 2018), https://cointopper.com/guides/tetherusdt-vs-trueusdtusdwhich-stablecoin-is-better; _see also_ Bloomberg, _Love Crypto But Not Its Volatility? Meet Stablecoins_ , FORTUNE.COM (Jan. 30, 2019), http://fortune.com/2019/01/30/stablecoins-bitcoin-cryptocurrency/; P.H. Madore, _Exclusive: TrueUSD Partners with Nexo to Provide Holders with Instant Loans on Cryptocurrency_ , CCN.COM: EXCLUSIVE (Dec. 19, 2019), https://www.ccn.com/exclusive-trueusd-partners-with-nexo-to-provide-holderswith-instant-loans-on-cryptocurrency. Circle’s CENTRE consortium (USD-C),<sup>107</sup> Facebook’s Stablecoin launch,<sup>108</sup> and of course, Tether,<sup>109</sup> among several others. Existing projects fall into two broad categories, e.g. collateralized and uncollateralized tokens. Both are subject to significant downsides. Collateralized projects use either fiat currencies or cryptocurrencies as collateral. Collateralized fiat currency pegs bear the brunt of expensive capital requirements and uncollateralized cryptocurrency pegs face heavy volatility pressures and swings. Most stable cryptocurrency projects that claim to be collateralized with fiat currency claim to be 100% backed. Without a 100% fiat collateralization, such projects would run the risk of arbitrage trade attacks similar to what Financier George Soros used to “break the bank of England”.<sup>110</sup> Fiat currency collateralization is expensive and inefficient because all of the value that is backing the cryptocurrency needs to be liquid, otherwise arbitrage opportunities, such as the Soros attack, are possible. Therefore, the price tag of fiat-backed tokens is, at a minimum, the interest rate of the pegged fiat currency.<sup>111</sup> > 107 CRYPTOGLOBE _Stablecoin Guide: Why are Stablecoins so Important to Crypto Markets?_ (Oct. 11, 2018), https://www.cryptoglobe.com/latest/2018/10/stablecoin-guide-why-arestablecoins-so-important-to-crypto-markets/. > 108 Nathaniel Popper & Mike Isaac, _Facebook and Telegram are Hoping to Succeed Where Bitcoin Failed_ , N.Y. TIMES, Feb. 28, 2019, at B1; _see also_ Linas Kmieliauskas, _Facebook is Already Pitching its Stablecoin to Exchanges – Report_ , CRYPTONEWS (Mar. 01, 2019), https://cryptonews.com/news/facebook-is-already-pitching-its-stablecoin-toexchanges-rep-3453.htm. > 109 Nikhilesh De, _Tether to Launch New Version of USDT Stablecoin on Tron Blockchain_ , COINDESK (Mar. 4, 2019, 12:01 PM), https://www.coindesk.com/tether-to-launch-new-version-of-usdt-stablecoin-ontron-blockchain; _see also_ Carlo C., _Tether Brings Benefits of P2P Transactions to Fiat Currency Transfers_ , COINTELEGRAPH (Nov. 22, 2014), https://cointelegraph.com/news/tether-brings-benefits-of-p2p-transactions-tofiat-currency-transfers. > 110 Devansch Lathia, _How Soros Broke the British Pound_ , ECON. REV. AT NYU (Oct. 16, 2018), https://theeconreview.com/2018/10/16/how-soros-broke-thebritish-pound/. > 111 _See generally_ , Becky Leighton, _What is a Fiat-backed Stablecoin?_ , COIN INSIDER (Feb. 6, 2019), https://www.coininsider.com/what-is-a-fiat-backed- STABLE CRYPTOCURRENCIES Cryptocurrency-backed tokens, are even more expensive, because the stability is achieved with the (currently) much more unstable cryptocurrencies. Any cryptocurrency-backed token must be backed with much more than 100% of the current value of the cryptocurrency in case the basket of other crypto currencies’ value drops. For example, in MakerDAO, if a token is backed by Ether, and Ether drops by half at any moment, then the automated scheme will punish anyone who has not backed their tokens by more than 200%.<sup>112</sup> The uncollateralized schemes include (formerly) Basis and NuBits, which follow the quantity theory of money,<sup>113</sup> algorithmically minting and burning tokens in order to maintain a peg.<sup>114</sup> At the time of this writing no uncollateralized algorithmic project had created a provable stable mechanism for its tokens. # _1. Growth_ The total volume of stable cryptocurrencies relative to the rest of the cryptocurrency market is growing consistently. The growth of stablecoin/ (“As the name implies, fiat stablecoins are tokens which are associated with the value of a particular fiat currency. Usually, these tokens are based on the US dollar and hold their value fixed at a 1:1 ratio.”). 112 MAKERDAO, _The Dai Stablecoin System_ , https://makerdao.com/en/whitepaper (last visited Apr. 25, 2019). 113 The quantity theory of money predicts that money growth should be neutral in the long run in its effects on the growth rate of production and should affect the inflation rate on a one-for-one basis. In David Hume's pioneering essays of 1752, Of Money and Of Interest, Hume stressed that changes in the number of units of money in circulation will have proportional effects on all prices that are stated in money terms. In turn, Hume suggests that changes in the number of units of money in circulation have no effect on economic output, e.g. on how much people produce or on the goods they produce or consume. The quantity theory of money has evolved dramatically since the beginnings of modern monetary theory in Hume’s pioneering essay. David Hume, _Of Money and of Interest_ , _in_ WRITINGS ON ECONOMICS (Eugene Rotwein ed.1970). > 114 Nader Al-Naji, Josh Chen & Lawrence Diao, _Basis: A Price-Stable Cryptocurrency with an Algorithmic Central Bank_ , BASIS.IO (Jun. 20, 2017), https://www.basis.io/basis_whitepaper_en.pdf; Jordan Lee, _Nu_ , NUBITS.COM (Sep. 23, 2014), https://nubits.com/NuWhitepaper.pdf. stable cryptocurrencies can largely be traced back to attempts to combine the utility and benefits of cryptocurrencies and blockchain technology with remedies for the existing fluctuation and volatility in the cryptocurrency markets.<sup>115</sup> The growth data suggests that demand for products that help manage the volatility inherent in other crypto assets is likely to continue to increase.<sup>116</sup> Ever-increasing Volume: Contribution of Stablecoin Volume to Total Industry Volume <!-- Start of picture text --> 40%<br>35%<br>30%<br>25%<br>20%<br>15%<br>%0%<br>5%<br>0%<br>2014/9/242014/12/242015/3/24 2015/6/242015/9/242015/12/242016/3/242016/6/242016/9/242016/12/24201/1242017/6/242017/9/242017/12/242018/3/242018/6/24 2018/9/242018/12/24<br>Total Stablecoin Volume 7-Day Avg.<br>source: coinmarketcap, Binance Research<br><!-- End of picture text --> # _2. Cost Reduction_ Stable cryptocurrencies are not subject to the same cost structure as f ~~iat currencies. Unlike fiat currencies, the cost associated with th~~ e use of cryptocurrencies is almost exclusively incurred upfront, e.g. during the development phase. Such upfront cost derives mostly from the cost of designing and implementing, coding, and ~~<u>maintaining the techn</u>~~ <u>ological infrastructure of the cryptocurrency.</u> The total cost of creation and maintaining cryptocurrencies is a fraction of those cost associated with printing and maintaining bank > 115 _Stablecoin_ , BINANCE ACADEMY, > https://www.binance.vision/glossary/stablecoin (last visited Apr. 24, 2019). > 116 BINANCE RESEARCH, _Ever-increasing Volume: Contribution of Stablecoin Volume to Total Industry Volume_ , in _Can JPM Coin Disrupt the Existing Stablecoin Market?_ at 4, (Mar. 1, 2019), https://info.binance.com/en/research/marketresearch/img/BinanceResearchJPMCoin.pdf. STABLE CRYPTOCURRENCIES notes.<sup>117</sup> First and foremost, all cost associated with printing and transporting paper notes<sup>118</sup> becomes obsolete with the use of cryptocurrencies. Cost associated with fiat bank note counterfeit response<sup>119</sup> is also unnecessary for cryptocurrencies because the technology applied in the case of cryptocurrencies makes counterfeit attacks near impossible. Moreover, all fees associated with money transmission services, ATM fees etc. and other intermediator fees<sup>120</sup> associated with fiat bank notes are almost in their entirety obsolete because the underlying technology of stable cryptocurrencies disintermediates. Cost reductions associated with stable cryptocurrencies can be quite substantial in the banking, money transfer, underwriting, trading and investment management context. Given the enhanced transparency and auditability of transactions on the blockchain, transactions between institutional banking clients can be executed without the need for intermediating pre-established trust. According to some estimates, significant cost savings are possible in the context of reporting, know your customer and client-onboarding, business operations, and overall compliance cost.<sup>121</sup> Stable cryptocurrencies can help lower the cost of trading in the cryptocurrency market. The existing cryptocurrency market forces the investing public to convert from different cryptocurrencies traded in different jurisdictions into other cryptocurrencies in a different jurisdiction or on a different exchange that may actually > 117 _See supra_ text and accompanying notes 14-24. > 118 _See supra_ text and accompanying notes 21-24. > 119 _See supra_ text and accompanying notes 25-34. > 120 _See infra_ note 130. > 121 _Banking on Blockchain_ , ACCENTURE.COM, https://www.accenture.com/usen/insight-banking-on-blockchain, last visited Apr. 24, 2019. Finance-reporting costs could be lowered by 70% as a result of optimized data quality, transparency, and internal processes enabled by a shared and verified database: the blockchain. Supporting functions of centralized operations (e.g. KYC, client-onboarding) could bring 50 % savings by establishing more efficient processes for managing digital identities and by “mutualizing” or sharing client data on a blockchain across multiple financial institutions. Business operations expenses from, for instance, middle office, clearing, and settlement activities could be lowered by up to 50% by reducing or eliminating the need for third-party reconciliation, confirmation and validation of trades. Compliance costs could be reduced by 3050% owing to higher transparency and easiness to audit financial transactions. trade a currency pair that is needed by the given investor in a given case. For all of these transactions, investors incur currency conversion fees. Removal of cryptocurrencies and conversion back into fiat is subject to even higher fees. Consumers pay a price every time they convert in and out of a currency. The use of stable cryptocurrencies, if traded in pairs with the cryptocurrency in question, allows investors to remove several levels of conversion fees and removes the risk of depreciation of the bridge currency during the trades. The perverse cost and fee structure in the existing cryptocurrency market and stable cryptocurrencies’ ability to overcome those downsides can best be illustrated with a representative hypothetical. Imagine a cryptocurrency project that claims to be the Amazon of the crypto world, e.g. it offers the public the ability to buy real goods in exchange for cryptocurrencies. In order to buy or sell its tokens, investors are forced to open an account on the Indonesian Cryptocurrency exchange Indodax, which has the highest liquidity of any exchanges in late 2018 trading the tokens. Indodax trades the tokens in pairs against ETH or BTC, among other currencies. If an investor wishes to sell her entire holdings of the tokens, Indodax allows only withdrawals from its exchange of 1 BTC every 24 hours.<sup>122</sup> The investor now sells the tokens for BTC (1<sup>st</sup> conversion/fee paid), then transfers the BTC to their BTC wallet with, for example, coinbase (2nd conversion/fee paid), and lastly sells the BTC via coinbase for conversion into $US (3rd conversion/fee paid). Had the investor used a well-established stable cryptocurrency that is traded on an exchange with deep liquidity in pairs with the token, the investor would have removed two levels of conversion fees. In addition, the investor is no longer subject to the downward risk of BTC itself, after conversion. The true power of a well-established stable cryptocurrency can best unfold in combination with an evolving universal exchange that provides deep liquidity. Cost savings enabled by stable > 122 _What is the Minimum and Maximum Amount of Bitcoin That I Can Withdraw in a Day?,_ INDODOX.COM, https://help.indodax.com/id_ID/berapa-jumlahminimal-dan-maksimal-bitcoin-yang-dapat-saya-tarik-dalam-sehari/ (translated with Google Chrome). STABLE CRYPTOCURRENCIES cryptocurrencies that remove the need for conversions can only truly be facilitated by a deeply liquid market facilitated by a universal exchange, e.g. an exchange that bridges the traditional assets and crypto assets for all investors. The national Swiss exchange is working on an exchange project that attempts to accomplish this universality,<sup>123</sup> so are several private projects.<sup>124</sup> In the above example, not only would the need to move assets from one illiquid exchange to another, with the associated fees, be unnecessary, market participants could simply convert into a wellestablished stable cryptocurrency to park their assets.<sup>125</sup> This creates more certainty and trust in the market which, in turn, increases market liquidity. In essence, the combination of a wellestablished stable cryptocurrency with a universal exchange create a positive feedback loop. The exchange liquidity is enhanced by the stable cryptocurrency and the stability and adoption of the stable currency is enhanced through the exchange. # _3. Equity_ Using cash in an economy has a disproportionate impact on the poor and unbanked.<sup>126</sup> In the United States, the FDIC estimates that 8.2% of U.S. households are unbanked and 20.1% of U.S. households are underbanked.<sup>127</sup> These estimates are much higher in the developing world.<sup>128</sup> Using cash for consumption imposes a regressive tax on individuals with the highest impact on the unbanked. Fees associated with gaining access to cash is around four times more > 123 Jimmy Aki, _Switzerland’s National Exchange is Listing an XRP Investment Product_ , CCN.COM, (March 3, 2019), https://www.ccn.com/switzerlandnational-exchange-xrp-etp. > 124 _See_ SHINGO LAVINE, DEMOCRATIZING CRYTPOCURRENCY (ver. 2.0.0 Nov. 15, 2017) available at https://www.ethos.io/Ethos_Whitepaper.pdf. > 125 In essence, a well-established stable cryptocurrency may serve the same function as bitcoin in crypto assets and the US dollar in traditional assets with the additional benefit of no exchange rate risk exposure. > 126 Rogoff, _supra_ note 53. > 127 _2017 FDIC National Survey of Unbanked and Underbanked Households_ , FDIC (2018), https://www.fdic.gov/householdsurvey/. > 128 U.S., Mexico, Egypt and India. than fees associated with using bank accounts for transactions.<sup>129</sup> These effects on the poor get exacerbated in economies that are mostly cash based. Whereas in the United States only about one third of all transactions in the economy are conducted using cash payments, countries like India, Mexico, and Egypt represent economies that are conducted almost entirely in cash.<sup>130</sup> Stable cryptocurrencies can help support equality. The disproportionate effects of cash economies on the poor and the unbanked can be remedied with stable cryptocurrencies. Access to cryptocurrency transactions is possible without a banking relationship. With equality of payment system access, the poor and unbanked are no longer disadvantaged through the use of cash.<sup>131</sup> The enhanced accountability that is built into stable cryptocurrencies also helps facilitate more equality in society. Reliance on cash in developing economies results in lost tax revenues for the government because of the associated underreporting of earnings and transactions. With fully traceable cryptocurrencies that are fully transparent, those tax revenues will not get lost.<sup>132</sup> The additional tax revenue is likely to benefit the > 129 Examples of fees associated with cash transactions are ATM fees, payday lending, cashing check fees, buy-here-pay-here auto loans, among others. “The unbanked have a five times higher risk of paying cash access fees on payroll and EBT cards. Poorer consumers have to spend far more time getting cash. On average, Americans spend twenty-eight minutes a month travelling to get cash, but that time isn’t evenly distributed. People who don’t use a bank spend about five minutes longer getting to the place where they can get cash, and unemployed people spent nearly nine minutes more.” > 130 _Id_ . 131 It is of course debatable if this gain for the poor and unbanked that is associated with equal payment system access is offset by the inability to evade taxes that comes with the enhanced accountability of cryptocurrencies. “cash paradox: while cash may be considered the poor man’s best friend, it also places a disproportionate burden on the poor.” _Id_ . > 132 The tensions and tradeoffs between transparency opportunities and privacy concerns in cryptocurrencies has been recognized in the literature. Susan Athey, Christian Catalini & Catherine Tucker, _The Digital Privacy Paradox: Small Money, Small Costs, Small Talk_ , (Stanford University Graduate School of Business, Working Paper, No 17-032, 2017), STABLE CRYPTOCURRENCIES poor and underbanked more than those with more substantial means. # _4. Counteracting Corruption_ The use of cryptocurrencies in commerce makes it much less likely for corruption to occur. The aforementioned negative economic effects of corruption<sup>133</sup> that often are associated with the lack of traceability of bank notes can largely be eradicated with the use of cryptocurrencies. Corruption in the economies of many countries largely maintain the status quo, undermines economic growth,<sup>134</sup> and makes participation of the entire population of a given country in its gross domestic product and value chain appreciation less likely. The use of cryptocurrencies in commerce helps counteract these negative effects by enabling increased economic growth that follows as a result of lower levels of corruption.<sup>135</sup> The transparency and traceability of public blockchain transactions in business and commerce counteracts corruption. Using public blockchains in commerce makes every and all transactions publicly visible and traceable for consumers and the government alike. The transparency and traceability make it impossible for corrupt public officials to siphon off value, by accepting bribes, that increases the https://siepr.stanford.edu/sites/default/files/publications/17-032.pdf; Bech & Garrat, _supra_ note 77. Privacy and freedom from government interference is sometimes presented as one of the big advantages of a cryptocurrency. However, privacy is a feature that government or central bank sponsored cryptocurrency may support less than transparency. It will be left to the designers of such cryptocurrencies to determine which parts of the currency will follow transparency metrics and which need to discount transparent to protect privacy. Making those determinations necessitate decentralized governance mechanisms. _See_ C raig Calcaterra, _On-Chain Governance of Decentralized Autonomous Organizations: Blockchain Organization Using Semada_ , (May 2018), available at https://ssrn.com/abstract=318837 4. Ultimately, market acceptance of government sponsored stable cryptocurrencies will determine the efficient tradeoffs between accountability and privacy. > 133 _See supra_ text and accompanying notes 35-44. > 134 _See supra_ text and accompanying notes 35-44. 135 On the tradeoffs between transparency and privacy, see supra Fn. 132. overall cost structure of doing business in such countries.<sup>136</sup> As such, the increasing proliferation of cryptocurrencies in commerce can be seen as negatively correlated with the level of corruption in a given economy and positively correlated with the level of economic growth associated with the removal of corruption in such economies. The acceptance of cryptocurrencies increases in commerce if the value of such cryptocurrencies is stable. The more stable a cryptocurrency is, the more likely it is to proliferate.<sup>137</sup> In turn, the more proliferation of stable cryptocurrencies occurs in commerce, the less likely it is for corruption to destroy economic growth. Following this logic, the degree of stability of cryptocurrencies can be seen as negatively correlated with the level of corruption in a given economy and positively correlated with the level of economic growth associated with the removal of corruption in such economies. # _5. Transforming Cryptocurrency Market Structure_ The market structure for cryptocurrencies is subject to multiple convolutions and inefficiencies that undermine mass adoption. Existing distributed token projects require multiple different volatile tokens for every project on the market. The market structure of cryptocurrencies from its inception to 2019 can be compared to mandating customers who wish to purchase groceries to purchase a different currency for each store they visit and for each product chosen in such store. The market for cryptocurrencies is very volatile and illiquid and lacks the investing infrastructure that is needed. For example, the market for cryptocurrencies does not allow for prime brokerage. It is very difficult for investors to borrow cryptocurrencies in the market. Leverage in the cryptocurrency market exacerbates the liquidity and volatility problems. While overall leverage creates more trading and liquidity in cryptocurrency markets, a lack of balance between leveraged longs and shorts can result in extreme > 136 See supra fn. 134. (Id.) > 137 _See supra_ note 139. STABLE CRYPTOCURRENCIES volatility. Take for instance the volatility in the cryptocurrency market in December 2017 where longs can only go to zero whereas shorts can keep going. Moreover, leverage may particularly benefit speculators at the expense of the overall trading public. The price of a given currency is determined by the person in the market who buys a given unit with leverage versus the person of a given unit without leverage. Such speculators driving up the prices can deepen the liquidity problem. Cryptocurrency exchanges such as Bitmax, Kraken, among others, offer 5-10x leverage for cryptocurrency trades. This exacerbates the problem of illiquidity as borrowed money is driving the price. Options on cryptocurrencies add another layer of cost and exacerbate the liquidity problem. Speculators benefit from the existing market structure in cryptocurrencies. Speculators benefit from the existence of multiple diverse tokens in the market with different valuation trajectories and very high volatility in a deeply illiquid market without a trading infrastructure. This market structure enables speculators to trade currencies up and down in disparate market environments and use arbitrage trades across different jurisdictions to profit on the spread. The lack of regulation also enables speculators to front-run and trade on inside information. Speculators know better than investors what generates supply and demand in cryptocurrency markets. In certain cryptocurrencies, speculators have control over supply and an associated informational advantage versus other market participants. The very high illiquidity of the cryptocurrency market in combination with the herd mentality of crypto investors benefits speculators because it allows scarcity to appear out of nowhere including for investors who are about to make an investment decision. When the value of a cryptocurrency doubles quickly, investors assumes that insufficient supply of the token merits quick decisions and such investors often make misinformed buy/sell decisions. Speculators anticipate and benefit from the resulting market movements. Making matters worse, investors in this market have demonstrated a very high risk tolerance, not comparable with investors in stock markets. Stable cryptocurrencies help transform the cryptocurrency market structure. Stable cryptocurrencies are a necessary first step to address the shortcomings of the existing market structure for cryptocurrencies. In 2019, every stable cryptocurrency in the market merely functions as an on or off ramp to investing in other cryptocurrencies. Stable cryptocurrencies create a cash equivalent for the cryptocurrency market. As such, they function as a proxy for conversion to fiat currencies or as a cash component of investment portfolios. Stable cryptocurrencies have knock-on-effects on consumer confidence. Stable cryptocurrencies transform the cryptocurrency market by experimenting with stability designs. Such experimentation has knock-on-effects on consumer confidence as more and more designs, regardless of stability design, prove themselves as stable around a base value.<sup>138</sup> The experimentation and their effect on consumer and market confidence may follow similar patterns as emerging market currencies. Emerging market currencies were initially pegged to the US Dollar, then policy makers would allow it to free float in the market to evaluate the stability of the currency.<sup>139</sup> If and when the currency moves outside of a predetermined price stability range/band, the currency would be repegged against the dollar until more confidence in the market enables price stability.<sup>140</sup> # _6. Fighting Inflation_ Stable cryptocurrencies’ ability to address inflation is evolving. Countries with high inflation and year-to-date currency devaluation,<sup>141</sup> have started to evaluate cryptocurrency alternatives to offset some of the effects of currency devaluation in their > 138 Tether has been stable at around $1 value since its inception. See _Tether_ , COINMARKETCAP, https://coinmarketcap.com/currencies/tether/historicaldata/?start=20130428&end=20190423 (last visited Apr. 24, 2019). > 139 Shaghil Ahmed, Brahima Coulibaly & Andrei Zlate, _International Financial Spillovers to Emerging Market Economies: How Important are Economic Fundamentals?_ , 76 JOURNAL OF INTERNATIONAL MONEY AND FINANCE 133, 133-152 (2017). > 140 _Id._ > 141 See, e.g. Venezuela (2018: -99%), Argentina (2018: -53.2%), Turkey (2018: - 38.4%), and Brazil (2018: -20.6%). See supra Fn. [___-___]. STABLE CRYPTOCURRENCIES economies.<sup>142</sup> Most early cryptocurrency attempts in 2015-2018 used designs that relied on limiting supply of tokens, e.g. capping and hardcoding the total number of tokens available in a given ecosystem, as policy tools to fight inflation.<sup>143</sup> Since 2017, a slowly increasing number of token designs is entering the market with designs that allowed the minting of additional tokens. Several factors help explain the emergence of minting token designs. The mere reliance on capped supply of tokens makes the undesirable overvaluation of tokens and the associated excessive speculation much harder to curtail. In fact, fixing token supply removes the core policy tool, minting of additional tokens to increase supply, intended to address overvaluation, speculation, market frenzy and irrational exuberance. As the token market matures, more market participants realize that stability designs to address irrational exuberance in the market are essential for the evolution and success of the crypto market. # _7. Price Stability_ The literature has examined Central Banks’ ability to maintain currency price stability over the long and short term.<sup>144</sup> The 142 See supra Fn. [___-___]. > 143 Wulf Kaal, _Crypto Economics – The Top 100 Token Models Compared_ , BANKING & FIN. SER. POL. REP. (2018) (https://ssrn.com/abstract=3249860). > 144 F.A. Hayek, DENATIONALISATION OF MONEY: THE ARGUMENT REFINED (1974); David Hume, _Of Money and of Interest_ , _in_ WRITINGS ON ECONOMICS (Eugene Rotwein ed.1970). In David Hume's pioneering essays of 1752, Of Money and Of Interest, Hume stressed that changes in the number of units of money in circulation will have proportional effects on all prices that are stated in money terms. In turn, Hume suggests that changes in the number of units of money in circulation have no effect on economic output, e.g. on how much people produce or on the goods they produce or consume. _Id_ . _See also_ DON PATINKIN, MONEY, INTEREST, AND PRICES (2nd ed. Harper & Row 1965). _Contra_ Milton Friedman, _The Role of Monetary Policy_ , 58 THE AMERICAN ECONOMIC REVIEW 1–17 (1968). “If liquidity preference is absolute or nearly so-as Keynes believed likely in times of heavy unemployment-interest rates cannot be lowered by monetary measures. If investment and consumption are little affected by interest rates-as Hansen and many of Keynes' other American disciples came to believelower interest rates, even if they could be achieved, would do little good. Monetary policy is twice damned. The contraction, set in train, on this view, by majority of economic authors emphasize the core role central banking plays for the betterment of society,<sup>145</sup> including through capitalism.<sup>146</sup> A large part of the literature discusses the limitation of central bank controlled monetary policy.<sup>147</sup> The core critique of central banks’ monetary policy revolves around the elusive goal of a collapse of investment or by a shortage of investment opportunities or by stubborn thriftiness, could not, it was argued, have been stopped by monetary measures. But there was available an alternative-fiscal policy. Government spending could make up for insufficient private investment. Tax reductions could undermine stubborn thriftiness. The wide acceptance of these views in the economics profession meant that for some two decades monetary policy was believed by all but a few reactionary souls to have been rendered obsolete by new economic knowledge. Money did not matter. Its only role was the minor one of keeping interest rates low, in order to hold down interest payments in the government budget, contribute to the "euthanasia of the rentier," and maybe, stimulate investment a bit to assist government spending in maintaining a high level of aggregate demand. ” _Id. See also_ JOHN STUART MILL, PRINCIPLES OF POLITICAL ECONOMY (1929). “There cannot be intrinsically a more insignificant thing, in the economy of society, than money; except in the character of a contrivance for sparing time and labour. It is a machine for doing quickly and commodiously, what would be done, though less quickly and commodiously, without it: and like many other kinds of machinery, it only exerts a distinct and independent influence of its own when it gets out of order.” _Id_ . > 145 JOHN M KEYNES, A TREATISE ON MONEY (1930). The economic turmoil of the 1930s shifted attention away from problems of monetary neutrality and lead to a focus on monetary policy for short-term economic stimulus. _Id. See also_ JOHN M KEYNES, THE GENERAL THEORY OF EMPLOYMENT, INTEREST, AND MONEY. (1936); JAN TINBERGEN, BUSINESS CYCLES IN THE UNITED STATES OF AMERICA (1939). > 146 CHARLES TILLY, COERCION, CAPITAL, AND EUROPEAN STATES: AD 990-1992 (2015). > 147 Milton Friedman, _The Role of Monetary Policy_ , 58 AMERICAN ECONOMIC REVIEW 11 (1968). “The link between the policy actions of the monetary authority and the price level, while unquestionably present, is more indirect than the link between the policy actions of the authority and any of the several monetary totals. Moreover, monetary action takes a longer time to affect the price level than to affect the monetary totals and both the time lag and the magnitude of effect vary with circumstances. As a result, we cannot predict at all accurately just what effect a particular monetary action will have on the price level and, equally important, just when it will have that effect. Attempting to control directly the price level is therefore likely to make monetary policy itself a source of economic disturbance because of false stops and starts.” _Id_ . STABLE CRYPTOCURRENCIES currency stability under the control of Central Banks.<sup>148</sup> Central banks are constantly being lobbied to increase or decrease money supply away from equilibrium.<sup>149</sup> Moreover, even without lobbying, Central banks are subject to information asymmetries that do not allow them to determine the optimal amount of supply at any given point in time.<sup>150</sup> Stable cryptocurrencies are not as much subject to the same limitations. By making part of their policy rationales and outcomes hardcoded solutions, stable cryptocurrencies limit the amount of lobbying that can affect policy decisions. While other market mechanism can affect policy decisions in algorithmically driven stable cryptocurrencies, such decisions may be more time sensitive and therefore less subject to lobbying efforts. Stable > 148 Robert Skidelsky, _Why Reinvent the Monetary Wheel_ , PROJECT SYNDICATE (May 23, 2018), https://www.project-syndicate.org/commentary/cryptocurrencies-false-promiseby-robert-skidelsky-2018-05?barrier=accesspaylog; Richard M. Ebeling, _The Myth that Central Banks Assure Economic Stability_ , FOUNDATION FOR ECON. EDUC. (Jun. 8, 2018), https://fee.org/articles/the-myth-that-central-banks-assureeconomic-stability/; Hayek _supra_ note 145; Friedman _supra_ note 148. “I have selected two limitations of monetary policy to discuss: (1) It cannot peg interest rates for more than very limited periods; (2) It cannot peg the rate of unemployment for more than very limited periods. [Yet, ] The first and most important lesson that history teaches about what monetary policy can do-and it is a lesson of the most profound importance is that monetary policy can prevent money itself from being a major source of economic disturbance. [. . . ] A second thing monetary policy can do is provide a stable background for the economykeep the machine well oiled.” _Id._ > 149 Kevin Dowd, _Against Helicopter Money_ , CATO INSTITUTE, (Winter 2018), https://www.cato.org/cato-journal/winter-2018/against-helicopter-money. > 150 John J. Merrick, Jr. & Anthony Saunders, _Bank Regulation and Monetary Policy_ , 17 JOURNAL OF MONEY, CREDIT AND BANKING (1985). The lack of policy transparency in centralized monetary policy making for fiat currencies also serves legitimate policy interests. For example, a healthy level of market speculation over and examination of interest rate decisions by Federal Reserve Banks can help make markets more efficient and stable. Richard Dennis & John C. Williams, _Monetary Policy, Transparency, and Credibility: Conference Summary_ , FEDERAL RESERVE BANK OF SAN FRANCISCO (2007), https://www.frbsf.org/economic-research/publications/economicletter/2007/may/monetary-policy-transparency-credibility-conferencesummary/. cryptocurrencies are also subject to comparatively fewer information asymmetries because cryptocurrency designs are capable of estimating and timely detecting anomalies in supply and demand of their currencies to an extent that is unprecedented in centralized purchasing power policy schemes. Cryptocurrencies enable optimized balancing of the transparency factors associated with monetary policy. Policies and sets of rules applicable to stable cryptocurrencies are largely hardcoded into the stable currency. This level of full or significantly enhanced comparative transparency in cryptocurrencies allows their associated monetary policy to follow clearly predictable patterns. Because of this transparency and associated predictability, market participants can anticipate policy making and adjust behavior accordingly. In fact, such anticipatory policy reactions could, over time, make actual policy-making the exception rather than the rule. The protocols underlying stable cryptocurrencies enable unprecedented tools for monetary policy making.<sup>151</sup> No stable cryptocurrency can hardcode all required policies and policy making actions with full transparency as future policy cannot be fully anticipated ex ante, before the needs occur. However, in addition to hardcoded and fully transparent policy guidelines, monetary policy for cryptocurrencies can additionally be supported by protocols enabling decentralized autonomous organizations (DAOs).<sup>152</sup> Decentralized but fully transparent policy DAOs can help function as policy makers. The combination of hardcoded and > 151 For instance, in the central banking comparison, if a central-bank were to issue its own cryptocurrency it could help the central bank solve the zero lower bound problem. _See_ Bordo & Levin, _supra_ note 93. 152 DAOs do not suffer from comparative democratic legitimacy concerns as centralized policy making is equally dominated by unelected officials. Yet, a core argument against DAO monetary policy making is associated with lacking expertise and perverse incentives of DAO members. In many existing DAOs, such governance and incentive design concerns are not fully addressed. Others have already provided a governance and incentive optimization framework for DAOs. Craig Calcaterra, _On-Chain Governance of Decentralized Autonomous Organizations: Blockchain Organization Using Semada_ , (May 2018), available at https://ssrn.com/abstract=3188374. STABLE CRYPTOCURRENCIES fully transparent policies with DAO policy making allows for enhanced transparency and may enhance price stability. The transparency afforded by cryptocurrencies may, over time, enable feedback effects between decentralized and centralized policy making. As stable cryptocurrencies evolve, it is conceivable that policy makers in centralized institutions will consider trends and announcements of cryptocurrencies for their own policy making.<sup>153</sup> Such feedback effects enable dynamic regulatory structures<sup>154</sup> that help facilitate innovation,<sup>155</sup> market efficiency, and capital allocation. Several countervailing arguments reduce the long-term impact of stable cryptocurrencies’ policy making. Stable cryptocurrencies are not subject to the same real-world complexities and political positioning as central banks. This allows them to experiment with monetary policy tools on an unprecedented scale. Such experimentation is limited if and when real-world market factors pertain to such stable cryptocurrencies. For now, stable cryptocurrencies can realize optimized policy outcomes quicker because they do not have to manage the same amount of information, complexities, and competing demands on policy as real-world central bank policy making. # _8. Interoperability_ The existing market structure for cryptocurrencies is dominated by project competition, data silos, and significant lack of technological > 153 Central banks are already experimenting with cryptocurrencies. _Central Banks On Cryptocurrency_ , ETHNews.com (2017), https://www.ethnews.com/centralbanks-on-cryptocurrency (last visited Apr 25, 2019); _see supra_ text and accompanying notes 79-88. > 154 Wulf A. Kaal, _Dynamic Regulation of the Financial Services Industry_ , 48 WAKE FOREST L. REV. 791, 791–828 (2013); Wulf A. Kaal, Evolution of Law: Dynamic Regulation in a New Institutional Economics Framework, in FESTSCHRIFT ZU EHREN VON CHRISTIAN KIRCHNER (Wulf A. Kaal & Schmidt M. Schwartze eds., 2014). > 155 Wulf A. Kaal & Erik P.M. Vermeulen, _How to Regulate Disruptive Innovation- From Facts to Data_ , 57 JURIMETRICS JOURNAL OF LAW, SCIENCE AND TECHNOLOGY 169–209 (2017). interoperability. The lack of interoperability can in part be traced back to blockchain technology itself. The consensus created to allow block propagation in some ways negates interoperability with other chains and their consensus. The lack of interoperability is a very serious threat of survivability of cryptocurrency projects. As the so-called “crypto winter” of 2018 and 2019 has demonstrated, the thousands of projects that dominated the market in 2017 and 2018 often competed and the lack of serious attempts at interoperability of projects undermined their survivability.<sup>156</sup> While some commendable projects hope to address the lack of interoperability in the industry,<sup>157</sup> the progress on interoperability is still insufficient. Stable cryptocurrencies provide a common denominator that can increase interoperability. Consumers expect one currency they can trust and use for disparate purposes. Consumers do not care how interaction with other technologies and disparate blockchains is facilitated. Consumers increasingly convert and apply stable cryptocurrencies in exchange for other tokens to gain access to products and services in the evolving decentralized commerce. Currency stability as a basis for interoperability is easier to sell and teach to consumers than technology-driven interoperability. At a minimum, stable cryptocurrencies help educate the public on the desirability of interoperability. Rather than using technological solutions and educating the public on the blockchain technology that helps create interoperability, currency stability, and the public’s recognition of the desirability of currency stability, serves as a proxy for interoperability. > 156 Paul Wilson, _The Interoperability Problem of Blockchain May Soon Be Over_ , GLOBAL COIN REPORT (Apr. 10, 2019), https://globalcoinreport.com/theinteroperability-problem-of-blockchain-may-soon-be-over/; Daniel Jeffries, _Surviving Crypto Winter – Part one: Mattereum and the Internet of Agreements_ , HACKERNOON (Jan. 1, 2019), https://hackernoon.com/surviving-crypto-winterpart-one-mattereum-and-the-internet-of-agreements-19c99453060. > 157 _See_ POLKADOT, https://polkadot.network/ (last visited April 24, 2019); TEZOS, https://tezos.com/ (last visited April 24, 2019). STABLE CRYPTOCURRENCIES # _9. Enabling Global Decentralized Commerce_ Decentralized commerce may generically be defined as the global exchange of financial instruments, goods and services via decentralized and emerging technologies. The emergence and proliferation of distributed applications (DApps) in the aftermath of the Bitcoin protocol invention in 2009 demonstrate that a nascent market for such applications and consumer demand already exists. Distributed app economy and decentralized commerce are not synonymous. Whereas the term “distributed app economy” describes commercial relationships between customers and DApps, the term “decentralized commerce” includes any form of evolving commercial relationships that utilize decentralized technology solutions and, as such, can be contrasted with centralized commerce. Several factors limit the evolution of a distributed app economy and decentralized commerce. In 2019, decentralized commerce is relegated to the trading and exchange of cryptocurrencies and basic smart contracting. The low transaction throughputs of public blockchains<sup>158</sup> is a core limitation that holds back more advanced DApps. Other core infrastructure products that do not exist in 2019 but are needed for the evolution of decentralized commerce include: truly decentralized consensus combined with higher levels of transaction throughput, evolutionary governance designs that overcome the need for hardforking, decentralized underwriting protocols that enable democratized access to insurance, and verification protocols for smart contracting, among other decentralized infrastructure needs. Moreover, without a core use case, other than the store of value, decentralization technology is less likely to proliferate. Banking and money transmission related services and triple entry accounting via blockchain technology are natural use cases but they fall short in their application as the universal use cases for public blockchains. User access and usability of existing decentralized technologies fall short of mass adoption needs. It will be very difficult to educate the public sufficiently to > 158 One of the leading projects on the transaction throughput front, EOS, is reportedly capable of processing up to 4000 transaction per second in January 2019. _EOS vs Ethereum vs TRON,_ DAILYCRYPTOTIMEs.COM (April 21, 2019), https://dailycryptotimes.com/2019/04/eos-vs-ethereum-vs-tron/. seamlessly adopt decentralized protocols in their daily life if users have to discern and manage public and private keys to wallets, among other concerns. The existing limitations for decentralized commerce can be overcome. Emerging technological improvements, such as the evolution of 5G technology,<sup>159</sup> among others, enable overall higher levels of applications of big data solutions<sup>160</sup> and higher transaction throughput in decentralized systems. Even without the availability of 5G technology, the rapid advances of AI in combination with big data and machine learning have already affected many of the sectors of the economy.<sup>161</sup> The combined effect of AI, big data, sensors, and blockchain technology<sup>162</sup> foreshadows a market expansion for DApps. Technological progress and decentralized infrastructure solutions can unleash the true comparative advance of decentralized commerce over centralized commerce. Decentralized commerce enables unprecedented economies of scale, it is subject to far fewer and rather different transaction cost, enhances trust and consumer as well as overall market confidence. > 159 Tadilo Endeshaw Bogale & Long Bao Le, _Massive MIMO and mmWave for_ _5G Wireless HetNet: Potential Benefits and Challenges_ , IEEE VEHICULAR TECHNOLOGY MAGAZINE (March 2016), available at https://ieeexplore.ieee.org/abstract/document/7397887. > 160 Kristiina Valtanen, Jere Backman, & Seppo Yrjola, _Blockchain-Powered Value Creation in the 5G and Smart Grid Use Cases_ , 7 IEEE ACCESS 25690 (2019), https://ieeexplore.ieee.org/stamp/stamp.jsp?arnumber=8648405. > 161 ERNST & YOUNG, DIGITAL TRANSFORMATION FOR 2020 AND BEYOND: A GLOBAL TELECOMMUNICATIONS STUDY (2017), https://www.ey.com/Publication/vwLUAssets/ey-digital-transformationfor2020-and-beyond/$FILE/ey-digital-transformation-for-2020-and-beyond.pdf. (suggests that 79% of executives in the study suggest that technological progress creates an unprecedented paradigm shift). _See_ ERIK BRYNJOLFSSON & ANDREW MCAFEE, THE SECOND MACHINE AGE: WORK, PROGRESS, AND PROSPERITY IN A TIME OF BRILLIANT TECHNOLOGIES 205–28 (2014); Townsend _supra_ note 65. _See_ Canton _supra_ note 65; Waral, Rana & Handrahan, _supra_ note 65; Merrett _supra_ note 65. > 162 _See_ Fenwick & Vermeulen, infra Fn. 67. STABLE CRYPTOCURRENCIES Decentralized commerce enables unprecedented economies of scale. Significant automation, trust enhancement, as well as removing intermediation and associated transactions cost are among the factors that enable decentralized commerce enables unprecedented economies of scale. Emerging decentralized technology often replaces intermediation needed in centralized systems and can automate entire value chains. Decentralized commerce is subject to far fewer and rather different transaction cost. The decentralized emerging technologies used in decentralized commerce can increase the overall trust of consumers and market participants at an unprecedented scale.<sup>163</sup> Trust can help lower transaction costs but it also increases consumer and overall market confidence and certainty, which facilitate economies of scope and scale that may not be possible in centralized structures. Moreover, because of their lower cost structure, decentralized cryptocurrency platforms have the ability to remove consumer fees that are an integral part of their centralized competitor businesses. Removing such centralized fees also allows for the eradication of downward pressure on the platforms’ worker compensation.<sup>164</sup> The lack of fees can help create a more efficient marketplace through the removal of the rent seeking intermediators. Decentralized payment systems’ ability to rely entirely on cryptocurrencies creates comparative advantages in orders of magnitude over centralized systems. Centralized fiat payment systems and platforms typically require some form of an existing banking relationship in order for consumers to utilize their services. Holding and storing cryptocurrencies does not require a banking relationship. Centralized fiat payment systems are subject to > 163 _2019 Edelman Trust Barometer_ , EDELMAN (2019), https://www.edelman.com/sites/g/files/aatuss191/files/201904/2019_Edelman_ Trust_Barometer_Technology_Report_0.pdf; KEVIN WERBACH, THE BLOCKCHAIN AND THE NEW ARCHITECTURE OF TRUST (2018). > 164 If centralized businesses can no longer charge their customer fees, they can still offset any losses by changing the compensation structure of workers. Hence, the existence of centralized fee structures in the business operations and associated profitability can create downward pressure on compensation structures. payment processing issues and slow processing times for payments. They also require high fees for intermediaries that facilitate the payment process such as banks and PayPal, among others.<sup>165</sup> The fees make it only economically viable for higher volumes of transactions, creating barriers to entry in the process. Decentralized payment systems are not subject to these limitations. Finally, anonymity of market participants in cryptocurrency networks can increase participation in certain markets and economies. The adoption, acceleration, and evolution of decentralized commerce depends, in part, on the functioning and stability of cryptocurrencies. Stable cryptocurrencies that allow for smart contracting can be expected to create widespread usage in cryptoasset trading, payments for products and services in decentralized applications, commerce across industries, and as a treasury currency for decentralized projects. Because of their disciplining and market stability enhancing effects,<sup>166</sup> stable cryptocurrencies are part of the financial technology infrastructure that will form the backbone of any emergence of the distributed app economy and decentralized commerce. In turn, decentralized commerce has knock-on effects for the evolution of stable cryptocurrencies. Why does the anticipated future decentralized crypto-economy need a stable coin? Neither party to a business transaction should be willing to risk their wealth on a long-term business contract which uses a volatile currency. Neither the renter nor the landlord will sign a contract if the rent may halve or double in any given week. So an artificially scarce resource like bitcoin, or a naturally scarce resource like gold, are poor representatives of money, which, for efficiency, should be a stable store of value. The best reason to leave the gold standard is because gold is not an efficient medium to use to account for the exchange of value in business transactions; the fluctuating value of gold requires the parties to a business > 165 Benjamin Lo, _Fatal Fragments: The Effect of Money Transmission Regulation on Payments Innovation_ , 18 YALE J.L. & TECH. 111, 113-20 (2016). 166 See infra FN. [__-__]. STABLE CRYPTOCURRENCIES transaction to continually recalculate and renegotiate as the value of the medium of exchange for a contract fluctuates. # _10. Market Stability_ Abundant evidence exists regarding the high volatility of cryptocurrency markets.<sup>167</sup> Several factors contribute to the existing volatility in cryptocurrency markets. Those factors include, but are not limited to the following: 1. The high degree of uncertainty for investors, 2. The lack of an effective disclosure regime for cryptocurrency markets, 3. The inability to list and trade cryptocurrencies on fully regulated and compliant exchanges in the United States, 4. The illiquidity of the market, 5. The lacking infrastructure products and solutions in the cryptocurrency markets. The use of cryptocurrencies increases the efficiency of capital allocation and overall functioning of markets. Centralized marketplace leaders often act as rent seeking intermediaries that create numerous inefficiencies in the market, in addition to the aforementioned transaction cost. Cryptocurrencies allow for the partial removal of such intermediation<sup>168</sup> and, thus, can help increase the efficiency of capital allocation and overall functioning of markets. Existing stable cryptocurrency designs are already creating market stability. The rise of an early stable cryptocurrency design, Tether, in terms of its total market capitalization,<sup>169</sup> its stability around $1 value, and investors’ uses of Tether as a temporary safe haven, provide some support for stable cryptocurrencies’ ability to create market stability. > 167 JT Hamrick, et al, _The Economics of Cryptocurrency Pump and Dump Schemes_ , (December 18, 2019), available at SSRN: https://ssrn.com/abstract=3303365. 168 Yet, at the same time cryptocurrencies and decentralized systems create new intermediators. Christian Cataline & Joshua S. Gans, _Some Simple Economics of the Blockchain_ , MIT SLOAN RESEARCH PAPER NO. 5191-16 (2017), available at SSRN: https://ssrn.com/abstract=2874598. > 169 _Cryptocurrency Market Capitalizations_ , COINMARKETCAP (2019), https://coinmarketcap.com/ (last visited Apr 22, 2019). As the cryptocurrency market matures, stable cryptocurrencies serve a similar function for cryptocurrency market stability as emerging market currencies did for emerging markets. To create stability, emerging market currencies were initially pegged to the US Dollar, then policy makers in the respective emerging market jurisdictions would allow their currencies to free float in the market to evaluate the stability of the currency.<sup>170</sup> If and when the currency moved outside of a predetermined price stability range/band, policy makers would repeg such currency against the dollar until more confidence in the market enabled enhanced price stability. This procedure allows policy makers to determine the best metrics and policy actions to ensure price stability for the national currency. Stable cryptocurrencies are using similar experiments by pegging against the US Dollar. Yet, stable currencies can go further by experimenting with pegs against baskets of goods, pegging against other cryptocurrencies and, most importantly, by creating algorithmic solutions that enable an entirely new framework for stability designs. Unlike emerging market currencies, stable cryptocurrencies may not be subject to the independent currency trilemma of emerging markets, or some derivation thereof for cryptocurrency markets. The currency trilemma of emerging markets postulates tradeoffs between different currency objectives. In essence, the trilemma suggests that no currency can attain all three core objectives: 1. Fixed foreign exchange rate, 2. Free capital movement (absence of capital controls), and 3. An independent monetary policy.<sup>171</sup> The > 170 Jeffrey Frankel & Jumana Poonawala, _The Forward Market in Emerging Currencies: Less Biased Than in Major Currencies_ , 29 JOURNAL OF INTERNATIONAL MONEY AND FINANCE 585-59 (2010). > 171 Atish R. Ghosh, Jonathan David Ostry & Mahvash Saeed Qureshi, _Exchange Rate Management and Crisis Susceptibility: A Reassessment_ , 14 IMF Working Papers 238–276 (2014) ; Michael Klein & Jay Shambaugh, _Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy_ , 7 AMERICAN ECONOMIC JOURNAL: MACROECONOMICS 33–66 (2015) ; Maurice Obstfeld, _Trilemmas and Trade-Offs: Living with Financial Globalisation_ , 480 BIS Working Papers (2015); Geert Bekaert & Arnaud Mehl, _On the Global Financial Market Integration “Swoosh” and the Trilemma_ , 94 JOURNAL OF INTERNATIONAL MONEY AND FINANCE 227 (2019); Valentina Bruno & Hyun STABLE CRYPTOCURRENCIES lack of real-world pressures that afflict emerging market currencies may enable stable cryptocurrency projects to experiment with solutions that can help overcome the trilemma. Especially the idea of a fully independent monetary policy in decentralized currencies may be attainable for stable cryptocurrencies because they can use a combination of hardcoded protocol elements and decentralized autonomous organizations (DAO) as monetary policy making bodies. The prospect of fully decentralized and independent monetary policy for stable cryptocurrencies hinges on DAO governance protocols.<sup>172</sup> Free capital movement is near guaranteed because capital controls are near impossible to enforce in the case of decentralized currencies.<sup>173</sup> Given the ability to use a fully Song Shin, _Capital Flows and the Risk-Taking Channel of Monetary Policy_ , 71 JOURNAL OF MONETARY ECONOMICS 119–132 (2015); Carlos Caceres, Yan Carriere-Swallow & Bertrand Gruss, _Global Financial Conditions and Monetary Policy Autonomy_ , 16 IMF Working Papers 1 (2016); Maurice Obstfeld, Jonathan Ostry & Mahvash Qureshi, _A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies_ , 17 IMF Working Papers 1 (2017); Jonathan D Ostry et al., _Capital Controls: When and Why?_ , 59 IMF ECONOMIC REVIEW 562– 580 (2011); Evgenia Passari & Hélène Rey, _Financial Flows and the International Monetary System_ , 125 ECONOMIC JOURNAL 675–698 (2015) ; Hélène Rey, _Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence_ , PROCEEDINGS FEDERAL RESERVE BANK OF KANSAS CITY ECONOMIC POLICY SYMPOSIUM (2015); Hélène Rey, _International Channels of Transmission of Monetary Policy and the Mundellian Trilemma_ , 64 IMF ECONOMIC REVIEW 6–35 (2016). 172 DAO governance for monetary policy making depends on a governance design that attains full decentralization and with it full independence. The Semada Research Institute has created an early design that accomplishes those determinants. Craig Calcaterra, _On-Chain Governance of Decentralized Autonomous Organizations: Blockchain Organization Using Semada_ , (May 2018), available at https://ssrn.com/abstract=3188374; CRAIG CALCATERRA, WULF A. KAAL, & VLAD ANDREI, SEMADA TECHNICAL WHITEPAPER - BLOCKCHAIN INFRASTRUCTURE FOR MEASURING DOMAIN SPECIFIC REPUTATION IN AUTONOMOUS DECENTRALIZED AND ANONYMOUS SYSTEMS, (University of St. Thomas (Minnesota) Legal Studies Research Paper No. 18-11, Feb. 18, 2018), available at SSRN: https://ssrn.com/abstract=3125822 ; CRAIG CALCATERRA & WULF A. KAAL, SEMADA’S PROOF OF STAKE PROTOCOL (University of St. Thomas (Minnesota) Legal Studies Research Paper No. 18-10, January 18, 2018), available at SSRN: https://ssrn.com/abstract=3125827. > 173 LAW LIBRARY OF CONGRESS, REGULATION OF CRYPTOCURRENCY AROUND THE WORLD 106-08, (June 2018); _Regulation of Cryptocurrency: China_ , LAW independent monetary policy tool, stable cryptocurrencies’ ability to overcome the trilemma may hinge on their ability to create fixed foreign exchange rate. The example of Tether demonstrates that price stability is attainable despite a lack of independence from the US Dollar. # _11. Supporting Mass Adoption_ The existing cryptocurrency market structure undermines mass adoption of cryptocurrencies. The existing cryptocurrency market structure consists of multiple different and highly volatile tokens for disparate projects and use case. Moreover, project silos and significant lack of interoperability of cryptocurrencies and associated projects is a very serious threat to the survivability of cryptocurrency projects.<sup>174</sup> The average user is unwilling to identify, research, and purchase diverse sets of tokens, even if their application and use cases would create value. The existing market structure for cryptocurrencies is simply too cumbersome for the average user.<sup>175</sup> Consumers expect one currency they can trust and use for disparate purposes. Stable cryptocurrencies support the adoption of cryptocurrencies by the general public and their proliferation. In other words, nonspeculator lay people are not going to use cryptocurrencies for their daily consumption tasks, payment of groceries, banking transactions, among other examples, if the value of their cryptocurrency is not stable. At the size, lacking depth, and level of illiquidity of the cryptocurrency market in 2019, the cryptocurrency market disproportionally benefits speculators at the expense of the general public. The general public will not use cryptocurrencies if a public perception of risk exists that suggests that consumers’ value may be half or double at the time of any given transaction or LIBRARY OF CONGRESS, https://www.loc.gov/law/help/cryptocurrency/china.php (last accessed April 24, 2019). > 174 _See supra_ Fn [___-___]. 175 The existing cryptocurrency structure can be compared with requiring consumers to research, understand and purchase different currencies in centralized systems to make basic economic decisions on consumption. _See supra_ Part [___-___]. STABLE CRYPTOCURRENCIES purchase. The proliferation of stable cryptocurrencies can help correct that consumer perception over time. The core common criterion for any currency that helps restructure the cryptocurrency market is that it provides stability and coded guarantees consumers can trust. Stable cryptocurrencies help adapt the cryptocurrency market structure to support mass adoption of decentralized technology. Consumers’ experimentation with and increasing belief in the stability provided by cryptocurrencies can help form the foundation of adoption and evolution of decentralized technologies. Once that foundation is formed, which could take decades, depending on the economy and jurisdiction, consumers will increasingly convert and apply stable cryptocurrencies into other tokens for products and services in the evolving decentralized commerce. The shift in consumption via stable cryptocurrencies in decentralized commerce may hinge on incentives for merchants. In the existing digital commerce, merchants pay 2.9% to the credit card company for any transaction involving non-cash transfer with credit cards. Merchants would benefit from any medium of exchange that requires them to pay less than that 2.9%. Consumers would be equally rewarded because merchants can incentivize the use of less expensive mediums of exchange by way of a % discount or other incentive. Theoretically, any exchange rate risk for consumption and associated exchange arguably would have to be higher than the 2.9% of the transaction in order to deter consumers and merchants. Technologically, atomic swaps already help address the problem of exchange rate risk for basic consumption transactions. Stable cryptocurrency help lower counterparty risk in commercial and banking transactions. Stable cryptocurrencies allow a faster speed of settlement for commercial transactions. Visa takes 5-7 business days to pay the merchant for the transaction. With stable cryptocurrency the transaction settlement would be much faster and could happen within seconds. Such speed in settlement takes away the counterparty risk and with less counterparty risk, speed of settlement with cryptocurrencies boosts consumer confidence and increases certainty for transactions. Lower counterparty risk is also correlated with a lower level of required regulation to protect against such risk. A culture shift has already started with regards to consumers’ acceptance of debt in their daily lives. Whereas the general public in the United States leading up to the 2000s was completely dependent on credit, including in consumption, the millennial generation is much less dependent on credit. This change in public attitudes may over the long-run benefit payment alternatives such as stable cryptocurrencies. # **V.** Conclusion and Outlook As cryptocurrencies evolve, increasing evidence suggest that they can establish and support core functions that are currently suboptimally provided in the centralized economies of emerging markets. Cryptocurrencies can provide more than just stability for the cryptocurrency market as a safe-harbor for investors. It is possible that in certain countries stable cryptocurrencies can function, as they evolve over time, as a supplement or even replacement for paper fiat currency. Yet, many open questions need to answered as the technology and associated stability designs evolve. While a progressively growing body of literature on cryptocurrencies is focused on technical aspects and implementation, some recent studies have approached the subject from a monetary economics perspective. One such noteworthy study is Fernandez-Villaverde and Sanches (2018)<sup>176</sup> who use the celebrated framework of Lagos and Wright (2005)<sup>177</sup> to conduct a theoretical investigation, among other things, of the issue of price stability in a world of competing private currencies. > 176 Jesús Fernández-Villaverde and Daniel R. Sanches, _On the Economics of Digital Currencies_ , Federal Reserve Bank of Philadelphia Working Paper No. 18-7 (2018), Available at SSRN: <u>https://ssrn.com/abstract=3117347</u> or http://dx.doi.org/https://doi.org/10.21799/ <u>frbp.wp.2018.07</u> > 177 Ricardo Lagos and Randall Wright, _A Unified Framework for Monetary Theory and Policy Analysis_ , Journal of Political Economy, (2005), 113(3), pp. 463-484. STABLE CRYPTOCURRENCIES Fernandez-Villaverde and Sanches’s work (2018)<sup>178</sup> provides significant insights that merit further research. They show that profit-maximizing issuers of cryptocurrencies, in order to benefit from seignorage, will in general be motivated to keep increasing the quantity of a cryptocurrency, thereby driving down the value of the currency to zero over time. Even under conditions in which a stable equilibrium is possible, self-fulfilling inflationary expectations cannot be ruled out. The authors argue that even in cases such as Bitcoin with a preprogrammed growth rate, the system is unlikely to result in a socially optimal outcome. In their model, private cryptocurrencies are in general socially wasteful, and hinder monetary policy implementation; the government can implement an efficient allocation only by driving out private money from the economy. Another interesting study of cryptocurrency prices and the impact on monetary policy of competition between a cryptocurrency and fiat money is by Schilling and Uhlig (2018).<sup>179</sup> They consider a setting consisting of a cryptocurrency – which they refer to as “Bitcoin” – and an official currency – which they refer to as the “Dollar.” The main difference between these two varieties of money is that Bitcoin production is decentralized while the supply of Dollars is controlled by a Central Bank with the objective of achieving an inflation target. The analysis reveals that under different conditions, Bitcoin prices may, in expectational terms, increase or decrease or stay the same over time. The study goes on to investigate the interaction between Bitcoin prices and monetary policy. For our purposes, the important result is that it is possible for official money and cryptocurrencies to co-exist in a manner consistent with stability. > 178 Fernández-Villaverde & Sanches, _supra_ note 176. > 179 Linda Schilling and Harald Uhlig, _Some Simple Bitcoin Economics_ , Becker Friedman Institute for Research in Economics Working Paper No. 2018-21, available at SSRN: https://ssrn.com/abstract=3155310 or http://dx.doi.org/10.2139/ssrn.315 <u>5310</u> In light of the trends examined in this paper, the authors expect a world in which cryptocurrencies and fiat currencies may offer different benefits, complement one another, and provide more functions than just serving as media of exchange. For future research in this evolving field,<sup>180</sup> a particular emphasis should be placed on open questions pertaining to real-world applications and their uses over time. > 180 _See, e.g._ Craig Calcaterra, Wulf Kaal & Vadhindran Rao, _Stable Cryptocurrencies – First Order Stability Design Principles_ , work in progress, on file with authors.