When the first cryptocurrency, Bitcoin, was released to the world, it had in its genesis block a cryptic message. “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” The line references a January 3 2009 London Times article about banks being bailed out by the British government. This is the seed of the cryptocurrency philosophy that the state should no longer control money.

The government is no more suitable to control money than it is to determine who we love or how we think.  When currencies used to be made of solid metals and more recently backed by reserves of gold, there was some restraint.  (Roman emperors like Diocletian debased their currencies and suffered inflation, not knowing why, and yet politicians in the modern day still haven’t accepted that money supply is the root of all inflation.) But when we removed this real-world item of value and created fiat currencies, the abuse by governments stepped up. Fixed supply cryptocurrencies like Bitcoin help us correct this.

Related: WTF happened in 1971?

Despite this clear vision, there is a gap in how we will get there. The world is still focused on understanding the first gap and how crypto will become a daily part of our lives. The crypto industry is still solving fundamental problems like secure wallets and more complex ideas like secure and efficient decentralised markets. When I first wrote about Bitcoin on this blog a decade ago, zero-knowledge proof protocols were being designed, which can now be implemented for the quantum age. When COVID locked us down, Threshold Signature Scheme started getting implemented. Academic math is being turned into protocols that enable a better way of doing things. A decade seems slow but we’re moving fast.

Genesis code

Despite this, there is a more significant gap few talk about: What incentive does a government have to give up its currency? This year, I realized we might be getting closer to that answer.

Former US House of Representatives speaker Paul Ryan proposed stablecoins, a $173 billion industry, as a solution to the debt crisis. That’s genius and let me tell you why.

A history of the USD’s reserve currency status

Following WWII, the Brenton-Woods agreement set the US dollar as the world’s reserve currency instead of gold. It was meant to create stability in the world. The Bretton Woods system eventually was dismantled in the early 1970s, with the traditional view, because the US could no longer meet the demand of supplying USD internationally (this is now being challenged due to other monetary issues and issues around the Vietnam war). In other words, the United States unilaterally suspended the dollar’s convertibility into gold. But then the US did something else: an informal agreement with Saudi Arabia, and created the petrodollar.

First revealed by Bloomberg in 2016, it was a secret deal in 1974 where the Saudi’s would park their oil revenue into US Treasuries. This became such an essential part of US power that it’s alleged this is one of the reasons why the US occupied Iraq 20 years ago, as Saddam Hussein was actively planning to switch to the Euro. But then, something happened this year: that 50-year agreement quietly expired. Saudi Arabia still uses USD to value it’s oil, but 20% in 2023 was valued in other currencies, a significant change. Russia and China are very conscious of US power from the petrodollar and have attempted to create competing markets, such as oil since 2018, being valued in Yuan and avoiding the USD in trade where possible (like how 96% of Russia-Iran trade is now, which wasn’t always the case). This is a direct threat to the US’s dollar hegemony.

US government debt. As long as the interest rate is below the inflation rate, it’s free money.

But not if Paul Ryan gets his way. Having a reserve currency is powerful because you can inflate the rest of the world from your debt, which is another way to say you can print money and others pay for it. The US can do this because it has so much wealth tied up in USD; it can effectively borrow this money against it at a rate below inflation. This is to say that the debt it takes will eventually pay itself off through inflation. What government doesn’t want free money? Ryan has proposed a genius strategy for the US to allow it to graduate from the petro-dollar. In fact, with the move to clean energy, it’s long term the only credible successor. Energy underlies our post-WWII economy, so the petrodollar made sense in the past, but the one thing that beats that is money itself.

A stablecoin future

A specific type of money called Stablecoins will do this. Stablecoins are an essential aspect of the crypto ecosystem, as they allow people to bring their money into the crypto ecosystem, move money between markets, and park it in something safe when the markets are volatile. Like the original gold standard, stablecoins match all their tokens to currencies 1-for-1, which is to say, they increase the demand for USD.

The cash stablecoins can provide will continue to enable cheap debt for the US government. While members of the political establishment rightly have issues with cryptocurrency, as they can no longer control it, giving up this control may be what the US needs to do to keep its status as the reserve currency and pay its bills. It may not even be a choice. That’s because the progressive Left in US politics that is trying to crack down on cryptocurrency may be forced to accept it to fund its goal of the welfare state.

This acceptance will force a favourable environment for stablecoin usage. Of course, in saying this, I assume consumers will prefer stablecoins, given a choice between USD and a Stablecoin version of USD. Programmable money will enable use cases we may have never thought of, just like how the iPhone with its Apps did to mobile phones. This, in turn, will drive demand for other cryptocurrencies, which, over time, will mean money will gradually be freed from the state’s control. Of course, the government can legalise Stablecoins and still ban/restrict other cryptocurrencies, but this to me is not an issue as the on-ramp and off-ramp that Stablecoins provide is all the crypto ecosystem needs, the rest it can do itself.

(It’s worth pointing out that stablecoin adoption is already happening in places like Bali: this will accelerate and cement this trend.)

Ultimately, Stablecoin’s mass adoption is necessary for crypto to go mainstream, and the hostile environment that exists for it will be alleviated by politicians who want to keep spending money. And that, is what I call, the ultimate Faustian bargain