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Stablecoin 101: What, Where, Why And Plans For 2019

GGC Team

Jan. 11, 2019

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As 2019 begins and regulatory compliance is at the horizon, stablecoins continue to garner attention.

The volatility of cryptocurrencies largely precludes them from being used as day-to-day currencies, and adequately building applications on top of them require more stability than what is currently available.

This is where stablecoins come in as cryptocurrencies that are stable when measured in fiat currencies or gold. They provide a price peg for goods and services, while retaining the properties of a medium of transfer and store of value - at least in the short-term.

However, it is worth noting that fiat currencies are also subject to their own fluctuations - including exchange rates and inflation, but those changes pale in comparison to the young cryptocurrency market, and are more prone to long-term effects than the short-term.  

 

 

Stablecoins come in a variety of shapes and sizes, from crypto-collateralized to fiat-collateralized and even non-collateralized. Fiat-collateralized is the prevailing option of choice for many, as it is the most familiar and stable design.

 

They are fully backed by a fiat currency, such as the USD or gold, as a proven store of value. Fiat-collateralized stablecoins are overseen by a central entity, with Tether being the most well-known fiat-collateralized stablecoin today.  

Crypto-collateralized stablecoins remove the centralized nature of fiat-collateralized versions, but are pegged to unstable cryptocurrencies and require more nuance. Maker’s Dai is the prominent example of a crypto-collateralized stablecoin but has its own limitations, particularly its lack of scalability.

Finally, non-collateralized stablecoins rely on algorithmic contractions and expansions of the circulating supply to maintain a stable value without being backed by anything.

This is the most complicated method for launching a stablecoin and is subject to several regulatory pressures. Basis - the $133 million stablecoin project startup - was an example of a non-collateralized stablecoin but recently had to shut down citing the regulatory constraints facing their model.

Tether was the dominant stablecoin in the cryptocurrency markets for an extended period, before extensively covered problems including reports of their inability to retain banking services, conflicting reports that the circulating Tether was not fully backed by USD, and analysis that the company was exiting surfaced.

Since then, numerous stablecoins have flooded the cryptocurrency markets, with many of them directly backed by exchanges. Exchange-issued stablecoins include Coinbase and Circle’s USDC and Gemini’s GUSD, both of which are fiat-collateralized.

Other fiat-collateralized stablecoins available now include the Paxos Standard Token and TrustToken’s TrueUSD. Following the emergence of a new class of stablecoins, Tether’s market share has declined.

Stablecoins also include gold-collateralized versions, such as GramGold, where one GramGold Coin is pegged to one gram of investment grade gold. (or gram of gold bullion).

Transparency is important, as the numerous adverse reports covering Tether indicate. Hand in hand with increasing integration with regulatory institutions, transparency is the defining narrative of stablecoins emerging today.

For instance, Gemini Dollar balances are examined monthly by BPM and have been audited by Trail of Bits, Inc. Moreover, Gemini Dollars are issuedwithin the regulatory oversight of the New York State Department of Financial Services, creator of the controversial BitLicense.

Newly issued fiat-collateralized stablecoins - like Gemini Dollars and Coinbase/Circle’s USDC - are explicitly designed to reduce counterparty risk and provide investors with better safeguards than Tether.

Having exchange-issued stablecoins directly as trading pairs within a specific exchange, also gives users more assurances and easier access to transferring in and out of a stable token, even if their money is still held with a custodian.

Predicting anything in the cryptocurrency realm is nearly impossible. Especially considering that most of the stablecoins that have materialized recently are precisely that, very recent, there is no clear frontrunner in the stablecoin scene right now that shows a unique ability to separate from the rest.

The concept of stablecoins also has faced its fair share of criticism. Stablecoins introduce more intermediaries and trust into a broader ecosystem, where one of the leading narratives is reducing the role that trusted intermediaries play.

Their future role as a means of payment - when fiat currencies already accomplish the same task - is unclear. Many cryptocurrency users are simply uncomfortable with the popular development of stablecoins.

The much blessed transition towards a more regulatory compliant cryptocurrency market seems inevitable, however. Compliance laws are forcing well-known exchanges services to enact KYC policies, while decentralized exchange operators are under the SEC’s microscope.

Further, legacy financial executives are continuing to enter the stablecoin and broader digital asset market, adding confidence through reputation for many participants that may be hesitant to enter the ecosystem.

Gemini has hired several Wall Street executives in a bid to attract more institutional investors, as part of a broader initiative to integrate more with traditional financial entities. Also, GramGold's CEO, Thomas Huang has served senior banking positions in the past.

Moves among companies within the young stablecoin industry are also increasingly common, with Coinbase recently losing Vaishali Mehta, their senior compliance manager, to TrustToken, who oversees the TrueUSD stablec oin.

Recent developments demonstrate a trend towards greater transparency and regulatory oversight of stablecoins, but understandably has many proponents of trust-minimization and censorship-resistance scratching their heads.

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