The Next Killer Application on a Blockchain Might Be the US Dollar
A lot of the enthusiasm for Bitcoin comes from what differentiates the cryptocoin from traditional money, like its fixed inflation schedule and lack of a central bank. But if you go back and read the original white paper that gave birth to it, it’s not clear that those characteristics were the primary reason why it was invented in the first place.
The paper’s title, for example, only references a system of cash, and there is no mention of inventing a new currency anywhere in the abstract, introduction or conclusion. Instead, the author’s focus is almost entirely on the mechanics of digitizing money, with the hope of creating a “peer to peer electronic cash system.”
Almost a decade later, the Bitcoin blockchain has been so successful at delivering on that promise that the next killer application to start using the same technology might be the U.S. Dollar.
That idea is anathema to the more ideologically minded members of the cryptocoin community, but makes plain sense for the average person. When it comes to money, most people and businesses just want a currency that’s stable, widely accepted and cheap and easy to transact. The dollar has been pretty successful on the first two fronts, but has not kept up with the digital age when it comes to payments.
Bank wires and ACH transfers are still rather slow, and credit card processing fees rather high. Even the more modern payment services like PayPal and Venmo are not as efficient as they could be, partly because they are built on top of aging bank infrastructure. Satoshi Nakamoto’s great innovation of replacing large financial intermediaries with a decentralized ledger that’s continuously updated via a transparent consensus mechanism can greatly improve how fiat money like the dollar moves.
And in fact, it already has, as today there are multiple blockchain-based “tokenized Dollar” products available for use, offering an experience very similar to that of transacting Bitcoins or Ethers.
For those that are not familiar, these products are created by private companies who deposit dollars into a bank account, then issue tokens on a blockchain corresponding to each one. So long as users trust that they can ultimately redeem their tokens for real dollars, the value of each one stays around a buck. In the meantime, the tokens can be used online for all sorts of transactions, quickly and at minimal cost.
The idea is similar to ETFs in the stock market that track the value of other assets, like treasury bonds or gold, but is in some ways superior, as tokens on a blockchain move around more freely than ETFs siloed at a single exchange. And since the consensus mechanism of a blockchain replaces multiple banking intermediaries, transactions that used to take days to settle can now do so in an hour.
Tether USD, the most popular such product in the world today, currently boasts a market cap north of $2B. Most of the demand for its tokens comes, ironically, from cryptocoin traders. Since many of the world’s crypto exchanges have no ties to the banking system, a product like Tether’s is the easiest way for people to trade from dollars to cryptocoins, and vice versa.
A similar use case exists on Wall Street, where the main bottleneck in complex financial transactions is often the dollar payments needed to finalize them. Although there is a lot of hype about how blockchain technology could someday revolutionize the actual trading for such products, using it to speed up their payments is the lowest hanging fruit.
IHS Markit, the biggest player in the trillion-dollar syndicated loan market, has recently announced the creation of its own tokenized dollar product to help simplify the complex back and forth cash transactions that loans traded on their platform generate. A dozen token transactions on a blockchain are far easier to execute than a dozen wires to multiple banks.
The one drawback of tokenized fiat money is that it’s not as decentralized as a pure cryptocoin. Trust and transparency are very important for such products, and the people at Tether have not been good about either, leading the value of the token to at times fall below $1, and the whole project to be at the center of countless crpyto-conspiracy theories.
That’s why one of the biggest announcements to come out of the Consensus conference back in May was the creation of a new tokenized dollar product by Circle, the Boston-based crypto trading company originally backed by Goldman Sachs and now Bitmain, the biggest name in Bitcoin mining. Unlike Tether, Circle’s USD token will be domiciled in the United States, audited by a trusted third party and compliant with US money regulations.
Should Circle succeed in its implementation, the financial community, along with average consumers, will have access to a product that combines all the benefits of blockchain based transactions with none of the uncertainty or volatility of a pure cryptocoin. The next killer application to be moved unto the blockchain might very well be the fiat money some thought the technology would replace.