A few weeks ago the FT wrote a compelling article on whether or not the 'petrodollar' was a thing, which inevitably discussed the emergence of Eurodollars (read the great article here).
One would be excused for believing those would merely describe dollars in the Eurozone, like some merger between the Euro and the dollar, but much like how Eurobonds simply describe bonds not denominated in the issuer's local currency (initially bonds issued by European countries), Eurodollars describe dollars not issued by the US, but issued by banks outside the US, initially primarily European countries too.
The article makes a great point on how that US flexibility, when it came to allowing non-US banks to provide USD accounts and thereby issue USD to their respective clients, played an important role in pushing USD dominance over the past few decades. It was that system of Eurodollars that allowed oil traders in the Gulf to trade in existing commodity hubs, such as London, while still dealing in USD as a currency. Interestingly, it wasn't the oil trade that made USD dominant; it was the USD in the form of Eurodollars that made oil traders of the 1970s choose the USD as a form of payment.
The author goes on to describe how USD usage has only been growing in the last few years, with more and more trade and invoices being written out in USD. When I started as an FX trader in 2015 that was the exact pattern we saw emerging then too. Excited to buy and sell Ghanaian cedis to import/export companies shipping goods in and out of Ghana, we soon discovered that none of them were actually dealing in Ghanaian cedis at all! They were all just converting back and forth between pounds and USD. There went our juicy markup dealing in those exotic currencies, replaced by the ever-growing exchange volume between pounds and USD, or EUR and USD, or CHF and USD. It was USD all around.
Now, 10 years later, that dominance has only increased, but it's not all the way it was. Throughout the article I couldn't help but think... well, what's the punchline here? Surely you have to see the parallels? To me it seemed obvious that we're actually in a very exciting new time here, one where we see the emergence of a new form of Eurodollar, one that is also used by global commodity trade interestingly, namely the stablecoin. The article failed to delve into that point further, unfortunately. We will, however.
While there are some similarities between Eurodollars and stablecoins, I do believe there are also some significant differences that overall make stablecoins a superior financial instrument for their purpose compared to Eurodollars. The article itself points to many accepted, but not necessarily required, trade-offs with the Eurodollar design that can significantly impact how good a tool it really is. The biggest difference, in my opinion, is that, similar to normal local currencies, Eurodollars can simply be created by banks and added to their balance sheets. Banks can even issue debt denominated in USD that was never actually 'given' to them by the Fed, meaning those banks create USD from nothing. That's great if you want a USD loan, or if you're such a bank, but arguably it's not ideal if your savings or your deposit rely on the USD at this bank, which is governed by local regulation and doesn't follow Fed rules.
Can you guarantee that the bank actually does have sufficient USD on its balance sheet to cover its exposure to you? You cannot, and this becomes an issue we see with banks globally all the time. They run out of dollars to serve; they're more than happy to take in USD deposits, but somewhat less enthusiastic about paying them out. In reality, the only guaranteed USD is the one that this respective bank holds in USD cash or in its account at its correspondent bank in the US. Anything else is simply printed out of thin air. So even though those USD look and feel the same as a USD in a NY bank, the 'real' value of it is defined by the ability of the respective bank to pay out the USD of all its reserves in full. It carries opaque credit risk compared to its 'real' NY cousin.
Which leads to the 'second' inherent issue with Eurodollars. With small exceptions (like HK), to send funds from one Eurodollar account in, say, Tanzania, to another Eurodollar account in, say, South Korea, the dollars have to move through a whole chain of banks, governed by the SWIFT messaging network. That chain usually includes at least 5 banks, namely the sending bank, the USD correspondent of the sending bank, the Fed, the US correspondent of the recipient bank, and finally the recipient bank in South Korea. Each time, each bank generates a ledger entry debiting one side and crediting the other, like a stack of ledgers, where the Fed connects the two correspondent bank ledgers with FedWire. Technically all these ledger entries are instant or near instant; that doesn't, however, mean that the transfer time is simply the sum of the time it takes to update the ledger at those 5 banks.
Unfortunately, the chain is riddled with additional time and complexity. Every single one of these banks (with the exception of the Fed, maybe) does its own compliance check on the payment, which means we have at least 4 compliance checks on the same payment. In addition, those banks usually do those checks during bank operating hours. Modern, big banks such as JPM run 24/7 operations that screen those transactions in real time, but many other banks in the chain, especially the ones at the edges, do not. They only screen during normal business hours and up to cut-off time. If you're unlucky and the payment crosses after cut-off time, you have to wait another day, which pushes transfer times longer and longer, up to several days at times, even though the underlying settlement, FedWire, is in reality instant.
Stablecoins address both problems. On reserves, stablecoins aren't issued by random banks around the world in some decentralised form. Interestingly, despite running on decentralised rails, their issuance is actually fairly centralised, by entities such as Circle or Tether. Meaning, regardless of which USDt you hold, you are guaranteed it is the same USDt as anyone else on the planet is holding. While centralisation carries some risk, for the majority of Eurodollar holders it comes with some very attractive properties: once the holdings of Tether and Circle are verified by reputable agencies (as they currently are), you have real proof that the stablecoin you hold is really backed 1-1 by liquid USD-like assets, dramatically reducing their credit risk.
Finally, because stablecoins are issued on the blockchain, and the blockchain runs on computers globally, those same coins also become available to anyone with a mobile phone and an internet connection. No bank is required to create an account for you or underwrite your holdings. You can furthermore transact directly on-chain with other holders of that stablecoin, regardless of where they are, what time it is, or what cut-off time kicks in at some random place in the universe. You can truly transact 24/7, and globally.
Reputable players such as ourselves screen transactions for AML risks or any scamming risk that would put our customers at risk. But that screening happens once, or at most twice, on the sender and the receiving side, with modern tooling and software that doesn't depend on human review for the vast majority (99.99%) of all use cases.
For us this is the real conclusion from the FT article. Eurodollars were a real innovation at the time; they equalised trade across more hubs, beyond just NY or London, into cities like HK, SG, or the UAE. They created the first real rails of an interconnected world. Stablecoins (and global on-chain finance) are here to take this a level further, and bring global rails from our current hubs into every single business and individual on the planet, regardless of where they are, what their nationality is, or what reputable bank does or does not give them access. As a result, we'll see more and more trade moving from Eurodollars to stablecoins in the near future. With nxos you can bridge between those two systems seamlessly: use Eurodollars (or US Dollars) to receive and send USD on banking networks, or convert into stables to receive and send stables to your counterparties.