Breaking the Buck May Break Faith in Currency-Pegged Stablecoins
Years from now, perhaps, the investing world may look back at the dominoes that fell, the mad rush for the exits, and say that breaking the buck broke the stablecoins.
Think back a few years and initial coin offerings (ICO) were the all the rage, the promise of all things possible done via blockchain that fizzled in short order.
Part of the reason that new and, let’s face it, exotic financial issues surge in popularity and then tank is because disruptive technologies promise a new way of doing things — and then bump up against the realities of real-world economics. Sometimes the friction results in new paradigms and practices within financial services. Sometimes, the disruptors get shaken out.
As relayed in this space, with TerraUSD gapping below the dollar “peg,” there’s been a massive recalibration and reconsideration of the tokens that are tied to the dollar but are also tied to complex, automated and lightning-fast algorithms to keep tokens tied to that peg.
Read more: Stablecoin Collapse Heightens Calls for Crypto Controls Worldwide
Anything but Stable
Other stablecoins have followed suit in sympathy. Tether’s an example.
See more: Tether Breaks Buck as Stablecoin Panic Spreads
And even Monday morning (May 16), CoinDesk reported on another example. Fantom Stablecoin DEI has become only one of the latest issues to break the buck, losing more than 30% to trade at roughly 67 cents. As has been seen elsewhere, the stablecoins, whose collateral/backing are monitored by advanced tech to keep that ostensible dollar parity are not in fact keeping up with their promise.
As investors continue to flee these stablecoins, as the crypto markets shudder and reel in sympathy, the path gets ever wider and clearer for the central banks (well beyond the U.S. and, indeed, across the globe) to tighten their holds on digital issues that, in fact, are backed by the centuries-old financial system.
Read more: Spooked by Stablecoin’s Collapse, Investors Flee DeFi
Bitcoin may have a place forever in the crypto realm, and this marquee crypto name trades purely on sentiment. But for the asset-backed digital offerings, we’re seeing evidence that the stablecoins are anything but stable. Algorithmic stablecoin that uses programming to recalibrate coins’ pricing and supply in response to demand may have no safety net if demand implodes.
And that spells opportunity for the central banks. Ninety percent of them are working on central bank digital currencies (CBDCs), so they’ve got skin in the game in moving stablecoins aside and getting digital money into the field, so to speak.
Officials at the European Central Bank (ECB) and the Bank of France are sounding the bell for more regulation.
See more: EU Regulators Lash out at Stablecoins While Boosting CBDCs
In the U.S., Treasury Secretary Janet Yellen has pointed to the risks of stablecoins. The fact is, as the criticisms show, these stablecoins cannot be redeemed at par; CBDCs can.
Read more: Yellen Says Terra’s Fall Shows Stablecoin Dangers
The opportunity is there for international, cross-border, instant transactions that are what Wall Street would call “money good.” PYMNTS own data has shown that a majority of multinationals have used cryptos — so the familiarity is there to smooth a wider embrace of CBDCs, if those companies are wary about volatility.
See more: Study Shows 58% of Multinational Firms Use Cryptocurrencies
In the marathon to transform finance, to bring it more fully into the digital age, as stablecoins gyrate, slow and steady may win the face, at least for the central banks.