Commodity Watch: Stablecoins: Benefits and Risks

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" data-fr-image-pasted="true" src="/getContentAsset/e4db1c4c-2687-44cd-adbd-db1eb849e5d2/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.jpg?language=en" alt="Ahmad Al Sati" title="Ahmad Al Sati" class="fr-fic fr-dii" style="width: 180px"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI<br></strong>PORTFOLIO MANAGER<br><br><p>Ahmad is the President and portfolio manager for Gemcorp Capital Advisors LLC, based in New York.&nbsp;<br><br>Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser.&nbsp;</p></div></span></div><hr><p>Over $30 trillion in global trade transactions remain subject to antiquated processes, which serve to throttle transaction volume, increase costs and lengthen cash conversion cycles, harming businesses globally. More specifically, invoice payments trudge through multiple layers of financial institutions and gatekeepers with their commensurate costs (a payment travels through a sending bank, correspondent bank, and receiving bank to reach a seller).</p><p>Stablecoins can be a solution. Stablecoins are financial assets designed to maintain value by being pegged to other assets. The largest cohort of stablecoins is backed by US treasuries or hard assets such as gold. Other forms exist. Stablecoins can be backed by crypto assets (ether) or governed by algorithms that manage supply-demand (Terra-Luna). Since 2019, the total size of stablecoins has increased 45x. But at $232 billion they are a fraction of the markets they could serve: remittances and global trade- traditional payment rails process $7 trillion of money transfers per day.</p><p>Stablecoin transfers are almost instantaneous and not subject to banking hours or holidays (a key feature in global trade where parties are operating in different time zones and subject to different holidays). Stablecoins cost a fraction of existing methods. In transactions with high volume and low margins, that matters. The barrier to entry is lower, allowing smaller companies to gain access to global markets. At the same time, the blockchain tracks transactions, enhancing transparency and ensuring provenance. Overlaying the entire transaction with smart contracts automates processes, enhancing efficiency and security.</p><p>The potential benefits are clear. The risks less so. Technology does not change human behavior, it amplifies it. The New York Fed recently found that demand for stablecoins today is tied to crypto assets. Fusing global trade to crypto trading is not prudent, but correlation may lessen as stablecoins are adopted by other participants. Stablecoins today also behave like money market funds (MMF). MMF dislocations do happen (’08 and ’20), which required the Fed to step in and stabilize the market. Will trillions of dollars of global trade flows weather that risk? We shall see.</p><p>More interestingly, stablecoin usage impacts treasury yields. The Bank of International Settlements found that $3.5 billion inflows into stablecoin money can lower yields by 2.5 basis points in 10 days, but similar outflows increase yields by 7 basis points (an asymmetry in risk). Significant outflows will impact the risk-free rate, especially as stablecoin usage increases (think Luna-Terra on steroids); there are ramifications for US debt financing, but that is outside our remit.</p><p>Diversification, as always, can help. Stablecoins can be backed by assets other than treasuries such as commodities more aligned with the underlying trade flow or any given transaction. The technical benefits will hold but with a more varied support structure. Efforts are underway to tokenize hard assets even as the financial plumbing is being upgraded. Interesting times lie ahead indeed.</p>