More Stablecoins, More Stability

Investing, Opinion | June 21, 2019 By:

 The digital asset landscape has undergone some significant changes since the dramatic price surges of December 2017 as a result from users becoming more interested in blockchain technology. The market turbulence that followed has undercut the perception of cryptocurrencies in the eyes of many, with erosion of the virtues of trust and security taking place due to price volatility and the actions of some illegitimate projects. In the midst of the highly speculative ICO craze, there was a growing appetite for digital assets to demonstrate more stability and reliability, in order to aid the proliferation of blockchain technology and cryptocurrency as a whole. This shift in perspective set the scene for a new financial instrument to emerge as a beacon of hope for an industry experiencing credibility issues — the stablecoin.

A stablecoin is a cryptocurrency pegged to a real world asset, and therefore thought to be less volatile in price. The peg of stablecoins can vary, depending on the model. Fiat-backed stablecoins, those that are pegged to everyday currencies like USD and EUR, have been the most popular implementation to date, providing users with a more familiar and accessible entry-point. Other formats such as crypto-backed, or non-collateralized stablecoins have also established a firm presence within the space.

Tether was the first mainstream flag bearer for the stablecoin space, pegged to USD. At the time of introduction, a stablecoin backed by familiar fiat currency presented a novel and attractive proposition for market participants to engage with the crypto space with higher levels of assurance. However, a trend of controversies led to questions around the credibility of Tether’s operations. Recently, it emerged that Tether is only 74% backed by asset reserves and that the issuer used some of these funds to invest in Bitcoin. Tether had become a stablecoin with unnecessary drama and questionable values.

Originally, Tether presented a promise of a stablecoin which could eradicate credit risk, which is the risk of a loss resulting from a borrower’s failure to repay a loan or meet contractual agreements. Tether claimed to hold every dollar in reserve, meaning the consumer would have a claim on a dollar in a bank account, eliminating any credit risk. Unlike a loan or deposit in a traditional bank, the dollar wouldn’t be loaned or invested elsewhere. When Tether admitted only partial backing by asset reserves, it cast a negative light on the wider stablecoin community, unfairly tarnishing the reputation of other legitimate projects that uphold the highest standards or reliability and security. These scandals have been a constant source of disruption for advocates of stablecoins, with the most recent accusations being leveled at Tether by the New York Attorney General. It is incorrect and unfair to tie the fortunes of stablecoins to one bad actor, and Tether’s time as the mainstream stablecoin mascot is up.

The arrival of stablecoins correlated with a spike in the amount of capital inflows for digital assets by institutional investors, with a report by Grayscale indicating that institutional investors were responsible for 66% of capital inflows for digital assets in 2018. It wasn’t long before major industry players took notice. In February JP Morgan announced the first digital currency to be backed by a major US bank. This followed the news around Facebook’s plans to launch a stablecoin for money transfers over Whatsapp, revealed in December of last year. Regarding the scale of Facebook’s stablecoin ambition, recent reports have suggested that the company is seeking up to $1 billion in VC funding for the project. According to Barclays, the venture could generate a $19 billion revenue stream for the company if executed correctly.

These kinds of initiatives have the potential to play a central role in popularizing stablecoins. It is encouraging to see mainstream names like JP Morgan and Facebook make in-roads in their pursuit of stablecoin innovation, as these efforts will raise the profile of the asset class in the eyes of traders, while also extending the reach of stablecoins to new cohorts of potential users.

While Tether was embroiled in numerous scandals, the stablecoin space has been boosted by the arrival of offerings such as Dai (DAI), USD Coin (USDC), True USD (TUSD), and Paxos (PAX). These coins better exemplify the desired traits of a stablecoin, and have ensured the buzz around stablecoins has endured, for the right reasons. Building on this, the emergence of Neutral’s stablecoin basket instrument has added a new layer or reliability and security to the space. By combining stablecoins together, represented by one overarching coin, Neutral reduces the overall risk exposure to one individual coin’s volatility and can produce a more stable token that fluctuates more closely to the intended value. While the influx of numerous USD pegged stablecoins has even fueled claims of market saturation, a more diverse range of quality stablecoins can act as an injection of life blood to the stablecoin market, providing market participants with more choice.

The status of stablecoins continues to be elevated by legitimate offerings that uphold the highest standards of transparency and reliability. As the crypto industry expands on its financial services offerings, crypto exchanges will be empowered by their communities to add stablecoin offerings to their portfolio of listed assets. More quality stablecoin offerings entering the market could spur an unprecedented race for stability in terms of how coins maintain their peg status, increasing demand, utility, and security. A more competitive and healthy stablecoin market will lead to higher levels of reliability, stability, and transparency — three key features that set them apart in this highly congested and fast evolving digital asset space.