When it comes to stacking coins, the name is unfortunately still wrong. The fact that stablecoins are tied to a “real” asset does not imply stability. Traditional underlying assets are not immune to market volatility, and since most stablecoins are pegged to fiat currencies, they can be equally volatile.
However, the name can be ambitious – something stacked coins can still live up to if they can bond to a solid foundation.
Where has all the stability gone?
At the risk of confusing metaphors, stability is today’s currency. Markets are volatile, debt levels are high, inflation is skyrocketing in the wake of the COVID-19 pandemic and ongoing supply chain problems. The cryptocurrency markets have benefited from investors looking for alternative wealth stores. But prices continue to fluctuate up and down unexpectedly.
In search of a solution to the volatility problem, the crypto community is gravitating towards stablecoins due to the remarkable stability offered by fixed relative valuation. A recent report by the Hong Kong Monetary Authority (HKMA) confirms this trend, showing the explosive growth of the stablecoin market since 2020 in terms of market capitalization. Payment companies are also joining the trend: PayPal recently announced plans to launch its own currency on US-backed PayPal.
Related Topics: Fear Not the Investor: Finding Stability Amid Volatility in the Cryptocurrency Market
Herein lies the problem. Stable currencies are usually backed by increasingly volatile fiat currencies. Governments have pumped $17 trillion in new money into the global economy amid massive quantitative easing, while increasing global debt levels and reducing the purchasing power of the currencies that underpin stablecoins.
So, the growing trend towards stacked coins, although a step in the right direction in many ways, must be rethought if they are to live up to the promise given in their name.
The decision is worth its weight in gold
As governments push more and more orders, we can’t let go of the possibility of stable coins 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 away from backing inflation-linked fiat currencies to more reliable physical assets.
Gold is the most reasonable option. Through the turmoil of 2021, the price of gold has remained stable between $1,700 and $1,950 per ounce, proving stability and value.
But attaching a coin to a virtual gold vault is not enough. The underlying asset must be distributed in full and redeemable – 1 gram of gold per token. This prevents the currency from detaching itself from reality from the asset it represents and prevents the currency from contributing to debt.
Related Topics: Why betting on gold-backed coins is a losing game
If the owner of a stablecoin can buy back an asset directly, it can provide an efficient store of value and exchange beyond even the capabilities of modern money systems.
New calls for regulatory oversight
Such a coin would only be possible in a fully tested system, and this is where the importance of regulation comes into play. Paradoxically, the massive transition to stacked coins based on a somewhat unfounded assumption of stability could be the last straw for the Jinja Economic Tower.
The recent controversy over the Tether (USDT) – the most widely used stable dollar backed by the US dollar – reportedly has no dollars to back the coin, has been rejected by the company and remains uncontrollable due to its largely unregulated and unaudited value.
Related Topics: Stablecoins Under Investigation: USDT Supports Pegging of “Commercial Papers”
This disclosure raises questions about how “stable” hoard 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 improving transparency. Indeed, a year ago, Bank of England Governor Andrew Bailey issued his own statement in Davos, warning that cryptocurrencies lack the “designs and governance mechanisms of a strong digital currency” and that “people need to have confidence that their payments are made in some way with a stable value.”
A way out of the inflation crisis
Despite their shortcomings, the potential of stablecoins to help us out of the COVID-19 inflation crisis should not be underestimated. They have the ability to store wealth and provide stable savings, and they also give traditional investors more confidence than other digital assets.