Table of Contents
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Introduction
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Stablecoin types
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Mitigating uncertainty
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Era of Digital Currencies
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Regulations and Gresham’s Law
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Impact of Stablecoins
By Thomas Coughlin, Chief Executive Officer of Allocated Bullion Exchange and Kinesis.
Stablecoins are currently the cryptocurrency market’s fastest growing field, worth $186 billion; these are cryptocurrencies whose prices are tied to real-life assets such as gold or the US dollar. This is opposed to conventional cryptocurrencies — such as Bitcoin or Ethereum — whose markets are very volatile and can fluctuate within a few hours by 10-20 per cent, creating significant investor confusion.
Governments across the globe, from Australia to Sweden, are recognizing the value of stablecoins and developing their own, in addition to official blockchain funds that grow GPB and Yen-pegged Japanese coins.
Stablecoin types
There are various stablecoins on the market that fall into three major categories: Totally collateralized, partially collateralized, and uncollateralized. Uncollateralized stablecoins are intended to increase and decrease the supply in the same way that a bank buys and sells its debt to stabilize purchasing power.
The stablecoin base refers to this as having an algorithmic central bank and uses ‘crypto-bonds’ that have drawn scrutiny because they are too close to the conventional banking system’s weaknesses. However, widely known as the most secure type of stablecoins are those that are entirely collateralized with stable units of value like gold or US dollars.
Currently, the largest stablecoin on the market is Tether, backed by the US dollar. They claim to have actual dollar reserves to back up each Tether unit, although critics point out that there’s inconclusive evidence.
Mitigating uncertainty
However, it is still subject to the same competitive financial markets as other fiat currencies, given the strength of the US dollar. Currencies are devalued by political and economic crises with steps taken to reduce government deficits, such as quantitative easing, resulting in inflation.
The price of gold, by comparison, has remained constant for hundreds of years — proving itself as a reliable quantitative value indicator. Currencies around the world were made from or backed by gold for decades. In fact, the US still operated under the gold standard until 1971—a monetary system that directly links the value of a country’s currency to a fixed price of gold.
Today, monetary systems are dominated by central banks and government policies. This produces cycles of economic growth — in which crises are often followed. A central floating-rate system has had damaging, unpredictable saving results. Gold, on the other hand, has a large, stable global reserve, increasing through mining activities on average only 2 percent.
Era of Digital Currencies
We’re entering an age of digital currencies is becoming more evident. Swedish central bank Sveriges Riksbank is in the final stages of the e-krona growth. This stablecoin is attached to the Krona, which will serve as a digital counterpart of the fiat currency of the region. Eighty-seven per cent of global central banks are currently exploring the possibility of introducing their own currency-backed stablecoins, with Australia introducing theirs in 2019. In addition, the multi-million blockchain fund Xiong’An is preparing to launch a Japanese Yen-backed stablecoin, which is 30 per cent funded by the Chinese Government.
Globally, stablecoins have attracted millions of dollars worth of investment from reputable multinational corporations in their ICO fundraising phases. This demonstrates that stablecoins are a respected alternative to traditional banking, valued for its reliable software which leaves no room for error.
Regulations and Gresham’s Law
Nevertheless, stronger market regulations are a critical element necessary for stablecoins to thrive, as many are concerned about the protection and legitimacy of cryptocurrencies. This is still being battled by government and foreign bodies across the globe, including global accountancy companies and tech start-ups like Elliptic.
A key problem that often plagues cryptocurrencies is Gresham’s law of money, which states that “poor money drives good.” This means that if two or more active currencies exist, the more important currency is often overtaken because it is exchanged less because of investment motives. Volatile cryptocurrencies face this behavioural hoarding problem.
Nevertheless, stablecoins with a yield method facilitate the use of a currency while similarly distributing back capital. Effective steps should also be placed in place to recover one’s collateralized assets, including clear procedures for checking or reclaiming these properties. Transparency would be central to the potential success of stablecoins.
Impact of Stablecoins
Stablecoins’ effect has the ability to change the cryptocurrency scene, and bring blockchain technology to the mainstream.
They will encourage the use of crypto payment applications, and their steady value means they can be used daily for shopping—currently an impossibility for volatile cryptocurrencies. Industry experts widely believe that non-volatile cryptocurrencies can provide a layer of infrastructure that could immeasurably expand cryptocurrencies’ per cent user base. They offer a valuable link between digital coins and fiat currencies—free from the perils of inflation—as well as providing less risk for prospective investors.
There are bound to be initial issues with innovative technologies, and stablecoins will need concrete guarantees of their stability, greater governance, and transparency before they’re projected into the mainstream. Nonetheless, they have the potential to completely transform our financial institutions in the near future.
