Opinion: Stablecoins must reflect and evolve to live up to their name

As far as stablecoins go, unfortunately, so far, the name has been a misnomer. The fact that a stablecoin is pegged to a "real" asset does not equate to stability. Traditional underlying assets are not immune to market volatility, and since most stablecoins are pegged to fiat currencies, they can be equally volatile.

Stablecoin names, however, can be aspirational — and if they can tie themselves to a solid foundation, they might achieve it.

Where is the stability?

At the risk of confusing the metaphor, stability is the currency of today. Markets are volatile, debt levels are high, and inflation is spiraling in the wake of the COVID-19 pandemic and persistent supply chain problems. The cryptocurrency market has benefited as investors look for other ways to store their wealth. However, the price continues to fluctuate unpredictably up and down.

In search of a solution to volatility, the crypto community has gravitated toward stablecoins because their fixed relative valuations provide perceived stability. A recent report from the Hong Kong Monetary Authority (HKMA) confirms this trend, showing that since 2020, the market capitalization of the stablecoin market has exploded. Payment companies are also jumping on the bandwagon, with PayPal recently announcing plans to launch its own PayPal Coin, which will be backed by the U.S. dollar.

The problem is here. Stablecoins are often backed by increasingly volatile fiat currencies. Under broad-based quantitative easing, governments have pumped $17 trillion worth of new money into the global economy, while raising global debt levels and devaluing the purchasing power of the currencies backing stablecoins.

So the stablecoin trend, while in many ways a step in the right direction, should be rethought if they are to deliver on the promise of their name.

A gold-pegged solution

As governments print more and more fiat currency, we cannot ignore the potential of stablecoins backed by truly stable assets. In order for stablecoins to live up to their promise of “stability,” there must be a broader, more mainstream movement away from being backed by inflation-prone fiat currencies and towards being backed by more reliable real assets.

Gold is the most logical choice. Amid all the turmoil that 2021 has brought, the price of gold has held steady between $1,700 and $1,950 an ounce, a testament to its stability and value.

However, pegging a coin to a hypothetical gold reserve is not enough. The underlying asset must be fully allocated and convertible - one gram of gold can be exchanged for one token. This prevents the token from moving away from the reality of the asset it represents and prevents the token from fueling debt growth.

If the owner of a stablecoin can directly redeem the asset, it could provide an efficient store of value and medium of exchange that exceeds even the capabilities of the modern monetary system.

renewed call for regulation

This currency is only possible in a fully audited system, which is why regulation is so important. Ironically, a mass migration to stablecoins based on some unfounded assumption of stability could be the straw that topples the tower of economic superposition.

The recent controversy surrounding Tether (USDT) — the most widely used stablecoin backed by the U.S. dollar — is allegedly not pegged to the U.S. dollar, but the company dismissed the controversy as it is largely unregulated and unaudited, and remains Unable to verify.

The finding raises growing questions about just 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 transparency. In fact, a year ago, Bank of England Governor Andrew Bailey issued his own statement in Davos, warning that cryptocurrencies "lack the governance and arrangements by which durable digital currencies are designed" and that "people need to ensure that their payments are something that stabilizes value".

The way out of the inflation crisis

Despite their shortcomings, stablecoins should not be underestimated in their potential to help us emerge from the post-COVID-19 inflation crisis. They have the ability to preserve wealth and provide a stable store of value, while providing traditional investors with more certainty than other digital assets.

Therefore, addressing the misnomer of stablecoins may be critical to our economic survival.

To really take advantage of 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 will create a stable virtuous circle, drive more institutions to support digital assets, and further stabilize the market and economy.

The volatility of cryptocurrencies has kept many businesses, large and small, from adopting this form of payment. Stablecoins may be part of the answer, but their so-called "stability" is far from inherent. Assets like gold and silver, on the other hand, will continue to provide a stable base to build upon for years to come.

Cointelegraph Chinese is a blockchain news information platform, and the information provided only represents the author's personal opinion, has nothing to do with the position of the Cointelegraph Chinese platform, and does not constitute any investment and financial advice. Readers are requested to establish correct currency concepts and investment concepts, and earnestly raise risk awareness.