The crypto space is so fast paced in its changes that sometimes things literally become unrecognizable after a few months. It is pretty unbelievable that merely 1 year ago people were throwing $50M+ of crazy money at random ICOs on Ethereum that promised to “store your files in a decentralized way” or to “put supply chain on the blockchain”, or that merely 1 year ago nobody has even heard of Binance.
The latest hype in crypto at the time of writing (October 2018) have been security token offerings (STOs) and stablecoins. For the purpose of this article I will talk about what I think of stablecoins.
The concept of a stablecoin has been around for a while now. Basically a stablecoin is supposedly a cryptocurrency that is pegged to the USD (fiat) 1:1. In other words, for every 1 stablecoin unit that exists, the issuing company/organization/person must hold $1 USD in a reserve somewhere. This is so that if all users of this stablecoin suddenly decide to withdraw fiat, the issuer can repay all users their USD without breaking a sweat. Actually, this is exactly how traditional banks were supposed to work originally with digital balances to actual cash, but let’s not even get started on that.
The whole purpose of the stablecoin was to get around the bitcoin/fiat conversion difficulty. With a stablecoin in place that represents the USD, bitcoin traders no longer needed to constantly convert between the crypto and fiat spheres when buying and selling the cryptocurrency. A USD-pegged stablecoin allowed traders to stay in the system and avoid the increasingly more and more cumbersome and restrictive process of converting between crypto and fiat. Banks never liked crypto very much to begin with, and they certainly have made it more and more difficult for traders to transport funds between the two worlds.
The first known stablecoin in the crypto space was Tether (USDT), which has been in circulation since early 2015. USDT was issued by Tether Limited, a company incorporated in the British Virgin Islands, and possibly tied to Bitfinex, one of the world’s largest exchanges. USDT itself is a cryptocurrency in that it is built on top of the Bitcoin protocol as a second layer, however its issuance and pegging is controlled by the Tether company.
From a utility and aesthetics point of view, one could argue that a stablecoin was much needed to promote cryptocurrency adoption and trading. I would argue that the ability of USDT to allow money to remain in the crypto world rather than having to go in/out to the fiat world was one of the drivers for the proliferation of cryptocurrency exchanges and altcoin trading pairs in 2017–2018. As well, being able to represent the price of a crypto in USD terms rather than in BTC or ETH units was simply much more convenient for the new crypto trader.
Of course, as with anything cryptocurrency-related, the path of USDT has been turbulent and not without scrutiny. On multiple occasions in its history, USDT has decoupled from its supposed price of $1.00, as severely as going down to $0.88 on October 15, 2018. These severe fluctuations in USDT value were underpinned by the lack/lost of trust in Tether and the operators behind it. USDT seemed to always be followed by FUD (fear, uncertainty, doubt), which can be attributed to the lack of audit and transparency of its parent company and the continuous musical chairs game of banks who were willing to work with Tether.
With Tether being shrouded in the latest FUD, other stablecoin competitors took the opportunity to enter the market. A month ago, Gemini and Paxos almost simultaneously announced their respective stablecoins, the Gemini Dollar (GUSD) and Paxos Standard (PAX). Then, this week, Coinbase announced that they are listing the USD Coin (USDC) by Circle. The common theme and major selling point with all these new stablecoins is that they are issued by reputation, regulated, and audited (US-based) companies, or so they claim.
On paper, this may seem like a good thing. After all, it’s nice to have more peace of mind that your money is actually backed the US judicial system rather than the conscience of some offshore company’s shareholders. However at the same time, for those who value decentralization and censorship-resistance, this may seem like a move for the government and regulators to further wrap their claws around the ecosystem and its incumbents.
As Eric Conner pointed out on Twitter, there is actually a section in the USDC terms of service that basically says the company has the right to blacklist and freeze any address at their mercy. This is an important detail in my opinion because it renders Coinbase/Circle/using USDC to be no different from using traditional banks and sending fiat across the SWIFT network. The question now is more on whether the men in power will go with the “innocent until proven guilty” philosophy or the “guilty until proven innocent” philosophy seen all too often with institutions around the world today.
Another thing to keep in mind is that by issuing these stablecoins, the issuing companies sort of become central banks in a way, at least among the markets where their respective stablecoins are circulating. These companies are able to onboard a large amount of fiat from traders that go into their disposal both as fiat and as the corresponding stablecoin. What the companies might do with these funds at their disposal is up for debate, but most likely there is less in it for you than there is for them. Not to mention, again, that they have the right to suspect you based on your KYC or your activities, and to freeze your funds at any given time.
With bitcoin now a certain part of our global financial landscape going forward, it was inevitable that more regulation, audits, and Wall Street involvement would get into the space. This hyped stablecoins movement may indeed be good for the entry of more institutional money into the space, because institutional money simply won’t touch something that is not regulated. However, the long term effects remain to be seen. For the time being however, I advise anyone who believes in what bitcoin represents to tread cautiously with these stablecoins. They currently represent everything that bitcoin is not, for the sake of convenience and added liquidity.