What will be the future of the global financial system?

The position of the dollar as a global currency, and the Eurodollar based on shadow banking outsideThe Fed system does not have the potential that Bitcoin and Ethereum open to the world.

Tribal fight between Bitcoiners and Ethereansdoesn't stop. Bitcoin is understood as the “cryptocurrency of money”, and Ethereum — as "cryptocurrency of technology". Bitcoin — it is sound money that will make all other money obsolete. Ethereum, on the other hand, is considered the best technology that will upgrade Wall Street's settlement layer. The conflict is unclear to outsiders, and each community says the other has not understood the actual purpose and ideal of cryptocurrency.

Can you imagine that this conflicthas been going on for years, a sort of Game of Thrones for the blockchain. But there is another — more hopeful — a way to imagine the future. The future will likely be one where Bitcoin and Ethereum benefit from the existence of both networks. Both “crypto money” and “crypto technology” will play a role. Perhaps this is not quite in the sense that either of the two maximalist groups would imagine it.

Dollar shackles

We are currently living under crushinghegemony of the dollar. Back in the 19th century, many parts of the world had a free banking system. Banks were given unlimited competitive issue of currency and deposited money on a convertible basis. But gradually the free banking paradigm disappeared and a government-organized currency took hold.

After World War II, most of the worldbegan to trade among themselves with the calculation in dollars, turning the US currency into a reserve. To this day, US Treasury bonds provide a safe haven in times of financial turmoil, strengthening the dollar’s ​​control over global finances.

Great dollar dependence means bigdependence on the Federal Reserve. As a national bank, the Fed puts national interests first. This often runs counter to the problems of other countries, leaving them in a quandary.

Under the dollarization of the world, a paradox arose: although the US central bank is often criticized for inflating its currency, global markets believe that the amount of dollar liquidity available is not enough. This lack of liquidity has forced financial figures around the world to start helping themselves.

The role of the Eurodollar

World, especially emerging market countrieseconomies really need dollars. The emergence of the eurodollar system in the 1960s was a direct consequence of the fact that the Fed is not able to provide the unceasing need of the world for dollars.

Eurodollars — these are dollar accountsUS, which are used to calculate cash flows between numerous players outside the banking system controlled by the Federal Reserve. Thus, Eurodollars are not subject to US banking regulation. As economist Milton Friedman noted in 1969, "Eurodollars are printed with an accountant's pen."

Corporations, banks and other international entitiesDepend on dealer markets that provide sufficient Eurodollar financing to maintain market liquidity and debt servicing. These private dealers operate mainly through the shadow banking system. As the dollar climbed the pedestal of the number one currency with the deepest and most liquid capital markets, people all over the world went into debt in dollars. The global debt in US dollars is almost $ 60 trillion, and there is a huge demand for servicing this dollar debt.

“The crypto-dollar system is more transparent than the strange euro-dollar system based on shadow bankruptcy”, - says Pascal Hugli — Chief Scientist Schlossberg & Co, Switzerland.

Eurodollars — this is a way to deal witha recurring global dollar shortage that manifests itself with increasing severity each time. But Eurodollars are not real dollars. These are offshore dollars or can be considered as approximations to the dollar.

In times of crisis, it becomes obviousas financial market participants seek to acquire real dollars. With each crisis, the Fed also needs to pump more dollars into the system, essentially preparing the way for a future crisis. As continued turbulence in the repo market and in the wider shadow banking system shows, the actions of the Fed seem to only temporarily soothe the appetite for more and more dollars.

Increased demand for dollars will also meanfurther depreciation of each local currency against the US dollar, especially in emerging markets. The most relevant example of this is Lebanon, where the local currency has lost at least 50% of its value against the dollar this year. It is possible that these markets will have more stringent capital controls, which will make it difficult for debtors to receive dollars or Eurodollars in this regard.

Introduction of public blockchains

In times like these, public blockchains with their ownassets without liabilities can act as neutral settlement networks independent of the financial system. It is being prepared that Bitcoin and Ethereum will be used as vehicles to alleviate the global dollar shortage in the world.

For example, stablecoins based on the US dollar— so-called “crypto-dollars” running on the Bitcoin and Ethereum blockchain — this is a way to access the dollar or "dollar proxies". As native digital bearer instruments with transparent and efficient audit capabilities, crypto dollars are easy to accept and can be traded 24/7/365. They also help bypass emerging capital controls on traditional financial and Eurodollar routes.

The Eurodollar approach was an attempt by individualscreate a dollar financing system outside the United States, but still within the traditional financial system. Crypto-dollars are mainly located outside the traditional financial system of the United States. Due to its inherent ability to audit, a crypto-dollar system is more transparent than Euro-dollars based on shadow banking.

Reissue of the Eurodollar

We are starting to see the dollarization of publicblockchains. Since March, the value of dollar stablecoins has exceeded $11 billion. Tether could surpass the market capitalization of Ethereum or even Bitcoin due to growing demand for “synthetic dollars”  — stablecoins.

Stablecoinization is the wayEurodollar banking updates. Individual countries or even individuals will be able to use innovative tools to ensure that they have the appropriate value for their assets. But this time the tools are public blockchains and cryptographic tokens.

Shadow banking is a way toindividuals to take a pledge to create synthetic dollar funds and approximations. But the world of cryptocurrency, combined with the programmability of public blockchains, will take another step forward. Both Bitcoin and Ethereum already serve as collateral for the creation of dollar deposits and dollar credit instruments.

A new type of free banking service inpublic blockchain networks are already on the horizon. While cryptocurrencies will be its main driver, BTC and ETH could also play a role. As powerful non-government collateral, these crypto assets can be used to back future crypto dollars, making them even more resilient.

It is likely that we will see more in the futuremore: cryptocurrency-backed stablecoins such as Dai, bitcoin-backed financial services such as Valiu, or stablecoins redeemable for bitcoin, such as the Chinese blockchain wallet provider Bixin plans to launch. Additionally, it seems only a matter of time before exchanges and crypto banks issue cryptocurrencies against synthetic crypto assets without liabilities.

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