Stablecoins Spell Trouble, US Economist Warns

With more types of stablecoins appearing each day, keeping the rates pegged may be a challenge to startups.

Creators of stablecoins in the world of cryptocurrencies may introduce risks previously unseen into the ecosystem, warned Barry Eichengreen, economist at the University of California, Berkeley, in an article for Project Syndicate.

The comments from Professor Eichengreen point out that there are no safe models for stablecoins in the crypto world. Even with money in the bank backing the tokens, the usage of coins like Tether (USDT) remains awkward, he believes. There would also be additional regulatory matters, and usage of USDT would not be as liquid as using dollars, the professor warns:

“This exchange may be attractive to money launderers and tax evaders, but not to others. In other words, it is not obvious that the model will scale, or that governments will let it.”

But the real trouble would come from partially-backed, or unbacked stablecoins, which are still being created. Basis, one of the projects used as an example, boasts of using “an algorithmic central bank”. However, Professor Eichengreen warns against the conviction that the supply could be effectively altered to safeguard against speculators.

“The third type of stable coin, which is uncollateralized, has this problem in spades. Here the platform issues not just crypto-coins but also crypto-bonds. If the price of the coins begins to fall, the platform buys them back, in exchange for additional bonds,” Eichengreen describes the model.

This model was used by the BitUSD-BitShares platforms, and they had serious trouble keeping the dollar peg, with frequent drops to much lower levels. The BitShares sales were not enough to prop up BitUSD.

The biggest fear would be deliberate attacks against the dollar peg. So far, however, the attacks against asset-backed currencies have not materialized in the world of crypto assets.

The Gemini stablecoin is perhaps the most prominent digital token with a dollar-pegged value, proposed in the past few days as a solution to price stability, and as a chance to trade against a non-volatile asset.

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In the case of the Gemini exchange, custody of the US dollar funds is more trustworthy, compared to the custody of the Tether company.

The effects of most stablecoins, such as the BitCNY, are limited due to the low number of trading pairs. USDT pairings have the greatest influence, typically taking up more than 20% of total crypto market volumes, and more than 58% of Bitcoin (BTC) volumes as of September 17. Other stablecoins take up a fraction of a percent of trading, affecting only separate exchanges. TrueUSD (TUSD), the strongest stablecoin contender, has a share of just 0.1%.

Analysts also believe that stablecoins are a temporary solution, before crypto assets develop more solid sources of valuation. But for now, stablecoins remain risky, despite their aim to mitigate price risk.