Stablecoins Miss the Mark

Although most stablecoins are touted as the next step for currency and a needed player in financial innovation, they have several fundamental flaws that make them even less suitable than the American dollar. Stablecoins are electronic currencies tied to USD, and in most situations, stay within a few percent of the dollar’s value. While historically some stablecoins have gone as low as 98% of USD, they generally stay relatively closer to the value of a dollar. Stablecoins’ first issue is that they are tied to an inherently unstable underlying asset. Their second issue is that they are controlled by private companies and are subject to far greater institutional tremors than the dollar, due to them not being backed by the power of the United States military. Finally, stablecoins’ consistent use in crime will only lead to a higher regulatory load and even further destabilization.

All stablecoins seek to be a more liquid alternative to the dollar, yet are based on two fatal flaws. They attempt to multiply while blocking the strength of the financial system that allows countless dollars to arise from just one real dollar. Additionally, even if they were effectively tied to the dollar, they would still face the same inflationary trends that make the dollar an unappealing asset. The dollar is inherently unstable and even in their naming conventions, the inventors of stablecoins seemed to forget this. The dollars circulating the economy today are a multiple of the actual dollars that have been printed. The required reserve ratio and financial machinations allow dollars to keep creating themselves. Stablecoins attempt to mimic dollars yet they have even less value than real dollars as they do not share the fractional value of a fiat dollar. If the United States continues to inflate, stablecoins will lose their value at an even faster rate than the dollar. Only when the US dollar is the international currency of exchange do USD-backed stablecoins have great relevance. 

The financial technology companies that have created stablecoins are subject to the same institutional and regulatory tremors that any business is. When they are functioning properly, their product is tied closely to the dollar, but there is no guarantee that they will continuously operate effectively. If the state that a stable coin is headquartered in decides to raise tax rates, the underlying value of the company and its stablecoin will waver. Risky speculation with money meant to back the stablecoins could lead to disaster if the market or specific investments have a negative price shock. Private companies will have the incentive to make a profit, and only for the most thoughtful of entrepreneurs does this lead to a maximization of stability rather than speculation. Some stablecoins have already gone under because the operators tried too aggressively to seek alpha. While ideally stable coin operators would compete along the axis of stability, they usually compete along the axis of short-term profitability, lending themselves too easily to an argument for the regulation of stablecoins.

Less than 1% of stable coin transactions are in the real economy. Most are either in crypto finance or crime. The fact that neither of these things is a great public good means that stablecoins must develop quickly or risk having no respectable advocate. A lack of compelling positive use cases coupled with constant use in criminal transactions means that it is a miracle that the national conversation about stablecoins and crypto generally has not been more negative. While absolute state control at the granular transaction level is not the answer to financial crime, if a significant minority of stable coin transactions are related to crime, there are few countries that would hesitate to regulate stablecoins aggressively. While fiat currency has many issues, something based on the currency that has a constant risk of instantly dropping to zero value could be said to have the worst inflationary risk of all. Stablecoins will never truly be stable as the only way they can escape regulatory scrutiny is through a deep enmeshment with national financial systems, which will only accelerate the evolution of all currencies for the benefit of the state. Stablecoins will certainly allow for more liquid international financial transactions, but they face the same long-term issues that any fiat currency does, while bearing a set of risks that no fiat currency has to. If a country released a stable coin, it would only face the regular risks that Fiat currency faces and be more palatable than private backed stablecoins, but the potential for government informational overreach, and the acceleration of inflationary trends in normal currency would still make this an unappealing option.

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