In the case of stablecoins, unfortunately, the name is so far a misnomer. The fact that stablecoins are pegged to a “real” asset is not synonymous with stability. Traditional underlying assets are not immune to market fluctuations, and with the majority of stablecoins pegged to fiat, they can be just as volatile.
What the name might be, however, is ambitious – something that stablecoins could still 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 levels are high and inflation is soaring following the COVID-19 pandemic and ongoing supply chain issues. Cryptocurrency markets benefited as investors sought alternative stores of wealth. But prices continue to move unpredictably.
Seeking a solution to volatility, the crypto community has turned to stablecoins for the perceived stability offered by their fixed relative valuation. A recent report from the Hong Kong Monetary Authority (HKMA) confirmed this trend, showing an explosive expansion of the stablecoin market since 2020 in terms of market capitalization. Payments companies are also jumping on the bandwagon, with PayPal recently announcing plans to roll out its own PayPal Coin, which 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 printed $17 trillion worth of new money into the global economy amid widespread quantitative easing, simultaneously increasing global debt levels and devaluing the purchasing power of currencies that back stablecoins .
As such, the growing trend towards stablecoins, while in many ways a step in the right direction, needs to be rethought if they are to live up to the promise of their name.
A solution worth its weight in gold
With governments printing more and more fiat, we cannot afford to turn away from the potential of stablecoins backed by truly stable assets. For stablecoins to deliver on the promise of “stability,” there needs to be a broader, more mainstream movement away from supporting inflation-prone fiat currencies toward more reliable physical assets.
Gold is the most logical option. Throughout all the turbulence that 2021 has brought, the price of gold has held steadily between $1,700 and $1,950 per ounce, proving both its stability and its value.
But, tying a coin to a hypothetical gold reserve 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 drifting away 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
If the owner of a stablecoin is able to redeem the asset directly, it can provide an effective store of value and medium of exchange, beyond even the capabilities of modern monetary systems.
Renewed calls for regulatory oversight
Such a currency would only be possible in a fully audited system, which is where the importance of regulation comes in. Ironically, a massive migration to stablecoins based on a somewhat unfounded stability assumption could be the straw that topples Jenga’s economic tower.
The recent controversy surrounding Tether (USDT) – the most widely used and US dollar backed stablecoin – allegedly not having the dollars to back their coin has been dismissed by the company and remains unverifiable as it is essentially unregulated and unaudited.
Related: Stablecoins under scrutiny: USDT sticks to “commercial paper”
The revelation contributes to the growing number of questions about the “stability” of stablecoins and what is being done to protect investors.
Regulators around the world must continue to provide greater oversight and redouble their efforts to increase transparency. In fact, a year ago Bank of England Governor Andrew Bailey made his own statement at Davos, warning that crypto lacked “design governance and arrangements for a sustainable digital currency” and that “people need the assurance that their payments are being made into something with stable value.
A way out of the inflation crisis
Despite their shortcomings, the potential of stablecoins to help us out of a post-COVID-19 inflation crisis should not be underestimated. They have the ability to preserve wealth and provide a stable store of value while providing traditional investors with more certainty than other digital assets.
As such, solving the stablecoin misnomer may well be essential to our economic survival.
To really exploit their benefits, they must be pegged to a solid base in the form of a fully redeemable physical asset, such as gold or silver. This would create a virtuous circle of stability, leading to greater institutional support for digital assets and further stabilizing the market and the economy.
Related: Wyoming State Stablecoin: Another Brick in the Wall?
Crypto’s volatility prevents many businesses, large 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 stable foundations on which to build for years to come.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Jai Bifulco is the Chief Commercial Officer of Kinesis Money and has a proven track record of growing businesses through his diverse business and operational experience spanning fintech, precious metals, mining, financial services, mining, investment and trade. As a founding member of Kinesis, Jai brings his wealth of experience to driving the adoption of a truly ethical global monetary system, which he believes will shape the future of precious metals and the currency space.
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