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Will the Fed embrace a de facto digital dollar?

June 24, 2021, 11:53 PM UTC

When waves of price volatility buffet crypto markets, so-called stablecoins can be a life raft. These digital currencies are designed to maintain a fixed price peg, which can make them attractive safe harbors.

Some cautious investors turned to these crypto flotation devices in the aftermath of China’s recent crackdown on Bitcoin mining, which wiped out hundreds of billions of dollars off crypto markets earlier in the week. At least one up-and-coming stablecoin got a big boost from the turmoil.

On Monday, when the worst of the downturn struck, people bought up USD Coin, one of the world’s most popular and fastest-growing U.S. dollar-backed coins. The total market capitalization of USDC, as it’s known, leaped by $1 billion to $25.5 billion since then. That’s a big jump for USDC even in a year of tremendous growth.

USDC started 2021 with a total market cap below $4 billion. The coin’s total market value has soared more than 550% since then, per market-tracker CoinMarketCap. “It’s on an exponential curve, essentially,” says Jeremy Allaire, CEO and founder of Circle, the company that issues USDC in partnership with crypto exchange Coinbase.

For Circle to further USDC’s adoption, it will have to overcome its biggest weakness, which also happens to be its biggest strength: When there’s little risk of downside, there’s scarce prospect for upside.

Circle is looking to remedy the situation. The Boston-based company, which recently raised $440 million from Fidelity, crypto exchange FTX, and other investors at an undisclosed valuation, is starting to offer high-yield accounts to companies that hold USDC. Allaire says Circle may offer up interest rates around 4%-to-7%, a potentially attractive option for corporate treasuries otherwise stuck in the generally low-to-negative yielding world of traditional finance.

The product adds to USDC’s attractiveness. The stablecoin is a compelling medium for payments, since it eliminates the wild price swings that regularly rock Bitcoin and Ether. Recognizing that virtue, Visa earlier this year started letting companies settle up payments on its network using USDC. The addition of high-yield accounts gives businesses another reason to keep their money parked in the coin.

Allaire says Circle’s ultimate ambition is to “get to a world where payments are a commodity or utility on the Internet.” The Federal Reserve—spurred by China’s deployment of a digital yuan—is pondering that same aim. The estimable institution is planning to publish a highly anticipated paper on stablecoins and central bank digital currencies this summer.

Could USDC ever get a nod of approval from the Fed? The idea is not so far-fetched. An op-ed on Liberty Street Economics, a blog hosted by the New York Fed, put it this way on Wednesday. “Central banks can support the development of digital currencies indirectly, by supporting the public provision of safe, privately issued digital currencies, or more directly, by issuing digital currencies themselves, among other possibilities,” the authors wrote. “These approaches are not necessarily mutually exclusive.”

Allaire has high hopes that privately issued USDC could one day be recognized by the government as a de facto digital dollar. “The history of payment systems is almost all driven by innovation in the private sector,” he says. “What that may mean is that projects like ours become much larger and end up in partnership with the Fed over the long run.”

Robert H. Hackett

@rhhackett

robert.hackett@fortune.com

DECENTRALIZED NEWS

Credits 🚀

The bulls weren't worried about this week’s crypto crash ... Bitcoin rebounded from below $30,000 to near $35,000 ... Kraken CEO reiterated what he told The Ledger about his IPO plans ...  The Marshall Islands, is vying to become the first country to issue a national digital currency ... Portugal granted its first crypto exchange operating licenses ... BlackRock, the world’s largest asset manager, is looking into developing a blockchain strategy for its portfolio management system ... Andreessen Horowitz raised its third crypto fund worth $2.2 billion ... Billionaire cofounder Marc Andreessen talks up crypto ... Morgan Stanley led a $48 million funding round for Securitize, a digital-asset securities firm ... Former AirBnB and Expedia executives launched a blockchain-powered AirBnB competitor called Dtravel. ... Blockchain Capital closed a $300 million fund with Visa and PayPal as backers ... Crypto startup Amber Group reached unicorn status ... A NASCAR driver will be the first in the sport to get paid in crypto.

Debits 🐻

All of this year’s crypto gains were wiped away, at least for a bit ... So much so that Bitcoin was underperforming stocks ... The tumble dragged down other coins, including Dogecoin ... Ether’s fall caused a 12% dip in associated alt-coins ... The Fed’s hawkish stance on rates contributed to the haircut ... But not as much as China’s crackdown and rationing of hydro power as it shuts down 90% of its Bitcoin mining capacity ... There are fears the U.S. will follow suit with restrictions of its own ... Bitmain suspended rig sales ... Technical analysts warned us about Bitcoin's “death cross” ... Coinbase also saw a dip this week ... Coinbase cofounder Fred Ehrsam issued a serious warning ... Criminals are digging Monero ... The SEC levied $1.69 billion in penalties against crypto firms out of a total of $2.5 billion in enforcement actions by U.S. regulators ... What's going on at Africrypt?

FOMO NO MO

At some point the market will figure out the value of crypto and incorporate that information into a high level of price for those assets. From then on, expected rates of return will be—dare I say—normal.... It is an entirely defensible (albeit contested) view that the market still hasn’t appreciated the full value of crypto. This state of affairs may yet endure for some while, but it will not last for decades.

Economist and professor Tyler Cowen offered some perspective on this week’s volatility. In a Bloomberg opinion column published Monday, he compared crypto to art, saying that it took the market some time to establish the actual value of an Andy Warhol painting, as compared to works by other well-known artists. The comparison was intended to demonstrate how crypto prices couldn’t continue to increase at high rates forever.

BUBBLE-O-METER

$400 billion

That was the amount of capital wiped out amid China’s crypto crackdown. The unfriendly shift caused coins such as Bitcoin, Ether, Dogecoin, and XRP to plummet early in the week. Prices have recovered substantially to a total market value of $1.4 trillion since then. An exodus of crypto "miners" is now seeking refuge in other countries. 

THE LEDGER'S LATEST

Why China is cracking down on Bitcoin by Robert Hackett

China is rationing hydropower—and Bitcoin mines are getting cut off by Eamon Barrett

Asia has the world’s most advanced digital currencies. Here’s where each one stands by Yvonne Lau

Bitcoin plunges, losing last week’s ‘Musk bump’––and then some by Shawn Tully

The great crypto sell-off continues as market jitters go global by Bernhard Warner

After the latest plunge, Bitcoin is underperforming stocks this year by Bernhard Warner

Bitcoin goes negative for the year by Chris Morris

Bitcoin forms a dreaded ‘death cross’ pattern as selloff continues by Vildana Jajric

A new report highlights the incredibly high environmental cost of Tesla’s Bitcoin investment by Shawn Tully

Crypto start up launched by former Morgan Stanley traders hits unicorn status by Zheping Huang

Even billionaire Mark Cuban is feeling the heat of the crypto crash by Chris Morris

This NASCAR driver is the first to get paid in crypto by Jessica Matthews 

Goldman Sachs is expanding its crypto presence by offering options, futures trading in Ether by Anchalee Worrachate

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MEMES AND MUMBLES

CNBC stonks-pontificator Jim Cramer has been maddeningly inconsistent in his position towards Bitcoin in recent days. The Mad Money host went on a tirade bashing the crypto asset—after previously saying it would be “almost irresponsible” not to include it in a portfolio. On Monday's Squawk on the Street show, he revealed his reversal, saying he “sold almost all of my Bitcoin. Don’t need it."

By the next day's morning, Cramer appeared to reverse that reversal in a comment on a post by Bitcoin ultra-bull Anthony Pompliano. Later in the day, he outlined the conditions under which he would buy back in. Previously stating his next purchase would come below $20,000 mark, he lowered that threshold to $10,000 (or $11,000, or $12,000).

Which is it Cramer??

Today's newsletter was lovingly assembled by Jared Lindzon. Thanks Jared!

Interested in joining Fortune's The Ledger as a writer? We could use another pair of (diamond) hands. Contact robert.hackett@fortune.com.

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