Will Stablecoins Blow Up?

Simon Paige
Jun 5 · 4 min read

What if holding stablecoins was the biggest risk of your trading strategy? The idea that stablecoins are a safe place to park your money between trades may be about to be turned on its head. Stablecoins that redeem back into fiat currency carry counterparty, systemic and regulatory risk. Tushar Jain, Managing Partner Multicoin Capital says “Stablecoins trade volatility for blow-up risk”. What he means is that there is plenty of powder under stablecoins that most traders are simply not aware of.

In a recent article Daniel Cawrey, Chief Executive at Pactum Capital outlined the potential catastrophic effects of the continued controversy between the New York Attorney General, Tether and its sister organisation Bitfinex. The NYAG is still looking for more information about inconsistencies it sees in the relationship between Tether and Bitfinex. It has already said that it believes fraud may have taken place. If the NYAG finds conclusive evidence of wrongdoing it is likely to take decisive action. This may include the seizing of funds. If this takes place then the value of Tether could fall to zero as people are unable to redeem the coin. Assets would likely to be locked into court battles which could take years to resolve. Regulatory risk would have come home to roost. Food for thought next time you park your money.

Staying with Tether, but also applicable to all stablecoins with redemptions into fiat, there are also counter-party risk to be considered. Tether banks with Deltec Bank & Trust Limited based in the Bahamas. If you own Tether what do you know about this bank? If the bank fails, or is corrupt then your ability to redeem Tether for US dollars may be limited or non-existent if these events take place.

Then let us not forget systemic risk. Stablecoins with redemptions into fiat are simply fiat money in a crypto-wrapper. This means that they remain exposed to the same systemic risk as the rest of the fiat system. If there is another Lehman Brothers event, even if it had nothing to do with the issuers of stablecoins, they could all be affected through the banking, trust and broker relationships each has that enable the redemption process.

The verdict is still out on what will unfold with Tether and the NYAG. But that is not the only regulatory risk stablecoins face. If, as Benjamin Sauter and Jake Chervinsky of Kobre & Kim LLP suggest it is still far from clear whether stablecoins will be considered securities by the SEC, the security provided by holding stablecoins is uncertain to say the least. Given that stablecoins now account for 65% of all trading volume on crypto-exchanges, the risk posed by the asset class has implications for the stability of the crypto ecosystem as a whole.

If capital preservation is the golden rule for effective trading, then where to park assets between trades becomes an important issue. One answer is to use Saver Token. Based out of New Zealand the token trades only on the Waves DEX. The security of the DEX avoids the risk of funds being hacked and stolen. The token itself is non-collateralised, functioning instead like a currency where value is created by users. The lack of collateral means Saver Token joins Bitcoin in having no counterparty or systemic risk. Regulatory risk is also greatly reduced because of the lack of redemptions.

Saver Token is liquid through a 100% reserve coverage provided by the issuer, Forecast Services Limited. This ensures traders can come and go according to their trading needs. As volumes of Saver Tokens increase liquidity will be provided by other users, making Saver Token again like Bitcoin in being wholly decentralised and able to operate without any external input.

Interestingly, given all the risk-mitigation benefits of Saver Token for traders, the token was designed and launched not with a view of competing in the stablecoin market. Instead its aim was to fulfil Satoshi’s vision of a universal decentralised means of payment. The aim of the token’s value referencing to the US Consumer Price Index (CPI-U) is to provide it with the stability required of sound money. In a world of volatile crypto-currencies and the depreciation of fiat and stablecoin assets, before Saver Token, stable money was last seen when the US left the gold standard in 1971.

Parking assets with Saver Token may take a couple of more minutes of a trader’s time as they have to be moved off-exchange into the Waves DEX. But for the sake of de-risking between trades does Saver Token and the Waves DEX provide a viable solution?

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