It is a golden find, the stablecoin: a crypto currency with all the associated advantages of security, privacy and tradability. But then fully covered by ‘real’ money. So for every crypto coin that comes into circulation, there is (usually) a dollar in the reserves. Facebook – as long as the company is still called that – launched the idea on Tuesday for a digital wallet, ‘Novi’, with which customers can pay with a stablecoin. For later in the ‘metaverse’, the virtual world that the tech giant is building.
Previously, Facebook came up with its own stablecoin libra, which was first renamed diem and then sidelined. Now the tech company is taking an existing stablecoin, the Paxos dollar, as a means of payment. Stablecoins are getting quite the wind in their backs. But are they as reliable as claimed?
There are two nice historical examples of stablecoins – among many more, by the way. The first is the Amsterdamsche Wisselbank (de Bank of Amsterdam, in international literature), which was founded in 1609, shortly after the Dutch East India Company. The Exchange Bank collected gold and silver coins, and issued bills of exchange, which made it much easier to pay. The value of those bills was always backed one-to-one by the coins in the bank’s reserves. A bill of exchange was therefore, initially, an early form of a stablecoin: fully covered by ‘real money’, but much more convenient for (international) payment transactions.
But as it goes: gradually loans were also provided, the balance sheet total exceeded the promised rock-solid reserves, and bills of exchange became a form of ‘fiduciary money’ – the value of which was based on trust in the issuer. The economic crises at the end of the eighteenth century proved fatal for the Wisselbank, and in 1820 it formally closed its doors. De Nederlandsche Bank, a distant successor to the Wisselbank, published a study worth reading about it last year.
The second example is Argentina’s currency board. In such a system, pesos were put into circulation that were backed one-to-one by US dollar reserves at the central bank. That gave the advantage of a stable currency, with low inflation and interest, and yet the illusion of its own currency – but very little flexibility. Gradually, unsurprisingly, the political temptation became too great to put slightly more pesos into circulation than there were dollars in reserve. And something more. Argentines, suspiciously, started to withdraw dollars rather than pesos and the system crashed in 2001. Long after that, cigarettes were the only means of payment.
The best-known stablecoin at the moment is tether: fully backed by dollars, but with all the other advantages of crypto. Bloomberg drew attention two weeks ago to the fact that there are now 69 billion tether in circulation, of which 48 billion have been issued this year alone. But where are the $69 billion that must be in return? Cash, apparent, or dollar-denominated short-term tradable corporate loans in the United States or China. Bloomberg didn’t really find out. Meanwhile, the Financial Times Tuesday confirmed that the cryptocurrency company Celsius Network has taken out a loan from tether with bitcoin as collateral. Bitcoin? In the reserves of tether? So no hard dollars?
Nevertheless. The rate of tether (USDT) was neatly 1.001 US dollar (USD) on Wednesday. The crypto world believes in it. But he believes quite a lot anyway, under the motto: I’m getting rich, so I’m right. And come there, as long as it goes well, just intervene.
Maarten Schinkel writes about economics and financial markets.
A version of this article also appeared in NRC in the morning of October 21, 2021
How stable is such a ‘stablecoin’ actually?
Source link How stable is such a ‘stablecoin’ actually?