How stable is a crypto currency like Bitcoin

Stable coins: the next big breakthrough?

The common denominator of all these types of money is their acceptance. In Money and the Mechanism of Exchange (1875) William Stanley Jevons analyzed money and assigned it to four functions: as a medium of exchange, as a unit of account, as a standard of value and as a store of value. Ten years after the creation of the first digital currency, "Bitcoin", there are over 2,000 crypto assets and cryptocurrencies (Bitcoin, Ethereum, Ripple, Litecoin ...). The high volatility of cryptocurrencies since their introduction represents an obstacle to their development from the point of view of both consumers and companies. The daily fluctuations in value of often more than 20% underline the speculative image of cryptocurrencies. Would you use cryptocurrency as your official tender if you risk paying twice as much for your pizza in a month?

In this context, stable coins are of great interest to all industries. The increasing investments by venture capitalists in various projects are a clear indication of this2.

WHAT IS A STABLE COIN?

A stable coin can easily be defined as a stable cryptocurrency. It is primarily an answer to the problems of volatility and enables the function of money to be fulfilled. There were over 50 such stable coins3 output, the stability of which is achieved using various methods:

  • Fiat-backed stable coins i.e. a cryptocurrency that is linked to a legal tender currency (also referred to as fiat currency in crypto jargon) or to a basket of legal tender currencies. Most cryptocurrencies have a stable value of $ 1. The body that issues the stable coin opens a bank account and mirrors the position. For example, if she spends 1 million coins pegged to the US dollar, she needs to credit the bank account with 1 million USD. This could be thought of as the simplest model for a stable coin, and it's very stable. This model requires centralization and therefore a trustworthy depositary with the need to check for transparency. The Tether, one of the most popular coins in this category with a market capitalization of USD 2 billion, is listed on over 65 crypto exchanges4.
  • Commodity-secured stable coins, i.e. a cryptocurrency guaranteed by a commodity. The business model is pretty similar to the Fiat model. There have been several initiatives in this area, particularly with gold. They are inspired by the Bretton Woods system.
  • Crypto-backed stable coins i.e. a cryptocurrency guaranteed by another cryptocurrency. In contrast to fiat currency and raw materials, where a custodian is needed to ensure security outside the chain, the entire process here takes place within a blockchain. This model has the advantage of decentralization as security is kept in a smart contract. However, since cryptocurrencies are inherently unstable, over-security is required here in order to buffer fluctuations in the cryptocurrency.
  • Unsecured stable coins. Are backed only by their value thanks to a smart contract that runs automatically. If the total supply or demand for the stable coin increases or decreases, the smart contract will automatically adjust the number of coins in circulation to keep the price unchanged.

The asset-backed stable coin is the dominant model and accounts for 83% of the initiatives, with the majority being based on an Ethereum protocol5.

WHY ARE STABLE COINS SO ATTRACTIVE?

The stability of stable coins calms the entire industry, small and institutional investors alike.

They are designed to allow global participation and broadcast in near real time - in seconds or minutes instead of days. In order to secure an exchange, most financial transactions with delivery take place in exchange for payment.

There is currently no fiat currency in the crypto world. This prevents an efficient exchange with delivery step by step against payment in the blockchain. Until a fiat currency is available, a stable coin linked to a fiat currency is one of the best solutions to make the value chain more efficient. Many blockchain initiatives in the post-trade industry would benefit from this introduction. In addition, the stable coin has the potential to be accepted as a real cryptocurrency from a macroeconomic point of view.

There is great potential for a number of countries plagued by hyperinflation or currency instability (Venezuela, Argentina, etc.). The stable coin could become an alternative here. From a trading perspective, the stable coin would be a good solution as it allows these countries to add a new currency pair. A number of crypto exchanges do not yet accept fiat currency, and stable coins can help manage risk better. In a speech6 Christine Lagarde, head of the IMF (International Monetary Fund) even mentioned the possibility of the IMF taking more control in this area, including issuing its own cryptocurrencies, the exchange rate of which would be regulated by macroeconomic mechanisms. Countries around the world are testing their own digital currencies and creating prototypes. They have recognized the potential of DL technology in combination with the trust that is placed in the currency issued by their central bank - and are issuing so-called central bank-supported digital currencies. There are already various public pilot projects in this area, for example in the United Kingdom, Sweden, Singapore and Switzerland.

WHAT ARE THE MAIN CHALLENGES FOR STABLE COINS? AND FINALLY: WHAT DOES YOUR FUTURE LOOK LIKE?

KYC is still the cornerstone of all stable coin projects, especially because of its volume to capitalization ratio, which is significantly higher than traditional crypto assets. Tether's 30-day volume is similar to Bitcoin's, whereas its market capitalization is valued 30 times lower on average. Good management of all aspects of KYC elements is critical to their efficiency. JP Morgan with his JPM Coin and Facebook7 have also started corresponding initiatives. This shows the attractiveness and the potential of stable coins. Despite considerable interest from regulators and the entire industry, we are still at the beginning of the journey. There are still obvious structural and regulatory issues to be resolved.

We have to keep an eye on the role of money; TRUST will be the answer.

(*) Using digital for cryptocurrencies.
(2) www.bloomberg.com/news/ articles / 2018-10-29 / stable-coin-backed-by-circle-coinbase-draws-most-earlydemand
(3) https://www.coindesk.com/the-secs-crypto-czar-is-hitting-theroad-and-she-wants-to-meet-you.
(4) https://coinranking.com/coin/tether-usdt
(5) https://www.blockchain.com/static/pdf/StablecoinsReport_2_21_2019.pdf
(6) https://www.bbc.com/news/business-46203869
(7) coin24.fr/actualites/ facebook-va-t-il-revolutionner-le-monde-des-crypto-monnaies /