The Stablecoin Paradox


Let’s not confuse lack of volatility with stability!

Kevin Murcko, CEO of CoinMetro

It’s safe to say that 2018 hasn’t been the best year for crypto. While Bitcoin might have been a popular gift in 2017, a crypto Christmas isn’t looking so likely now. But what we have seen this year is a significant amount of innovation and experimentation as the potential of crypto continues to be explored.

One such experiment has been stablecoins, the fiat pegged assets that aim to tackle the volatility of crypto through digitally fixing their value in terms of dollars (or an equivalent fiat currency). Tether has been particularly thriving as one of the most heavily traded coins – but the questions still stand – do these coins really have a use case? And is there merit in their model?

In a limited number of cases, maybe. For immediate transfers and transactions, stablecoins allow funds to be cleared immediately, offering the convenience of crypto without the volatility. Central Bank Digital Currencies (CBDCs) are another captivating case, with the potential to limit payment risks and fraud.

But beyond these cases, stablecoins have a hard time proving their worth.

Stablecoins are essentially being used as a stand-in for fiat by exchanges that, for various reasons, don’t have to ability to offer fiat. While this may provide traders with a degree of convenience and stability, when we break the model down, it becomes pretty absurd.  

As the Bitcoin whitepaper originally laid out, crypto was designed to “transact directly with each other without the need for a trusted third party.” The premise laid out in the anarchic vision of crypto is to step back from the dependency on the government to uphold the value of our money.

What stablecoins have come to represent is the very antithesis of this idea. The crypto community are now getting behind privately-issued coins that are pegged to the very centralised system they were designed to pull away from – because they didn’t trust the governments that backed them.

Stablecoins go step further and require that you not only have confidence in the government, but also in an unfamiliar private third-party company which is even less accountable than the government, subject to corruption and fraud.

Our reliance on the integrity of third parties is even greater now than where we started.

Why abandon the comparatively safe government backed fiat money for a coin with no consumer protection which is susceptible to fraud and hacking? What is there to gain? Centralised banks aren’t without their flaws, of course, but to their credit, they’re more likely to still be here tomorrow than private institutions.

The absurdity of stablecoins replacing our reliance on central banks with a reliance on a combination of both central banks and their loosely regulated businesses is pretty mind-boggling. Ultimately, let’s not conflate stability with a lack of price volatility. If stablecoins demand more trust than government-backed fiat, then ‘stable’ is precisely the wrong descriptor to use.

Merry Christmas, everyone! Enjoy and see you next week!

The CoinMetro Team