Austin Vernon on digital dollars (from my email)

I was curious about if banks had many use cases for stablecoins, so I talked to [redacted] who works at a nationwide bank that focuses on small business lending. The use case he mentioned was that sometimes they need cash very quickly to stay within their requirements but wires are slow and cumbersome. If you could use a crypto network, the settlement time in minutes would be a big advantage.

The mechanics don’t quite work out because they would also want to use a product that does not change valuations compared to dollars. Stabecoins should fit the bill, but to transfer stablecoins from one bank account to another you would have to wire or ACH someone like Coinbase, do the transaction on chain, then withdraw the money from coinbase. So it would not be fast.

It is possible to imagine where every bank has their own stablecoin backed by US dollars they hold 1:1. It’d be like the days of banks issuing their own gold back notes. If Alice Bank needed more USD, they could borrow from Bob Bank. The actual mechanism might be that Bob Bank uses cash reserves to instantly create USDB and sends the USDB to Alice Bank’s wallet. Alice Bank then goes to Uniswap and trades USDB for their own USDA stablecoin. Alice Bank then retires those stablecoins and releases cash from their stablecoin cash reserves into their general fund. Any customer of Alice Bank or Bob Bank could do this same transaction with other bank customers to have cash faster than an ACH.

Can this happen today? Uniswap 3.0 is a leap forward for adding liquidity for automated market making and is especially beneficial for stablecoin transactions. There are practical limits on small transaction sizes and very large transaction sizes. The biggest practical transaction is limited by liquidity in the trading pools. Uniswap 3.0 should make this much larger than previous automated market makers, the actual amount depends on how much liquidity the market makers provide. The smallest size is limited by fees. Uniswap is launching Layer 2 scaling very soon, but the scaling is optimistic roll ups that utilize fraud proofs. If the banks were only transacting in Layer 2 this would not be a problem, but with fraud proofs it can take one week to take funds out of Layer 2 into the main Layer 1 chain. ZK-SNARK based roll ups would fix this, allowing instant settlement, and are progressing rapidly, but aren’t available yet. Blockchain technologies are still somewhat immature for this use case, but that capability is rapidly approaching.

Banks are so regulated they may not want to get involved without regulators giving them a nod. If the government favors a digital dollar, they may not want to give that nod. I think China has made its preference clear. They want a digital yuan and independent crypto networks will be subordinated. Very soon governments and central banks might have a choice between writing 100 pages of regulation that clarify standards for registered banks creating stablecoins and de facto creating a digital dollar system or embarking on a very large project to create their own digital dollar that requires much more work and owning implementation risk.

Will be fun to watch!

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