Opinion: Stablecoins must rethink and evolve to live up to their name

In the context of global inflation, stablecoins can be a promising alternative system, but they must be auditable and stable.

In the case of stablecoins, unfortunately, the name has been used inappropriately so far. The fact that a stablecoin is pegged to a "real" asset does not equate to stability. Traditional underlying assets are also not immune to market volatility, and since most stablecoins are pegged to fiat currencies, they can be just as volatile.

Opinion: Stablecoins must rethink and evolve to live up to their name

However, stablecoin names can be aspirational — and if they can tie themselves to a solid foundation, they might make it happen.

Where has the stability gone?

At the risk of confusing the metaphor, stability is the currency of today. Markets are volatile, debt levels are high, and inflation is spiraling in the wake of the Covid-19 pandemic and ongoing supply chain issues. The cryptocurrency market has benefited as investors look for other ways to store their wealth. However, prices continue to move up and down unpredictably.

In search of solutions to volatility, the crypto community has turned to stablecoins because their fixed relative valuations provide perceived stability. This trend was confirmed by a recent report from the Hong Kong Monetary Authority (HKMA), which showed that the stablecoin market has seen an explosion in market capitalization since 2020. Payments companies are also jumping on the bandwagon, with PayPal recently announcing plans to launch its own PayPal Coin, which will be backed by U.S. dollars.

The problem is here. Stablecoins are often backed by increasingly volatile fiat currencies. Under broad quantitative easing, governments have issued $17 trillion worth of new currency to the global economy, while raising global debt levels and devaluing the purchasing power of the currencies that underpin stablecoins.

So the trend towards stablecoins, while in many ways a step in the right direction, should be rethought if they are to live up to the promise of their name.

A priceless solution

As governments print more and more fiat currency, we cannot ignore the potential of stablecoins backed by truly stable assets. For stablecoins to deliver on the promise of "stable" there must be a broader, more mainstream movement away from inflation-susceptible fiat backing to more reliable real assets.

Gold is the most reasonable choice. Amid all the turmoil that 2021 has brought, gold has held steady between $1,700 and $1,950 an ounce, proving its stability and value.