Unfortunately, stablecoins’ name is a misnomer. Stability does not necessarily mean that stablecoins can be pegged to “real” assets. Market fluctuations aren’t exempt for traditional underlying assets, and stablecoins that are pegged to fiat can be just as volatile.
However, the name is aspirational. Stablecoins could still live up to this if they can attach themselves to a solid foundation.
Where has all the stability gone?
At the risk of confusing metaphors stability is the currency. Markets are volatile and high levels of debt mean that inflation is on the rise. This is due to ongoing supply chain issues and COVID-19. As investors look for other sources of wealth, the cryptocurrency markets have benefited. However, the volatility of prices continues to be a problem.
Stablecoins have been a popular choice for crypto enthusiasts looking for a way to combat volatility. Their fixed relative valuation gives them a sense of stability. The Hong Kong Monetary Authority’s (HKMA), a recent report, confirmed this trend. It showed an explosive growth of stablecoin market capitalization since 2020. PayPal announced recently that it will launch its own PayPal Coin. It will be backed with the United States dollar.
Related: Investors, don’t be afraid: Finding stability amid volatility in the crypto market
This is the problem. Stablecoins are often backed by unstable fiat currencies. In a wide-ranging quantitative easing program, $17 trillion of new money has been printed by governments around the world. This has led to an increase in global debt and a devaluation of stablecoins.
The growing trend towards stablecoins is a positive step in the right direction. However, it’s time to rethink their promise of delivering on their name.
Solution worth its weight in Gold
We cannot ignore the potential for stablecoins that are backed by stable assets, as governments continue to print more fiat. Stablecoins must live up to their promise of stability by being supported by stable assets rather than inflation-prone fiat currencies.
The most rational option is gold. Despite all the turmoil that 2021 brought the price of gold remained steady at $1,700 to $1,950 per ounce. This is a testament to both its stability as well as its value.
However, simply tying a coin with a hypothetical gold store doesn’t go far enough. One token is worth one gram of gold. The underlying asset must be fully redeemed and allocated. This prevents the coin’s disengagement from the assets it represents, and the coin stops contributing to debt growth.
Related: Why betting with gold-backed stablecoins can be a loss game
Stablecoin owners who are able to redeem the asset immediately can serve as a valuable store of value and exchange medium beyond the reach of modern monetary systems.
Recurrent calls for regulatory oversight
This currency can only be created in an audited system. That is why regulation is so important. Ironically, mass migration to stablecoins could lead to the fall of the economic Jenga tower.
Tether (USDT), the most popular stablecoin, has been criticized for not having enough dollars to back it up. The company dismissed the claims and they remain unverifiable because it is essentially unregulated.
Similar: Stablecoins under review: USDT stands by “commercial paper” tether
This revelation raises questions about the stability of stablecoins and how investors can protect themselves.
The global regulators must provide greater oversight and increase transparency. Andrew Bailey, the Bank of England Governor, made his own declaration at Davos one year ago warning that crypto lacks “design governance and arrangements to sustain digital currency” and that people need assurances that payments will be made in stable currencies.
Way out of the Inflation Crisis
Stablecoins have the potential to be a solution to an inflation crisis after COVID-19, despite their flaws. They can preserve wealth, provide stability and value, while giving traditional investors more security than digital assets.
Therefore, solving the misnomer of stablecoin might be crucial to our economic survival.
They must be tied to a solid foundation, such as a fully redeemable tangible asset like gold or silver, in order to truly reap their benefits. This would create a positive cycle of stability that drives greater institutional backing for digital assets and further stabilizes the market and economy.
Similar: Wyoming’s State Stablecoin: A Brick in the Wall?
Many businesses, large and small, are hesitant to adopt crypto’s payment method due to its volatility. Stablecoins might be part of the solution, but their “stability”, while it may seem like they are stable, is not. For many years, assets like gold and silver will provide solid foundations upon which to build.
This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Jai Bifulco, chief commercial officer of Kinesis Money, has a proven track record in driving business growth. His diverse operational and commercial experience spans the financial, precious metals and mining sectors as well as investment and trading areas. Jai is a founding member and he brings his vast experience to the drive for a truly ethical, worldwide monetary system. He believes this will change the future of precious metals as well as the monetary space.