In the case of stablecoins, unfortunately, the name is so far wrong. The fact that stablecoins are pegged to a “real” asset does not equate to stability. Traditional underlying assets are not exempt from market fluctuationsand with most fiat-pegged stablecoins, they can be just as unstable.
However, the name could be an aspiration, something that stablecoins could aspire to if they get pegged to a solid foundation.
Where has stability gone?
At the risk of confusing the 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 have benefited as investors have sought alternative havens of wealth. But prices keep going up and down unpredictably.
Seeking a solution to volatility, the cryptocurrency community has gravitated towards stablecoins for the perceived stability offered by their fixed relative valuation.. A recent report from the Hong Kong Monetary Authority (HKMA) verified 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 launch its own PayPal Coin, which will be backed by the US dollar..
And therein lies the problem. Stablecoins are often backed by increasingly unstable fiat currencies. Governments have printed $17 trillion 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.
Therefore, the growing trend towards stablecoins, while in many ways a step in the right direction, needs to be rethought if it is to deliver on the promise of its name.
A solution worth its weight in gold
With governments printing more and more fiat money, we cannot afford to walk away from the potential of truly stable asset-backed stablecoins. For stablecoins to live up to the promise of “stability”, there needs to be a broader, more widespread move away from being backed by inflation-prone fiat currencies and backed by more reliable physical assets..
Gold is the most logical choice. Throughout all the turbulence that 2021 brought, the price of gold remained stable between $1,700 and $1,950 an ounce, proving both its stability and its value.
But linking a coin to a hypothetical gold deposit is not enough. The underlying asset must be fully allocated and redeemable: one gram of gold for one token. This prevents the currency from distancing itself from the reality of the asset it represents and prevents the currency from contributing to debt growth.
If the owner of a stablecoin is able to directly redeem the asset, it can provide an efficient store of value and medium of exchangebeyond even the capabilities of modern monetary systems.
Renewal of requests for regulatory supervision
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 assumption of stability could be the last straw for the economy.
The recent controversy surrounding Tether (USDT)—the most widely used stablecoin backed by the US dollar— who supposedly don’t have the dollars to back their currency, has been dismissed by the company and remains unverifiable as it is essentially unregulated and unaudited.
The revelation contributes to a 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 provide more oversight and redouble their focus on increasing transparency. In fact, a year ago Bank of England Governor Andrew Bailey made his own statement at Davos warning that cryptocurrencies lacked “governance and design agreements for a durable digital currency” and that “people need guarantees that their payments are made in 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 offering traditional investors more security than other digital assets.
Thus, solving the stablecoin problem could be essential 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, driving further institutional support for digital assets and further stabilizing the market and economy.
The volatility of cryptocurrencies is preventing many companies – large and small – from adopting this type of payment method. Stablecoins may hold part of the answer, but their supposed “stability” is far from inherent. Assets like gold and silver, by contrast, will continue to provide stable foundations on which to build for years to come.
This article does not contain investment advice or recommendations. All investments and trading involve 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 the Chief Commercial Officer of Kinesis Money and has a history of driving business growth with his diverse business and operational experience spanning the fintech, precious metals, mining, financial services, investment, and trading spaces. As a founding member of Kinesis, Jai brings his wealth of experience to drive the adoption of a truly ethical global monetary system, which he believes will shape the future of precious metals and the monetary space.
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