CoinMetro CEO Says Stablecoin Tokens Require More Trust Than Fiat Currencies
Kevin Murcko, CEO at the cryptocurrency exchange CoinMetro, said that stablecoins demand more trust than normal fiat currencies. In an article written on November 15, he talks about stablecoins and how they work in the virtual currency market.
The cryptocurrency market is full of virtual currencies. Some of them more valuable and usable than others. But there is a specific kind of virtual currency known as stablecoin. These stablecoins are usually tethered to the price of a fiat currency. Most of the stablecoins are linked to the US dollar. This is the case of Tether (USDT), USD Coin (USDC) or Gemini Dollar (GUSD).
He says that the cryptocurrency market has a lot of volatility. And this is real. Although we reached a very low volatility in the last weeks, the market remains generally volatile. This is why stablecoins help the overall virtual currency market to be more stable and have a hedge against this volatility.
According to Mucko, traders are very happy with volatile markets because it is possible to generate more profits. Nevertheless, volatility is not good for other investors. Why? Because it is not compatible with the concept of a day-to-day currency and store of value. Stablecoins can fix this and digitize fixed values.
He explains that there are different use cases for stablecoins. He shares the following example:
“Let’s say a liquidity provider owes me $0.5 million. Maybe I need that money immediately to be able to rebalance my book – the traditional banking system isn’t the best way to do that. Even if we’re with the same bank, it can take a while to clear that transaction.”
With stablecoins it is possible to clear funds back and forth, he explains. That means that they are fast and convenient without having to be harmed by volatile markets.
He then mentions that Christine Lagarde, the head manager at the International Monetary Fund (IMF), said that Central Bank Digital Currencies (CBDC) could be very positive for the financial world. Banks could reduce costs and mitigate fraud and money laundering. Additionally, she explained that it is possible to also integrate those unbanked that the private system does not include.
Nevertheless, there are some issues with these stablecoins. This is the case of Tether, which was not able to prove their worth. Stablecoins are several times used as substitutes for fiat on different cryptocurrency exchanges.
However, in some cases, stablecoins are not preferred to fiat currencies. And this situation is related to trust. Cryptocurrencies entered the market promising to be trustless. But stablecoins are not pretended to work in this way.
With stablecoins is necessary to have confidence in the government and in the company that issued this stablecoin. It is important to trust the institution behind it that it will be able to self-regulate the supply and demand that it has.
There are some stablecoins that are fully collateralized, other stablecoins that are not collateralized at all, while some are just partially collateralized. Nevertheless, this is not enough to regulate its price.
Murko explains that noncollateralized tokens have their value suppressed by ‘printing’ digital money. If the price drops, it is not possible to delete the tokens that are already in circulation. This is why, he says, if the smart contract is not able to keep the price around $1 dollar, then the algorithm will be issuing bonds. That means that the user will have an entitlement to coins in the future. These bonds are later redeemed and the price returns to $1 dollar.
However, this is just a theory. If prices keep falling, there is a bigger problem because bonds cannot be issued indefinitely. As the price drops, more bonds have to be issued.
There are also stablecoins that are partially collateralized. This is an improvement, but companies might not have all the necessary funds to sustain the adequated price if there is a sell-off. This could clearly have a very bad ending.
Murcko says that fully collateralized coins such as Tether are also not reliable.
“Even if we take the company for its words (there’s some uncertainty as to whether their assets are fully collateralized), it still doesn’t make much sense to abandon the relatively safe greenback for an inconvenient crypto that doesn’t always have fiat parity, provides no consumer protections, and is vulnerable to hacking.”
Making a summary, he says that stablecoins are not a good idea. He says that central banks are no the best institution to trust, but trusting a ‘loosely regulated business’ and central banks at the same time is not a good idea.
He says that it is important not to make a mistake between lack of volatility with stability. Stablecoins provide assets that are not volatile compared with the rest of the virtual currency market, nevertheless, these stablecoins are not stable.