Stablecoins: the end of traditional money?
To be clear from the start, the goal of this article is not to answer the question in the title but rather to ask it.
Let’s begin first by defining what stablecoins are. Stablecoins are a type of asset-backed cryptocurrency, their objective is to provide the end user with a medium of exchange as stable as traditional money but also as private and instantaneous as cryptocurrencies.
This sounds like an absolute dream until you ask yourself one question: how?
Normally, cryptocurrencies are highly volatile which makes them unsuitable for every day use. On the other hand, fiat money (i.e. any government issued currency) is slow-moving especially when international payments, the need for middlemen (e.g. banks) and foreign exchange rates are taken into consideration.
Could stablecoins solve those issue?
Ideally, they could. The concept of stablecoins is to provide the world with an independently stable currency that is easy to move around and that holds a fixed foreign exchange rate.
With blockchain technology now in growing effect, stablecoins are not only capable of providing the above-mentioned promises but they would also be hard to attack, debase and steal. Furthermore; they promote decentralization, facilitate online transactions, minimize inflation and reduce the cost linked to remittance and international trade.
Practically, however, numerous problems ensue. Looking at the mechanics behind stablecoins, it is clear to see that the grounds are still shaky.
Stablecoins can work in several ways. They can either be collateralized, stabilized algorithmically or a combination of both of those methods.
For stablecoins to be collateralized means that they are to be subject to whatever the collateral that backs them is subject to. Thus, fiat-backed stablecoins would still be vulnerable to inflation and the slow movement related to custodial accounts (e.g. transferring money, remittance, online banking etc.). The same goes for commodity-backed stablecoins. Examples of commodities include gold, silver and other precious metals among other things. Cryptocurrency-backed stablecoins, on the other hand, would be vulnerable to the volatility of the cryptocurrencies behind them. Hence, they do not offer a better solution than the first two alternatives.
As for algorithmically constant stablecoins, they follow monetary policy and “game theory”, basically, supply and demand. This option, however, faces many regulatory constraints. Algorithmic stablecoins are legally viewed as securities and therefore, cannot be used as mediums of exchange.
Consequently, the flaws in making stablecoins hybrid present themselves clearly; they’re a mixture of all those problems faced by the previously proposed versions of stablecoins but on a smaller scale. The stablecoins would start off fully backed by a collateral (i.e. a collateralized stablecoin) and eventually grow into algorithmic stablecoins when the economy is strong and established enough to only operate with and have trust in said stablecoins. Nevertheless, regulatory bodies and public trust can still have a subversive effect.
In the beginning, all of this sounds quite overwhelming until the history of money and currency comes into play. From barter, to gold, to precious metal coins, to commodity backed paper money, to nominal value money, to credit cards and now to contactless payment methods… Money has never stopped changing.
Just like the public eventually came to trust paper money and credit cards, even when those two are no longer fully backed by gold, it is not so far-fetched of an idea for the public to begin using stablecoins or any other form of cryptocurrencies. At first, the majority will be wary but as the economy takes its course and the general trust grows bigger and bigger, it will come as no surprise for the world to adopt uncollateralized stablecoins as the primary means of exchange.
To answer the title question as of now would be too soon. Will stablecoins be end of traditional money? Only time can tell.