Professor of economics Barry Eichengreen openly criticizes stablecoiny.
Until now, Tether (USDT) was a well-known stablecoin, which has, however, caused some controversy for some time.
The dollar reserve does not make cryptocurrency valuable
According to Professor Barry Eichengreen, stablecoins are not automatically valuable only from the fact that they are linked to reserves in fiat currencies. Eichengreen writes that “conventional cryptocurrencies, such as Bitcoin, are [bought and sold] at sharply changing prices, which means that their purchasing power – their control over goods and services – is highly unstable.”
In spite of this, the economist also criticizes stablecoins: “Stablecoiny is aimed at solving these problems. Because their value is stable in terms of dollars or their equivalent, they are attractive units of account and value measure. They are not the usual tools for financial speculation. But that does not mean that they are valuable. ”
However, the cryptocurrency branch opens before the idea itself. This week the regulators have allowed the introduction of stable cryptocurrencies of the twins Winklevoss, dollar-Gemini, into circulation. Earlier, the Liechtenstein bank announced its intention to issue a stablecoin based on the Swiss franc in August.
3 types with defects
However, for Eichengreen, these assets fall into three categories, depending on the completeness of the security of tokens – full, partial and unsecured – and each has its own economic weaknesses.
The first type – fully secured – means that the operator has a reserve equal or above the value of coins in circulation. Tether, which is tied one to one to the dollar, has allegedly dollar deposits equal to its turnover. The truth of the matter has, however, been questioned. What’s more, the professor can still see a gate for criminals in Tether. He points out that if the platform wants to put 1 Theter into circulation, he must attract one dollar of investment capital from the investor and put it on the bank account.
“One of us would sell a perfectly liquid dollar, supported by the full faith and credit of the US government, for a cryptocurrency with dubious support that is inconvenient to use. This exchange can be attractive to people involved in money laundering and tax fraud, but not for others. “- says the economist.
The second type of stable coin is characterized by partial protection. In this case, the platform has, for example, 50% security for coins in circulation. “The problem with this variant will be known to every decision maker in the monetary system, whose central bank was seeking to set the exchange rate, while having reserves constituting only a fraction of its liabilities.” – equates this system with traditional markets.
Here the exchange rate problem may appear: “The platform will have to buy them [stablecoiny] with the help of its dollar reserves (…)”. Ultimately, however, the price will go down if investors do not believe in the currency.
The problems of the third variant “will be obvious to even the novice central banker”. In it, the platform, if the price of coins starts to fall, will buy them back, in exchange for additional tokens-bonds. Here, “the issuer promises to pay interest in the form of additional coins.” This interest would be financed from the proceeds from the issue of future coins.
“The issuer’s ability to service bonds depends on the platform’s growth, which is not guaranteed. If the result becomes less reliable, the bond price will fall. Then you will have to spend more bonds to prevent a given decrease in the value of the coin, which further hinders the fulfillment of interest liabilities, “explains Eichengreen.
What to do with stablecoins?
It is difficult to disagree with his theses. On the other hand, stablecoins can be an effective tool for promoting crypto-currency in the mainstream. Surely, the economist is right that the creation of foreign exchange reserves (even total) for stablecoins based on currencies, which themselves do not have a gold back, is ineffective in the long run. Doubts, therefore, remain, while the cryptocurrency community will have to answer the question of what to do with the idea itself.