Stablecoins need to reflect and evolve to live up to their name
Unfortunately, the name of the stablecoins has been a misnomer so far. The fact that stablecoins are tied to a “real” asset does not equate to stability. Traditional underlying assets are not exempt from market volatility, and since the majority of stablecoins are fiat-pegged, they can be just as unstable.
What the name might be, though, is ambitious — something stablecoins might yet live up to if they can tie themselves to a solid foundation.
Where has all the stability gone?
At the risk of confusing metaphors, stability is the currency of the day. Markets are volatile, debt is high and inflation is rising after the COVID-19 pandemic and ongoing supply chain issues. Cryptocurrency markets have benefited as investors have looked for alternative stores of wealth. But prices continue to bob up and down unpredictably.
Seeking a solution to volatility, the crypto community has been drawn to stablecoins due to the perceived stability offered by their fixed relative valuation. A recent report by the Hong Kong Monetary Authority (HKMA) confirms this trend, showing an explosive expansion of the stablecoin market since 2020 in terms of market capitalization. Payments firms are also jumping on the bandwagon, with PayPal recently announcing plans to launch its own PayPal coin that will be backed by the US dollar.
Related: Fear Not Investor: Finding Stability Amid Crypto Market Volatility
And therein lies the problem. Stablecoins are typically backed by increasingly unstable fiat currencies. Governments have pumped $17 trillion worth of new money into the global economy amid widespread quantitative easing, while increasing global debt and devaluing the purchasing power of the currencies that back stablecoins.
Therefore, the growing stablecoin trend, while in many ways a step in the right direction, needs to be reconsidered if it is to live up to the promise of its name.
A solution worth its weight in gold
As governments print more and more fiat, we cannot afford to turn away from the potential of stablecoins backed by truly stable assets. For stablecoins to live up to the promise of “stability,” there needs to be a broader and more widespread move away from support from inflation-prone fiat currencies and toward more reliable physical assets.
Gold is the most logical option. Throughout all the turmoil that 2021 has brought, gold prices have remained stable between $1,700 and $1,950 per ounce, proving both its stability and value.
But tying a coin to a hypothetical gold stash doesn’t go far enough. The underlying asset must be fully allocated and redeemable – one gram of gold for one token. This prevents the coin from distancing itself from the reality of the asset it represents and prevents the coin from contributing to debt growth.
Related: Why betting on gold-backed stablecoins is a losing game
When the owner of a stablecoin is able to redeem the asset directly, they can provide an effective store of value and medium of exchange even beyond the capabilities of modern monetary systems.
Renewed calls for regulatory oversight
Such a currency would only be possible in a fully audited system, and this is where the importance of regulation comes into play. Ironically, a mass migration to stablecoins based on a somewhat unfounded assumption of stability could be the straw that brings down the Jenga economic tower.
Recent controversies surrounding Tether (USDT) — the most widely used stablecoin backed by the US dollar — allegedly not having the dollars backing its coin have been dismissed by the company and remain unverifiable as it is essentially unregulated and are unchecked.
Related: Stablecoins under scrutiny: USDT stands by “Commercial Paper” Tether
The revelation adds to the growing number of questions about how “stable” stablecoins really are and what is being done to protect investors.
Regulators around the world must continue to increase oversight and redouble their focus on increasing transparency. In fact, it was a year ago that Bank of England Governor Andrew Bailey made his own statement in Davos, warning that crypto lacks “design governance and provisions for a durable digital currency” and that “the People who need reassurance that their payments are going into something of stable value.”
A way out of the inflation crisis
Despite their shortcomings, the potential of stablecoins to bail us out of a post-COVID-19 inflationary crisis should not be underestimated. They are able to preserve wealth and provide a stable store of value while offering traditional investors more security than other digital assets.
Therefore, solving the stablecoin glitch could be vital to our economic survival.
To truly reap their benefits, they must be tied to a solid foundation in the form of a fully redeemable physical asset such as gold or silver. This would create a virtuous circle of stability that would bring greater institutional support for digital assets and further stabilize the market and economy.
Related: Wyoming State Stablecoin: Another Brick in the Wall?
Crypto’s volatility is keeping many businesses – big and small – from adopting this type of payment method. Stablecoins may hold part of the answer, but their so-called “stability” is far from inherent. Assets like gold and silver, on the other hand, will continue to provide a stable foundation to build on for years to come.
This article does not contain any investment advice or recommendation. Every investment and trading move involves risk and readers should do their own research when making a decision.
The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Jai Bifulco is Chief Commercial Officer at Kinesis Money and has a track record of driving the company’s growth with his diverse commercial and operational experience in the fintech, precious metals, mining, financial services, investing and trading sectors. As a founding member of Kinesis, Jai brings his wealth of experience to drive the adoption of a truly ethical, global monetary system that he believes will shape the future of precious metals and the currency space.