Stablecoin, Cryptocurrency–Stablecoins, the industry-denominated name for cryptocurrencies which have valuation pegged to a stable fiat or asset, have become all the rage within the last several months. Tether (USDT), the most popular stablecoin and one backed 1:1 with U.S. Dollars, has been at the center of controversy and ongoing scrutiny dating back to last year over the exact holding of the company printing the new coins. Regardless, Tether has managed to flood the market with $2.7 billion worth of USDT, good for eighth overall by total market capitalization. Binance Labs, a subsidiary company for one of the world’s leading cryptocurrency exchanges, announced at the end of August that it was spearheading an investment into Terra, a new crypto stablecoin that looks to replace fiat in East Asian commerce via the attractive appeal of digital assets, cryptocurrency and lack of price fluctuation.
However, not all bodes well in the realm of stablecoins, despite their growing popularity. Barry Eichengreen, Professor of Economics out of University of California Berkeley, has found fault with the concept of stablecoins and believes they do not constitute a viable future for money or other digital assets. His main argument revolves around the idea that pegging an asset to a stable entity, such as the value of the U.S. dollar or another global power fiat, does not constitute inherent value in itself.
In addition to taking a shot at Bitcoin over the price volatility, a sentiment that has been echoed by numerous economists at this point including Nobel Prize Winners, Eichengreen writes in an article published Tuesday,
“Conventional cryptocurrencies, such as Bitcoin, trade at wildly fluctuating prices, which means that their purchasing power – their command over goods and services – is highly unstable…Stable coins purport to solve these problems. Because their value is stable in terms of dollars or their equivalent, they are attractive as units of account and stores of value. They are not mere vehicles for financial speculation. But this doesn’t mean that they are viable.”
Eichengreen also finds fault with a similar flaw that has been presented to other cryptocurrencies in the ability to scale to volumes useful for global adoption. While Bitcoin has managed to work fairly well as a transacting currency, high network volume and elevated transactions during December and January’s crypto-frenzied markets led to a sharp decrease in utility for the coin. Eichengreen is not convinced that stablecoins will be able to break free of the limitations of scale so far imposed on some of the more popular coins on the market, in addition to whether governments will allow a currency to gain market competition alongside fiat–particularly if that country’s fiat is the one backing the coin,
“In other words, it is not obvious that the model will scale, or that governments will let it.”
Despite otherwise having a bearish stance on the outlook for stablecoins and their potential impact upon markets and the global money supply, Eichengreen does relate to why they have become an attractive idea–particularly in juxtaposition to the massive price volatility currently affecting the majority of the market,
“It’s easy to see the appeal of these units. Viable monies provide a reliable means of payment, unit of account, and store of value.”