F.I. -A New Alternative in Stablecoins
In response to the recent market decline in cryptocurrencies, many investors in the sector have turned to stablecoins in an effort to curb their losses and to wait out the storm until things sort themselves out. It’s analogous to stock investors putting their money in cash waiting for a bottom to form.
Stablecoins are supposedly backed by something of value which gives its underlying token price stability. It can take the form of a commodity such as gold, a peg to a fiat currency such as the USD, or just about anything that the issuer believes will keep its token from experiencing significant swings in value.
Each of the above examples comes with its own inherent drawback. Gold in the post-gold standard era does not work well as a provider of stability. It is traded on the world market and its price often fluctuates significantly. Any crypto backed by gold is the recipient of this instability, rendering it useless as a medium of exchange.
Fiat currency serves much better as collateral for a stablecoin. Those cryptos backed by the USD, for example, attempt to maintain a 1–1 relationship between the token and the fiat which backs it. This will impart a stabilizing influence on the underlying cryptocurrency, at least in the short run. However, anyone holding the crypto for any length of time would find their investment decline in value due to monetary inflation, an element which central bankers work tirelessly to maintain. Therefore, any fiat-backed stablecoin would lose value over time, rendering it unsuitable as a store of value.
Some other issuers have tried to provide stability to their tokens by collateralizing it with other cryptocurrencies, real estate, energy, etc.; you name it and there is probably a token which has it as a backing. However, most of the things used for collateral are not stable themselves and cannot provide stability to its underlying currency.
One item that has not been given much attention as a backing for stablecoins is interest-bearing financial instruments. This form of collateral has some very important advantages over other forms of backing.
First, FI backing is inherently stable, depending on the instrument chosen to do the job. Naturally, junk bonds or other risky investments would not be suitable to ensure a token’s stability. However, conservative short-term instruments such as U.S. treasuries work very nicely. They normally yield at least enough to keep pace with inflation. This means that stablecoins collateralized by this type of financial instrument would actually increase gradually in value.
The question was asked of me, “Well, if that type of stable token increases in value, how can it be stable?” The answer is, a very gradual increase in value is every bit as stable as a very gradual decrease in value due to inflation. Given the choice, why would anyone want their asset to decrease in value rather than increase?
The final analysis demonstrates that a stablecoin backed by conservative interest-bearing financial instruments would not only provide the coin with price stability, but also with a gradual appreciation which would negate the effects of inflation. A true stablecoin and a true store of value.
And that’s light years better than a stablecoin collateralized by anything else, including the U.S. dollar.
Don Bielak
