The conflict involving Iran has led to increased oil prices by closing the Strait of Hormuz, bringing inflation back into focus for investors.
In February, U.S. inflation rose by 0.9%, primarily driven by energy costs linked to tensions in the Middle East; however, core inflation, excluding food and energy, fell below predictions with an increase of only 0.3%.
Michael Ashton, co-founder of USDi stablecoin with Andrew Fately, points out a significant flaw in crypto’s monetary system architecture. “Stablecoins have addressed the medium-of-exchange issue for cryptocurrencies but failed to tackle the store-of-value challenge,” he explained to CoinDesk. “USDi represents a serious effort to complete the monetary infrastructure on-chain.”
The $300 billion stablecoin market, which is predominantly made up of dollar-pegged tokens and essential for crypto trading and payments, typically maintains a nominal value of $1 through cash or Treasury bills backing. However, Ashton argues that these tokens are losing real-world purchasing power.
As stablecoins transition from being mere crypto-trading instruments to genuine payment infrastructure, the gap in store-of-value becomes an institutional concern rather than just a philosophical one. “Entities like treasurers and neobanks using stablecoins for transactions are unknowingly absorbing inflation risk,” he noted.
USDi aims to address this by tracking inflation itself, with its value adjusted according to changes in the U.S. Consumer Price Index (CPI), effectively offering a blockchain-based version of an inflation-protected principal akin to Treasury Inflation-Protected Securities (TIPS) but without their drawbacks.
The stablecoin’s reserves are invested in the Enduring U.S. Inflation Tracking Fund, which utilizes TIPS, U.S. Treasury debt, and other financial instruments to generate returns. “There isn’t a real inflation-protected savings account,” Ashton remarked, indicating USDi fills this void.
Since February, oil markets have experienced sharp volatility due to the Iran conflict, with prices spiking above $100 per barrel amid fears of disruptions in the Strait of Hormuz, which handles about 20% of global supply. Rising oil prices can escalate inflation by increasing transportation and production costs across the economy.
“While T-bills yield around 3.5% and inflation is at 3%, historically, inflation often surpasses short-term rates over extended periods,” Ashton observed, suggesting a return to this trend. “This strengthens the argument for an asset explicitly designed to track inflation rather than nominal yields.”
USDi is envisioned as more than just a tactical financial tool; it represents a structural evolution in cryptocurrency that completes the monetary system bitcoin initiated. Bitcoin, while conceived as an alternative monetary system and store of value like gold, struggles with volatility over short periods. Stablecoins addressed payments but not the store-of-value issue.
USDi also plans to offer customizable inflation exposure, allowing users to select specific components or geographic regions for tracking inflation. This capability could benefit industries like insurance, which faces inflation risk in areas such as healthcare but lacks precise hedging tools. Ashton anticipates insurers and reinsurers will be among the first institutional adopters.
Further applications include education financing, where USDi can offer a flexible alternative to locking in tuition fees years ahead. With an operational USDi platform, Ashton is seeking a seed raise of approximately $1.5 million soon. He emphasizes that inflation risk is inherent from birth, unlike credit or equity risks, urging investors to rethink their approach to risk management.
Read more: Oil shock and Iran war risks keep crypto investors cautious: Grayscale.