When it comes to the stack of coins, the title is unfortunately a misnomer so far. The fact that stablecoins are pegged to a “real” asset does not mean stability. Traditional underlying assets are not free from market volatility, and since most stack coins are pegged to fiat currencies, they can be quite volatile.

However, the name can be ambitious – something that stacked coins could achieve if they could be attached to a solid foundation.

Where has all the stability gone?
Despite the risk of obscure metaphors, stability is the currency of the day. Markets are volatile, debt levels are high, and inflation is rising in the wake of the COVID-19 pandemic and ongoing supply chain problems. Cryptocurrency markets profited as investors looked for alternative stores of wealth. But prices continue to rise and fall unexpectedly.

Looking for a solution to the problem of volatility, the crypto community is gravitating towards stack coins due to the perceived stability that a fixed relative valuation provides. A recent report released by the Hong Kong Monetary Authority (HKMA) tests this trend and shows a significant expansion of the stablecoin market since 2020 in terms of market value. Payments companies are also jumping into the basket, as PayPal recently announced plans to launch its own PayPal currency backed by US dollars.

Related: Dare Investor: Finding Stability Amid Cryptocurrency Market Volatility

This is where the problem is. Stable currencies are usually backed by increasingly volatile fiat currencies. Governments have pumped $17 trillion of new money into the global economy amid extensive quantitative easing, while increasing global debt levels and reducing the purchasing power of currencies that underpin stable currencies.

So the growing trend towards stacked coins, while in many ways a step in the right direction, has to do with a reassessment of whether they should deliver on the promise of a name.

Decision worth its weight in gold
As governments print more and more banknotes, we cannot afford to give up 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 massive shift from supporting inflation-linked fiat currencies to more trustworthy physical assets.

Gold is the most affordable option. Despite the turmoil of 2021, the price of gold has remained stable in the range of $1,700 to $1,950 an ounce, proving stability and value.

But linking a coin to a virtual store with gold is not enough. The underlying asset must be fully allocated and redeemable – 1 gram of gold per 1 token. This does not allow the currency to distance itself from the reality of the asset it represents and does not allow the currency to contribute to debt growth.

Related topic: Why betting on gold-backed stablecoins is a losing game

If the holder of a stablecoin can buy the asset outright, they can provide an efficient asset and medium of exchange that is beyond the capabilities of modern monetary systems.

New calls for regulatory oversight
Such a currency will only be possible in a completely overhauled system that emphasizes the importance of regulation. Ironically, a massive move to stablecoins based on a somewhat unsubstantiated assumption could be the final straw for Jinja’s economic tower.

The recent controversy surrounding Tether (USDT) – the stack’s most widely used dollar-backed coin – reportedly has no dollars to back its currency by the company and remains unverifiable as it is largely unregulated and unverified.

Related Topics: Stablecoins under investigation: USDT on the tightrope of “paper trading”

This revelation fuels questions about how “stable” stack coins really are and what is being done to protect investors.

Regulators around the world must continue to exercise closer oversight and redouble their focus on increasing transparency. In fact, it has been a year since Bank of England Governor Andrew Bailey issued a statement of his own at Davos, warning that cryptocurrency lacks “design governance and mechanisms for a permanent digital currency” and that “people need to make sure their payments are made with using something to do with stable value.”

Way out of the inflationary crisis
Despite their shortcomings, the potential of stablecoins to help us out of the COVID-19 inflationary crisis should not be underestimated. They are able to retain wealth and provide a stable value for shares, providing traditional investors with greater security than other digital assets.

Source: CoinTelegraph

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