Stablecoins are a temporary answer for the volatile market of traditional cryptocurrencies. These fiat-backed coins, such as Tether (USDT) or the Winklevoss Twins’ new Gemini Dollar, are generally used to exchange and store value in a safer way than, say, Bitcoin (BTC).
The Solution We Needed?
However, while stablecoins seem like a necessary step in moving crypto to the mainstream, Berkeley Economics Professor Barry Eichengreen claims these assets aren’t as viable as we’d like to believe.
In an article published on Project Syndicate, Eichengreen comments on the apparent faults of current digital assets before disputing the different variants of stablecoins:
“To issue one dollar’s worth of Tether to you or me, the platform must attract one dollar of investment capital from you or me, and place it in a dollar bank account. One of us then will have traded a perfectly liquid dollar, supported by the full faith and credit of the US government, for a cryptocurrency with questionable backing that is awkward to use. This exchange may be attractive to money launderers and tax evaders, but not to others. In other words, it is not obvious that the model will scale, or that governments will let it.”
Suggested Reading : Learn more about Tether (USDT) in our beginner’s guide.
Destabilizing Stablecoins
First off, Eichengreen states that Tether, which is tied to the value of a U.S. dollar, requires too many steps for efficient use. The process is awkward, and he doesn’t see the appeal over traditional bank usage.
Scalability is another issue. The professor ponders why a government would enable a digital asset to “compete” with its fiat currency. Instead, it’s better for the governing entity to establish a small use of stablecoins for specific situations while keeping fiat currency as the standard form of paying for goods and services.
Finally, Eichengreen discusses the idea of “crypto-bonds”. This third form of stablecoin is issued by exchanges when an asset price begins to fall. The exchange buys any affected coins back from investors and offers a bond, allowing those same investors to trade “at a discount”, enabling the price to rise again.
The platform will pay interest on these bonds in the form of the affected currency. However, interest funds come from the success of other coins on the exchange. In theory, the idea works, but it relies too much on the supposed success and growth of the platform. Should prices keep falling due to lack of investor interest, bond prices will drop as well, and, barring a miracle, the exchange will fail to make its money back.
Eichengreen ends the post claiming his observations are glaring to those in the economic field:
“All of this will be familiar to anyone who has encountered even a single study of speculative attacks on pegged exchange rates, or to anyone who has had a coffee with an emerging-market central banker. But this doesn’t mean that it is familiar to the wet-behind-the-ears software engineers touting stable coins. And it doesn’t mean that the flaws in their currently fashionable schemes will be familiar to investors.”
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