Recently I made a bet on a stable coin forum because I know something, 90% of the people on that forum did not.
I made a bet that stable coins would not exist in 1 year.
And I was able to make this bet, after a long conversation, in a Facebook forum, about fundamentals. It was a stable coin forum, and a post mentioned fundamentals.
- I knew that the DLT fundamentals, which should drive innovation in the DLT space, were not the fundamentals these traders had in mind.
- If it is a stable coin, it must be a platform, and that platform has expenses.
- Because it has expenses Stable coins are stable until (i believe) they try to scale.
There are now more than $100 billion in circulation. But are stablecoins stable? The answer is uncertain. Should we have $100 billion of this stuff floating around, without testing at scale? This says volumes about the need for testing at scale. Or we could just wait and see where the wheels fall off.
Here is the rub as I see it. In the fiat world, you price things appropriately to sell. There are fees taxes holding charges that are passed along in the transaction. Every transaction pays fees. These fees are added to the price you pay and deducted at settlement. Stable coins do not have this mechanism for settlement outside of the platform. For every transaction on a stable coin platform, there is friction and there are associated fees. You cannot keep those costs off-chain for long.
You see, instead of being “mined’’ by an open, distributed network of computers performing a combination of math and record-keeping, a stablecoin derives its price from the value of another asset. In short, a stablecoin is pegged to some other underlying asset. That underlying asset doesn’t have a dog in the hunt when it comes to the stable coins expenses or issues. Stable coins as they exist today, I do not believe can scale. And in about a year that is going to become very important.
Then there is the problem of, we looked inside of Fort Knox and it is empty. Theoretically, a stable coin’s value is ensured by a bundle of assets including cash, treasuries, and commercial paper. The trouble is, there is no guarantee that the issuers have on hand the assets they say they do.
Tether Holdings’ story is the prime example: The company once claimed to have $69 billion in real currency to support that amount of its coin in circulation. Yet no one who went looking for the money was able to find any evidence of it. After being sued by the state of New York, the company revealed it had been loaning money from its reserves to prop up an affiliated cryptocurrency exchange that was hundreds of millions of dollars in the hole. Among the fiat stablecoins, it’s Tether that now shows the most risk to the downside, dropping as low as $0.945 on November 4th, 2021.
Should we have a standard deviation for something touted as stable? Is a 5% deviation indicative of a stable environment. Is this the industry misleading the general public?
Has any of this been tested? By who and when?
The risk, and the challenge for the regulators, is that belatedly policing stable coins now that so many are in circulation could prompt the type of run on their issuers that the government wants to guard against.
Cryptocurrency lobbyists have come to Washington to ask Congress for “guidance.” New laws, however, should not be permitted to evade old ones that apply to banking and other traditional financial operations.
Meanwhile, federal regulators seem to be letting the US know they’re prepared to enforce the laws that currently exist. If this happens, the US will not be able to compete in global digital commerce.
I believe we have lost touch with the reality here.
What do you think?
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Michael Noel CBP = Certified Blockchain Professional
Co-Founder Blockchain Consultants
Host Blockchain Weekly
Cryptonite Ventures Founding Member
Cryptonite Ventures Wizard
This week, November 21st, 2021
Crypto.com bought naming rights to Staples Center in LA for $700M. It will be renamed Crypto.com Arena in 2022.
The Houston Rockets partnered with NYDIG to bring a suite of crypto services to the team in 2022.
Hang on to your Hat, 2022 is almost here!