Blockchain Could Use Some Help From the Dollar

It won't be easy for smart contracts to go mainstream without the lifeblood of international and U.S. commerce.

Blockchain Could Use Some Help From the Dollar

Wealth is measured in dollars, not Bitcoins.

Photographer: Bloomberg

Photographer: Bloomberg

This post originally appeared in Money Stuff.

The U.S. dollar is a useful unit to keep track of the prices of things. A sandwich costs $8. A share of Apple Inc. stock costs $222.19. A cargo of Iranian oil costs $150 million. 

The U.S. dollar is also, conventionally, a medium of exchange, a way to actually pay those prices. But this use of the dollar is much less straightforward than the unit-of-account one. If you want the sandwich, you can give the seller eight pieces of paper marked “one dollar” and get the sandwich. If you want the Apple share, you can’t do that; you need to go through the banking system, instructing your bank to make some electronic entries in its accounts to move (purely electronic) dollars into the account of your broker, who in turn moves them into the account of the seller’s broker, etc. etc. etc.

If you want the Iranian oil, you also need to use the banking system—except that the U.S. government doesn’t particularly want you to spend your dollars on Iranian oil, and so is likely to re-impose sanctions that prevent banks from making those electronic entries on your behalf to buy the oil. If the sanctions work right, you just won’t be able to buy the oil with dollars, like at all: Any method of payment that passes through the dollar system (sending a wire transfer in dollars, converting the dollars into rubles and wiring those, putting $100 bills in suitcases and flying those to Iran) will be blocked by U.S. law.

There are two points to make here. One is that the mechanism of turning dollars into stuff is socially constructed, legally regulated, intermediated by institutions rather than a pure natural market mechanism. The other is that this mechanism, complicated though it is, is very very very popular and standard, the lifeblood of international (and U.S.) commerce. People complain about it all the time—the slowness and inefficiency of money transfers using the banking system, the outsized geopolitical clout that the centrality of the dollar gives to U.S. sanctions regimes—but they use it anyway, because everyone else uses it.

Let’s say you want to build a smart contract on a crypto blockchain that pays out some amount if something happens. (Say, if a shipment of goods arrives, the smart contract pays for them; or say the smart contract is a bet on a baseball game, and pays out if your team wins.) You probably want the amount to be measured in dollars, because the dollar is the most useful measure of value, at least in the U.S. You could measure the amount in Bitcoin or whatever, but then if the price of Bitcoin falls by 50 percent against the dollar, then in every practical sense you will have half as much money. Wealth is measured in dollars, not Bitcoins.

But how do you put dollars into the smart contract? How do you use dollars as a medium of exchange, here, rather than just as a unit of measure? One answer would be “the normal way”: The smart contract links up to your bank account, and your bank transfers some electronic units from its account to the smart contract’s account, and the smart contract settles in dollars.

The other answer is “a stablecoin”: Some crypto institution builds a thing on its blockchain that is supposed to be worth a dollar. The mechanism for converting your dollars into stablecoins is more or less the normal one: The crypto institution links up to your bank, your bank transfers some electronic units, etc. But then once you have the stablecoins they live in the blockchain ecosystem, not the U.S. dollar ecosystem. They can work natively with the smart contract, live on the same blockchain, be transferred however the crypto people want to transfer them rather than by going through the institutions—banks, the Fed, etc.—that transfer dollars.

Here is a story about a new stablecoin, Circle USD Coin, from Circle Internet Financial Ltd. Like other recent stablecoins it is meant to be more transparent, regulatorily compliant and generally grown-up than the previous generation of stablecoins. Here is Circle’s explanation for it:

As crypto assets have grown in their importance and adoption, it’s become vital to be able to use fiat currencies for payments and trading. A price-stable currency such as the US dollar (and similar stable currencies such as EUR, GBP, JPY, RMB, etc.) is critical for enabling mainstream adoption of blockchain technology for payments, as well as to support maturation in financial contracts built on smart contract platforms, such as tokenized securities, loans, and property.

There are two points to make here, and they are the opposite of the ones above. First, using a stablecoin in a crypto ecosystem allows you to get around some of the institutions, laws, social constructions, etc., of the dollar system. This can be totally innocent and efficient! Maybe your bank just isn’t set up to move money to a smart contract, and there is no fast sensible way to explain it and meet your bank’s know-your-customer rules, and the only way to make smart contracts work efficiently is by having all of the money that goes into them live on the blockchain. Or, alternatively, it can just be a direct dodge around the law: Maybe the smart contract is to buy illicit drugs or Iranian oil, and you’re doing it with stablecoins instead of dollars because otherwise the dollar system would stop you.

But the other point is that the dollar mechanism is very very very popular and standard. If your goal is mainstream adoption of blockchain payments or smart contracts, then you might spend some time trying to get those things to work with dollars in the normal way, so that people can enter into smart contracts with their credit cards or brokerage accounts rather than by first buying stablecoins. If your smart contract can pull baseball scores from ESPN, why can’t it pull dollars from Bank of America? That is a harder approach, probably, because the normal dollar system is encumbered by law and custom and legacy technology. But it’s the system that everyone (in the U.S.) natively uses, and if you are looking to go mainstream, it might be the place to be.

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