Stablecoins will have to reflect and evolve to live up to their name

Stablecoins have the possibility to become a promising alternative system amid global inflation, but they must be auditable to remain stable.

In the case of stablecoins, unfortunately, the name is so far a misnomer. The fact that stablecoins are pegged to a “real” asset does not equate to stability. Traditional underlying assets are not exempt from market fluctuations, and with the majority of stablecoins pegged to fiat, they can be just as unstable.

What the name could be, however, is aspirational — something that stablecoins might yet live up to if they can tie themselves to a solid foundation.

Where did all the stability go?

At risk of confusing metaphors, stability is the currency of the day. Markets are volatile, debt levels are high and inflation is spiraling following the COVID-19 pandemic and ongoing supply chain problems. The cryptocurrency markets have benefitted as investors have searched for alternative stores of wealth. But, prices continue to see-saw up and down unpredictably.

In search of a solution to volatility, the crypto community has gravitated toward stablecoins for the perceived stability afforded by their fixed relative valuation. A recent report by the Hong Kong Monetary Authority (HKMA) verified this trend, showing an explosive expansion of the stablecoin market since 2020 in terms of market capitalization. Payment firms are also jumping on the bandwagon, with PayPal recently announcing plans to roll out its own PayPal Coin, which will be backed by the United States dollar.

Related: Fear not, investor: Finding stability amid crypto market volatility

And, therein lies the problem. Stablecoins are usually backed by increasingly unstable fiat currencies. Governments have printed $17 trillion worth of new money into the global economy amid widespread quantitative easing, simultaneously raising global debt levels and devaluing the purchasing power of the currencies that prop up stablecoins.

As such, the growing trend toward stablecoins, although in many ways a step in the right direction, is due a re-think if they’re to deliver on the promise of their name.

A solution worth its weight in gold

With governments printing more and more fiat, we cannot afford to turn away from the potential of stablecoins backed by truly stable assets. In order for stablecoins to live up to the promise of “stability,” there must be a wider and more mainstream movement away from being backed by inflation-prone fiat currencies toward more reliable physical assets.

Gold is the most logical option. Throughout all the turbulence that 2021 brought, the price of gold sat steadily between $1,700 and $1,950 an ounce, proving both its stability and value.

But, tying a coin to a hypothetical store of gold doesn’t go far enough. The underlying asset must be fully allocated and redeemable — one gram of gold for one token. That prevents the coin from distancing itself from the reality of the asset it represents and stops the coin contributing to debt growth.

Related: Why betting on gold-backed stablecoins is a losing game

If the owner of a stablecoin is able to directly redeem the asset, they can provide an effective store of value and medium of exchange, beyond even the capabilities of modern monetary systems.

Renewed calls for regulatory oversight

Such a currency would only be possible in a fully audited system, which is where the importance of regulation comes in. Ironically, a mass migration to stablecoins based on a somewhat unfounded assumption of stability could be the straw that topples the economic Jenga tower.

Recent controversy around Tether (USDT) — the most widely used stablecoin and backed by the U.S. dollar — allegedly not having the dollars to back up their coin have been dismissed by the company and remain unverifiable due to it being essentially unregulated and unaudited.

Related: Stablecoins under scrutiny: USDT stands by ‘commercial paper’ tether

The revelation contributes to the growing number of questions about how “stable” stablecoins actually are and what is being done to protect investors.

Regulators around the world must continue to provide more oversight and double down their focus on increasing transparency. In fact, it was one year ago that Bank of England Governor Andrew Bailey made his own statement at Davos warning that crypto lacked “design governance and arrangements for a lasting digital currency” and that “people need assurance that their payments are made in something with stable value.”

A way out of the inflation crisis

Despite their shortcomings, the potential for stablecoins to help us out of a post-COVID-19 inflation crisis should not be underestimated. They hold the capacity to preserve wealth and provide a stable store of value while offering traditional investors more certainty than other digital assets.

As such, solving the stablecoin misnomer might just be essential to our economic survival.

To truly harness their benefits, they must be pegged to a solid foundation in the form of a fully redeemable physical asset, like gold or silver. This would create a virtuous cycle of stability, driving greater institutional backing towards digital assets and further stabilizing the market and economy.

Related: Wyoming’s state stablecoin: Another brick in the wall?

Crypto’s volatility is keeping many businesses — big and small — from adopting this type of payment method. Stablecoins may hold part of the answer, but their so-called “stability” is far from inherent. Assets like gold and silver on, the other hand, will continue to provide stable foundations on which to build for years to come.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.