Stablecoin could be a trap for investors
So-called stable coins (stablecoins) have value that is rigidly tied to the dollar, the euro, or a basket of national currencies. Barry Eichengreen, Professor of Economics at the University of California, Berkeley, published an article in Project Syndicate stating that stablecoins could be very attractive for investors but at the same time it could be a trap.
Stablecoins have very low volatility, can be used all around the world and are not connected to any central bank. Eichengreen distinguishes three types of stable coin and pointed out that each category has its own downside that causes problems for investors.
The first type is fully collateralized: the operator holds reserves equaling or exceeding the value of the coins in circulation. Tether, which is pegged one-to-one to the dollar, claims to hold dollar deposits equal to the value of its circulation. But the veracity of this claim has been disputed. In addition, they too expensive for most companies and can’t be regulated by the government.
The second type of stable coin is partly collateralized. In this case, the platform holds dollars equal to, say 50%, of the value of the coins in circulation. If a company tries to buy it back from investors it will lead to the collapse of the peg.
The third type of stable coin is the worst one. It is uncollateralized, has this problem in spades. Here the platform issues not just crypto-coins but also crypto-bonds. If the price of the coins begins to fall, the platform buys them back, in exchange for additional bonds. The bonds are supposed to appeal to investors because they trade at a discount – so that, in principle, their price can rise – and because the issuer promises to pay interest to the bondholders, in the form of additional coins. That interest is to be funded out of the income earned from future coin issuance.
To sum it all up, Barry Eichengreen says that it is well known to anyone who ever encountered even a single study of speculative attacks on pegged exchange rates, or to anyone who has had a coffee with an emerging-market central banker. But this doesn’t mean that it is familiar to the «wet-behind-the-ears» software engineers and unexperienced investors touting stable coins.
One of the most famous stablecoin is USDT (Tether) that has been in the market for quite some time now. However, on Monday, September 10, the Winklevoss twins bitcoin exchange Genimi announced the launch of stablecoin Gemini Dollar (GUSD) on ERC-20. At the same time blockchain startup Paxos revealed its plans to launch stablecoin Paxos Standard that is also tied to the dollar.