G20 Financial Leaders Find Stablecoins Too Risky

Image Source: forbes.com

Fiat currency is a “tool” we use to exchange goods and services. It is recognized by the government that issues the currency from their national or state controlled treasury, and released to each nation’s banking system. While the value of the currency in question will vary over time, mostly—it is stable. There are a few exceptions that make a fiat currency unstable such as when unstable governments loses control, as in Venezuela, or when hyperinflation seeps in and destroys the confidence of that currency.

Today, currency is relatively stable in each country, with the U.S. having one of the most stable currencies in the world: One reason why the price of oil is pegged to the dollar (petrodollar), or countries may prefer the U.S dollar, over the Russian Ruble, where one Rubble equals to 0.016 USD–that is 1.6 cents.

With cryptocurrency, there is no government or central bank to put its full faith and belief in the digital currency. There are no armies to back cryptocurrency. It is strictly based on market forces.  Quora says that its people who determine the value of a crypto. Employing the same principle as any other traded instrument or currency—namely supply and demand. “The value is determined by what people are willing to pay for it. The value itself is embedded in the faith of the community that the supply and demand will have gradual upward price pressure over time.”

However, what is different about this model, is that the people are not organized around a central government. They do not have armies and police to enforce regulation and ensure stability, as much as any government can. It is set up on a system of trust in the cryptographic code and the community itself.

It is evident that cryptocurrency continues to be plagued by volatility. As an example, Bitcoin—for October alone—has seen a number of dramatic swings. Going from $8,322 per coin on October 1, to $8,590 on October 5. It then dipped to $7,430 by October 24, only to soar to $9,548, just 3 days later on October 27.

If mass adoption of cryptocurrency is to take hold, one area that needs to be addressed is the volatility.

Image Source: cbinsights.com

Stable Coin

In response to the uncertainty of the market value of traditional cryptocurrency, the stable coin was created. In essence the stable coin derives its value from fiat currency. It can be pegged to a currency for that stable coin, such as the USD.  According to Ben Longstaff  (Hackernoon) –JP Morgan was the first bank to issue a stable coin.

Investopedia [link: https://www.investopedia.com/terms/s/stablecoin.asp   ] characterizes stable coins as follows:

    • Stablecoins are cryptocurrencies that attempt to peg their market value to some external reference.
    • Stablecoins may be pegged to a currency like the U.S. dollar or to a commodity’s price such as gold.
    • Stablecoins achieve their price stability via collateralization (backing) or through algorithmic mechanisms of buying and selling the reference asset or its derivatives.

Risky Business

Even though the attempt to peg a cryptocurrency to a currency is noble, nonetheless, Cointelegraph  reports there are serious regulatory risks. Joeri Cant, writing for Cointelegraph, reports that the “G20, an international forum for the governments and central bank governors from 19 countries and the European Union, have called upon the International Monetary Fund to examine various macroeconomic implications of global stablecoins.”

Reuters reports that the G20 agreed to “set strict regulations on cryptocurrencies such as Facebook’s (FB.O) Libra, warning that issuance of such ‘stablecoins’  should not be allowed until various global risks they pose have been addressed.”

One of the risks addressed is money laundering. Indeed, according to Cointelegraph, the G20 finance ministers said that “Such risks, including in particular those related to money laundering, illicit finance, and consumer and investor protection, need to be evaluated and appropriately addressed before these projects can commence operation.”

Thus, the overall acceptance of cryptocurrency even with stable coins, continues to meet one hurdle after another.

Conclusion

While many in the crypto community would love to see mass adoption take off sooner, rather than later, it is clear that the cryptocurrency ecosystem isn’t as stable as it ought to be. With an industry that is merely 10 years old, it is phenomenal that cryptocurrency has taken off as fast as it has.

However, slowing the process down may not be a bad thing at all. Indeed, it will force the industry to develop methods in protecting the industry itself, protect the consumer, and indeed protect society from bad actors across the globe.

 

Samuel H. is an author, writer and speaker with over twenty years in the educational technology sector.

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