Cryptocurrency is going to eat fiat. Over time, central banks will lose more control over monetary policy as things start to evolve.

Since Bitcoin was introduced, we were told this would happen. However, the idea of everything being price in satoshis is not how things will unfold.

For a currency to be an effective medium of exchange and unit of account, it has to be stable in relation to goods and services. For a currency to bounce around like a Mexican jumping bean (or Turkish lira) makes it useless.

When we look at Bitcoin, Ethereum, and a host of other crypto assets, we see similar moves. These can jump more than 100% in a year. We also know that a 70%-90% declines can happen.

This makes these "currencies" worthless as a medium of exchange. Volatility is the enemy. Merchants and customers require price stability.

Of course, achieving this is a difficult job. When price stability exists, everyone simply expects it. However, when inflation hits, people lose their cookies.

This is why the main focus of central banks is low and stable inflation.

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Expanding The Money Supply

The key to this entire discussion are stablecoins. Here is where we can see price stability along with the losing of control by central banks.

Most stablecoins are USD denominated. Since the majority of them are asset backed, we will start with them.

Circle is a US based company. When a foreigner gives that entity $1, a token is created. Circle deposits the dollar in a bank, making it part of the U.S. money supply. Most of these go to buy U.S. Treasuries, still becoming part of the domestic banking system.

Tether is a different animal. It operates in a similar fashion yet is not U.S. based. This means the dollar given to the company is actually now a Eurodollar (a dollar outside the U.S. banking system). It will deposit it in a bank somewhere, adding to that country's dollar supply.

So far this is pretty straight forward.

Now we can really convolute things.

Crypto Economy

Money supply tends to follow the business cycle.

When the economy is expanding, banks are lending, Hence, we tend to see an expanding money supply. The reverse happens during period of economic contraction. Lending dries up as banks dig in for the headwinds.

The business cycle is one of the most overlooked aspects in the discussion of money, finance, and monetary policy. However, with stablecoins, there is another element.

We have the crypto economy which, for now, is completely separate from the business cycle. We are dealing with small numbers across the board. That will not be the case as utility for stablecoins expand. For the moment, most uses cases are online. What happens when there is mass ability to pay for real world goods and services as we are seeing in some areas with the Hive Backed Dollar (HBD)?

Suddenly, we have an economy springing up with its own money supply that is separate from the existing one. Even if it carries a USD peg, it is not actually dollars.

The crypto economy is charted in billions right now. There will come a point when this will reach trillions.

Dollarization on Steroids

For all the talk of de-dollarization, especially in crypto, the reverse is actually happening, Any country with a currency that is less stable than the USD, which is almost all of them, is at risk.

What is going to put this on steroids are algorithmic stablecoins. Essentially we have a currency that targets a fixed exchange rate similar to the riyal of Saudi Arabia.

The key point in this is these never hit the traditional banking system. Algorithmic stablecoins do not increase the money supply of any country. They exist on a global basis in the digital realm (for now). However, as they start to enter the real economy, things start to accelerate.

Here is where we find the Trojan Horse in this battle.

Price stability for the USD is the job of the central bank, not stablecoin issuers. That said, as the number of coins increase, the percentage under the control of the Federal Reserve, i.e. in the banking system, declines. That creates a problem for them since it reduces their relevance.

Global Network Effect

It is rather ironic how all of this will evolve.

Stablecoins are going to ride the backs of the Fed to maintain price stability. Then, as they become popular, the size of the market will grow to where it actually makes the Fed even more ineffective than they are today. When we are dealing with a multi-trillion dollar stablecoin market, the raising or lowering of interest rates by the central bank will be meaningless.

At that point, the network effect will be the driving force. The volume of commercial (and financial) activity done will be mind boggling. While there will be many different stablecoins used, the unit of account will be the same. Here is where we see a system emerging that follows the pattern of the Eurodollar system albeit with a different form of money.

All of this means that, as the crypto economy expands and real world purchases are done with a money supply that does not touch the traditional banking system, the local fiat currencies will get crushed. They will only be relevant when dealing with the banks or governments (taxes). Merchants will always deal in what is to their advantage when given a choice.

And with the growth of the digital world, choices are now outside the scope of geographically based entities such as governments.

The death of the dollar is not upon us. In fact, it is just getting started. The difference is that we will see a separate money supply from what the traditional system set up. Price stability will be the job of the central bank for a number of years, with crypto simply enjoying the benefits. As the system reaches trillions, the global volume will start to eat up everything in its way, feeding more volume.

At that point, price stability will return to its relationship with the business cycle. After all, for all the propaganda by central bankers, that is really what is in control.

This is how we are going to see crypto eat the lunch of fiat currency. It will be the destruction of anything that has less price stability than the U.S. Dollar while also establishing a supply that is totally separate from the traditional banking system.

Posted Using InLeo Alpha