Stablecoins: The Inherent “Trust Crisis” Posed By Asset-Backed Digital Currencybr>
A controversial code review of Gemini’s new dollar-backed stablecoin, the GUSD, recently made waves across the crypto industry thanks to allegations that the coin effectively allows the Winklevoss twins to “freeze any account or make all tokens non-transferrable”. While these revelations came as a shock to those who had hoped the GUSD would serve as a more trustworthy, fiat price-pegged alternative to Tether (or USDT, the still-dominant collateralized stablecoin with a comparatively opaque reserve record), they also added to the already long list of “trust factor” worries about the entire category of asset-backed stablecoins, which are inherently susceptible to centralization risks.
When the stablecoin space began to heat up, the crypto community had no choice but to sacrifice decentralization in order to escape the dangers of crypto volatility. Worries that Tether may not actually retain a dollar in the reserve for every USDT coin its management “prints” led to the emergence of Tether copycats promising more transparency. Today, this trend continues with new IOU-style stablecoin entrants like Gemini’s GUSD and Circle’s USDC, each promising enhanced trustworthiness with features like reserve attestations and 1:1 caches of dollars stored in FDIC-insured accounts.
But these latest coins may offer nothing more than hollow “advancements” over the Tether model, since any asset-backed stablecoin necessarily remains under the full control of the company that issues it. In this way, asset-backed stablecoins are like casino chips: should the “house” fail or decide to change the rules, the coins’ value could be destroyed. But the control retained by Gemini and other purveyors of fiat-backed crypto-tokens still may not represent the greatest risk, since a government may one day decide that these asset-backed tokens threaten its control over monetary policy, the movement of money, the imposition of sanctions, the monitoring of terrorist financing, the collection of taxes, etc. When this happens, fiat-collateralized stablecoins will be the first and easiest projects for governments to shutter.
And this would be a shame, because the true promise of stablecoin does not lie simply in the facilitation of trading and institutional investor access to crypto markets, but rather in stablecoin’s ability to deliver financial access and control to billions of people around the globe currently locked in regional monetary systems with inflationary or unstable fiat currencies. Indeed, the crypto industry has not only the ability, but also the moral responsibility to create truly decentralized, non-asset-backed stablecoins—and projects using algorithms instead of assets to stabilize cryptocurrency values are already in development by teams at companies like Basis and Kowala. Decentralized stablecoin projects like these require our support and attention because they alone can offer a stable and unstoppable currency to those who need it the most.
Eiland Glover is the CEO and Cofounder of Kowala, creator of the world’s first autonomously stabilizing cryptocurrency: kUSD. Eiland has spent his career creating systems and companies at the intersection of finance, technology, education, game theory, and human psychology. He is a firm believer that new technologies must be consciously designed and utilized to empower humans. In 2012, Eiland learned about bitcoin and wondered why this amazing technology had not become ubiquitous. He co-created Kowala based on his belief that a decentralized stable coin is necessary for the mainstream adoption of cryptocurrencies.