• Jai Bifulco, CCO at Kinesis Money


• 07.02.2022 03:45 pm
#cryptocurrencies

Over the past decade, cryptocurrencies have taken centre-stage. However, with growing concerns around their volatility, many have looked for ways to mitigate against the drawbacks of investing in crypto. As a result, investors are gravitating towards virtual assets that are backed by a real underlying asset, known as stablecoins.

Institutional adoption, in particular, is growing. Leading payment firms are also now examining how to allow customers to settle in stablecoins, and JP Morgan is reportedly issuing its own stablecoin.

Yet, the growing trend towards stablecoins, although a step in the right direction, should be reexamined. It has been readily accepted that stablecoins are stable, simply because they are pegged to an underlying asset. Whereas, in reality, these underlying assets are also subject to market fluctuations themselves, which in turn means that, for example, cryptocurrencies pegged to fiat tend to be far less stable than those anchored to a physical asset.

A grave misnomer

The recent concerns around Tether suggest that stablecoins might not always deliver on their namesake. The rumour that Tether – the most widely used stable – might not have the billions to back up its token, is a valuable lesson for the financial community. It brings into question just how stable some stablecoins actually are and is representative of yet another problem - the irresponsible handling of underlying assets.

At a time when the world economy is already fragile with stagflation and volatility, these so-called stablecoins, pegged to unstable and inflation-ridden fiat currencies, could prove just the opposite. Government issued currencies have collapsed in the past and numerous countries are laden with new debt in the wake of the pandemic.

Quite literally, a stable foundation

It’s becoming increasingly clear that the future of stablecoins lies in moving away from backing them with fiat currencies, which are experiencing their own instabilities. Instead, digital currencies can benefit from being pegged to physical assets – for which gold is the obvious choice.

Throughout all the turbulence this year, gold's price has sat steadily between $1,700 and $1,950 an ounce. It’s the ultimate source of stability and value. But tying a coin to a hypothetical store of gold doesn’t go far enough. The optimal solution is brought by fully allocating the underlying asset and making it easily redeemable – one gram of gold for one token. Therefore it’s good news that regulators have promised more oversight and will look to increase transparency.

However, carefully balancing the implementation of regulation whilst simultaneously allowing for innovation and disruption, is the key to a successful and welcomed framework. Transparent,  regulated stablecoins would create a virtuous circle of stability by driving greater institutional backing for cryptocurrencies and thus further stabilising the market.

A route out of inflation

Stablecoins are one of the few sources of optimism in the current inflationary period. The rising levels of global debt and continued quantitative easing means inflation could spiral soon. The US has already printed almost $10 trillion worth of new notes, which is simply devaluing the currency. With fiat money getting further out of control, the promising alternative system in stablecoins offers a ray of hope.

Therefore, the potential of stablecoins is not to be underestimated. They hold the capacity to preserve wealth and provide a stable store of value, whilst also offering traditional investors more certainty than other digital assets.

However, to truly harness the benefits of stablecoins, they need to be pegged to a solid foundation with regulatory oversight. And in our view that solid foundation is a fully redeemable, physical asset, like gold or silver.

Without a doubt, if cryptocurrencies are to become stable by name, they must be gold by nature.