To live up to their name, stablecoins will have to reflect and adapt

Stablecoins have the potential to be a viable alternative to fiat currency in the face of global inflation, but they must be auditable to remain stable.

Unfortunately, in the case of stablecoins, the moniker is still a misnomer. The fact that stablecoins are linked to a “real” asset does not guarantee that they will remain stable. Stablecoins, like traditional underlying assets, are subject to market swings, and the majority of stablecoins are tethered to fiat.

img1 17

However, the name could be aspirational — something that stablecoins might be able to achieve if they can establish a solid basis.

What happened to all the stability?

Stability is the currency of the day, at the risk of mixing metaphors. Following the COVID-19 pandemic and ongoing supply chain issues, markets are turbulent, debt levels are high, and inflation is on the rise. As investors seek alternate sources of wealth, the bitcoin markets have benefited. However, prices continue to fluctuate unpredictably.

The crypto community has gravitated toward stablecoins in pursuit of a solution to volatility because of the perceived stability provided by their fixed relative valuation. This tendency was confirmed in a recent report by the Hong Kong Monetary Authority (HKMA), which showed an accelerated growth of the stablecoin market in terms of market capitalization since 2020. Payment companies are following suit, with PayPal recently announcing plans to launch its own PayPal Coin, which will be backed by the US dollar.

That is the crux of the issue. The majority of stablecoins are backed by increasingly volatile fiat currencies. Governments have poured $17 trillion in new money into the global economy as part of broad quantitative easing, rising global debt levels and weakening the purchasing power of the currencies that support stablecoins at the same time.

As a result, the growing trend toward stablecoins, while in many ways a positive step forward, needs to be reconsidered if they are to live up to their name.

This is a remedy that is worth its weight in gold.

We can’t afford to ignore the possibility of stablecoins backed by truly stable assets while governments continue to issue more money. Stablecoins must move away from being backed by inflation-prone fiat currencies and toward more reliable tangible assets in order to live true to their “stability” promise.

The most reasonable option is gold. Despite all of the turmoil that 2021 brought, the price of gold remained stable and valuable, fluctuating between $1,700 and $1,950 per ounce.

img2 12

However, linking a currency to a fictitious gold shop does not go far enough. One gram of gold for one token must be completely allocated and redeemed. This keeps the coin from becoming detached from the reality of the asset it symbolizes and prevents it from contributing to debt increase.

If a stablecoin’s owner can immediately redeem the asset, it can serve as a useful store of value and medium of exchange, well surpassing the capabilities of existing monetary systems.

Calls for regulatory control have been renewed.

Only a thoroughly verified system could produce such a currency, which highlights the significance of regulation. Ironically, a huge migration to stablecoins based on an inaccurate perception of stability could be the final straw in the economic Jenga tower’s collapse.

Recent allegations that Tether (USDT), the most extensively used stablecoin backed by the US dollar, lacked the funds to back up their coin have been refuted by the firm and remain unverifiable due to the fact that it is virtually unregulated and unaudited.

The news adds to the growing list of concerns about how “stable” stablecoins really are and what is being done to protect investors.

Regulators all over the world must continue to strengthen their monitoring and focus on greater transparency. Indeed, one year ago at Davos, Bank of England Governor Andrew Bailey warned that crypto lacked “design governance and mechanisms for a sustainable digital currency” and that “customers require certainty that their payments are done in something with stable value.”

img3 2

A solution to the inflation problem

Despite its flaws, stablecoins’ ability to rescue us out of a post-COVID-19 inflation problem should not be overlooked. They have the ability to retain money and provide a steady store of value, while also providing more certainty to traditional investors than other digital assets.

As a result, resolving the stablecoin misunderstanding may be critical to our economic existence.

To fully benefit from them, they need to be anchored to a strong foundation in the form of a completely redeemable physical asset, such as gold or silver. This would set in motion a virtuous cycle of stability, resulting in increased institutional support for digital assets and additional market and economic stability.

The volatility of cryptocurrency is preventing many firms, large and small, from using it as a payment mechanism. While stablecoins may hold a piece of the puzzle, their so-called “stability” is far from guaranteed. On the other hand, assets such as gold and silver will continue to provide secure foundations on which to build for many years to come.

Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

Leave a Comment

Your email address will not be published. Required fields are marked *


Recent Posts

Follow Us