Unfortunately, the term "stablecoin" is a misnomer in this case. The fact that stablecoins are tied to a "real" asset does not imply that they are stable. Traditional underlying assets are not immune to market fluctuations, and the majority of stablecoins are pegged to fiat, making them just as volatile.

What the name could be, however, is lofty – something that stablecoins could still live up to if they can establish a solid foundation.

What happened to all of the stability?

Stability is the currency of the day, at the risk of conflating metaphors. Following the COVID-19 pandemic and ongoing supply chain problems, markets are volatile, debt levels are high, and inflation is skyrocketing. As investors sought alternative wealth storage, cryptocurrency markets benefited. Prices, on the other hand, continue to fluctuate erratically.

In search of a solution to volatility, the crypto community has turned to stablecoins for the perceived stability provided by their fixed relative valuation. According to a recent report from the Hong Kong Monetary Authority (HKMA), the stablecoin market has grown explosively in terms of market capitalisation since 2020. Payments companies are also jumping on board, with PayPal recently announcing plans to launch its own PayPal Coin, backed by the US dollar.

That is the crux of the issue. Stablecoins are typically backed by fiat currencies that are becoming increasingly unstable. Governments have printed $17 trillion in new money into the global economy as part of widespread quantitative easing, increasing global debt levels while devaluing currencies that back stablecoins.

As a result, while the growing trend towards stablecoins is a step in the right direction, it needs to be reconsidered if it is to live up to its name.

A gold-plated solution

We can't afford to ignore the potential of stablecoins backed by truly stable assets as governments print more and more fiat. To deliver on the promise of "stability," stablecoins must be accompanied by a broader, more mainstream shift away from supporting inflation-prone fiat currencies and towards more reliable physical assets.

The most obvious choice is gold. Despite the turmoil that 2021 has brought, the price of gold has remained consistent between $1,700 and $1,950 per ounce, demonstrating both its stability and value.

However, tying a coin to a fictitious gold reserve is not sufficient. The underlying asset must be fully allocated and redeemable – one gramme of gold for one token, for example. This keeps the coin from deviating from the reality of the asset it represents, as well as from contributing to debt growth.

If the owner of a stablecoin can directly redeem the asset, it can serve as an effective store of value and medium of exchange, far exceeding the capabilities of modern monetary systems.

Calls for increased regulatory oversight have been re-issued.

Such a currency would be possible only in a fully audited system, emphasising the significance of regulation. Ironically, a massive migration to stablecoins based on a somewhat erroneous assumption of stability could be the straw that breaks Jenga's economic tower.

The recent controversy surrounding Tether (USDT), the most widely used and US dollar-backed stablecoin, allegedly not having the dollars to back their coin, has been dismissed by the company and remains unverifiable because it is essentially unregulated and unaudited.

The disclosure adds to the growing list of concerns about stablecoin "stability" and what is being done to protect investors.

Global regulators must continue to provide greater oversight and increase transparency. Indeed, Bank of England Governor Andrew Bailey made his own statement at Davos a year ago, warning that crypto lacked "design governance and arrangements for a sustainable digital currency" and that "people need the assurance that their payments are being made into something with stable value."

A way out of the inflationary quagmire

Regardless of their flaws, stablecoins have the potential to help us get out of a post-COVID-19 inflation crisis. They have the ability to preserve wealth and provide a stable store of value while offering traditional investors greater certainty than other digital assets.

As a result, eradicating the stablecoin myth may be critical to our economic survival.

To fully benefit from them, they must be tied to a solid foundation in the form of a fully redeemable physical asset, such as gold or silver. This would result in a virtuous circle of stability, with increased institutional support for digital assets and further stabilisation of the market and economy.

Because of the volatility of cryptocurrency, many businesses, both large and small, are hesitant to use it as a payment method. Stablecoins may hold part of the answer, but their "stability" is far from inherent. Gold and silver, on the other hand, will continue to provide solid foundations for years to come.

Support us!