Gu Yanxi: The areas where the US dollar stable currency will be applied first

Recent U.S. financial regulatory policies have clearly indicated that they encourage the development of U.S. dollar stablecoins in the market. In view of the current demand for USD stablecoins in the market, it is expected that USD stablecoins will develop rapidly. Moreover, the development speed of the US dollar stable currency will be faster than the current rapid growth rate of the current US dollar stable currency.

The first application areas of USD stablecoins can be viewed from two perspectives, functional and geographical. In terms of function, it will first be applied in the cross-border field. Specifically, it will first be applied to cross-border transfers, encrypted digital currency transactions and cross-border e-commerce. In terms of geographical area, it will first be circulated in areas with weak local fiat currencies, rather than starting with major fiat currency regions.

Scenarios where USD stablecoins are first applied

The original intention of Facebook to issue stable currency is to apply it to cross-border transfers in India. This is because India is the largest foreign exchange remittance country, and the speed of foreign exchange remittance will continue to grow in the future. India is also the country with the most Facebook social network users. So if Facebook can provide cross-border transfer services based on stablecoins, then this business will definitely be welcomed by India. On a larger scale, the high cost and inefficiency of cross-border transfers are already widely recognized problems. This problem has long been urgently needed to be solved, and the stable currency running on the blockchain is the best way to solve this problem. Therefore, after the US dollar stablecoin begins to circulate, cross-border transfer must be its first major application field.

The creation of stablecoins is to facilitate global encrypted digital currency trading services. Today, the US dollar stablecoin has become the main trading medium for encrypted digital currency trading services. After more compliant US dollar stablecoins are launched in the future, one of its first application scenarios must be global encrypted digital currency transactions. For trading users, the risk of using USD stablecoins issued in compliance is far less than the risk of using USDT. USDT will still have its user base, but a larger amount of funds must enter encrypted digital currency transactions through compliant US dollar stablecoins. This is why I think cryptocurrency trading will soon appear in the Diem ecosystem.

In terms of cross-border transfer payment, a major application scenario is cross-border e-commerce. For the application scenario of cross-border e-commerce, payment based on stable currency is superior to existing payment methods in terms of cost, efficiency and convenience. Therefore, stablecoins are a better choice for both parties in cross-border e-commerce transactions. This is why Shopify, a cross-border e-commerce company, has joined the Diem Association at a relatively early stage, that is, before Diem was approved to operate. This is precisely because Diem's ​​ecology has an important impact on its business.

Geographic regions where USD stablecoins are first applied

In terms of geographical areas where stablecoins are used, USD stablecoins will start to be used in non-mainstream fiat currency regions, especially in regions like Ecuador that are already actively striving for dollarization. Now there are about 200 countries and about 180 legal currencies in the world. The US dollar stablecoin is based on distributed ledger technology, so it is possible to use the US dollar stablecoin anywhere with access to the Internet. Such a stable currency circulation mechanism is far superior to the existing currency circulation mechanism. So the dollars flow to a wider geography. This would allow USD stablecoins to compete more directly with local fiat currencies. For those regions where the local fiat currency has problems, the chances of the local market adopting the US dollar stable currency are even greater. Therefore, I think that in terms of geographic regions, the fastest-growing areas for the use of US dollar stablecoins should be areas where the local legal currency has weak influence or serious problems, rather than in the circulation area of ​​​​the main legal currency.

In the competition between the U.S. dollar and the euro, the emergence of the U.S. dollar stable currency will be a big challenge to the euro. The emergence of stable coins is actually a development of blockchain technology in practical applications. Now the U.S. financial regulation encourages the development of U.S. dollar stable currency, which is recognized from a policy perspective. In the euro zone, there is a clear and strong opposition to such a dollar stablecoin. For example, the German Minister of Finance clearly expressed his opposition to private digital currencies. He believes that European banks should have the monopoly right to issue euros. And even though Diem has changed his name, he is still a wolf in sheep's clothing. But now that U.S. financial regulation recognizes the USD stable currency, European financial regulation needs to decide whether to allow such USD stable currency to circulate in the euro zone. If it allows dollar stablecoins to circulate in the euro zone, it also needs to provide a digital version of the euro as soon as possible. This form is either a euro CBDC, or a euro stablecoin that is the same as the US dollar stablecoin issuance mechanism.

In general. Since stable coins are generated and circulated on top of blockchain technology, and blockchain technology is essentially different from the existing centralized bookkeeping model that supports legal currency circulation, such digital currencies are superior in some respects. Based on the existing currency circulation mechanism. Therefore, the circulation of digital currency is an inevitable development trend. But this is not to say that digital currency is a replacement for the existing centralized bookkeeping currency and paper currency, but that a new form will emerge outside the existing currency form. Such monetary mechanisms compete with existing forms of money, but are also complementary to existing forms of money. For the existing legal currency issuers, if they can seize this opportunity, they can enhance the competitiveness of their legal currency in the currency market.