In 1992, Professor Barry Eichengreen made waves among economists with his book Golden Fetters: The Gold Standard and the Great Depression. In it, he argued that gold-backed currencies caused the Great Depression. Today, Eichengreen is criticizing a new type of asset-backed money: stablecoins — cryptocurrencies like Tether and TrueUSD that are backed one-to-one by fiat reserves.
Professor Eichengreen’s recent hit-piece in The Guardian criticizes not only these asset-backed stablecoins, but also the entire class of stable cryptocurrencies. And, while much of his analysis is spot on, he nevertheless fails to understand new algorithmic stability mechanisms made possible by blockchain that have never been available to central bankers. It is these new approaches to money supply control that promise to create non-asset backed stable cryptocurrencies that offer more utility than any money technology of the past.
Current use of stablecoins already proves their value
But even today’s low-tech solutions like Tether have proven their utility to large numbers of users. In his attack on Tether, Eichengreen questions why anyone would trust a controversial project with opaque physical dollar reserves over the U.S. government? Despite the ongoing debate as to whether or not Tether has the physical dollars to back its currency, the project has nonetheless seen a meteoric rise. Over the course of this year it has become a top-10 cryptocurrency by market cap.
It’s true that Tether is currently being used mostly by day traders (particularly on Asian exchanges) as a way to temporarily escape the volatility of Bitcoin (and increasingly altcoins) in the absence of instant or low-fee access to fiat dollars. But the mere fact that it has picked up such a large, active user base signals that users are indeed willing to forgo the ironclad trust of the government-backed U.S. dollar. And we can assume that if merchant gateways for such stablecoins become more common, such projects could become a popular option for a sizable minority of consumers.
As newer asset-backed competitors like TrueUSD begin to bridge this trust gap with transparent reserves and fiduciary agreements, it is becoming increasingly apparent that asset-backed stablecoins remain viable — they just may not ultimately prove to be the optimal choice. Centralized and collateralized projects do always harbor the threat that incompetence or malfeasance could threaten the coin’s value, and, beyond these threats, even a perfectly run asset-backed coin is ultimately at the mercy of governments that may eventually feel compelled to crack down.
On the opposite end of the spectrum, Eichengreen’s criticisms of decentralized and uncollateralized stablecoins seem ironically at odds with his advocacy of central bank controlled fiat money back in 1992. Many of these projects use a so-called “seignorage shares” model that seek to algorithmically ape the United States’ central banking system that Eichengreen supports. The seignorage shares model includes the use of both a stablecoin and a secondary “bond” coin through which financial players lower money supply through the purchase of bonds that lock away the currency until the bonds mature. This approach is not tangibly different from the Federal Reserve’s open market operations. The Fed sells securities in order to reduce dollars in circulation. Eichengreen argues that within such a system, “an issuer’s ability to service the bond depends on the growth of the platform” — a feature that can inspire trust in the firmly established American government but not a lesser-known crypto project. Within this rigid framework, he is correct, as evidenced by the recent and dramatic value drop of seignorage shares stablecoin Nubits.
The goal of creating a truly decentralized stable cryptocurrency is, however, still a worthy one because such currencies represent the best insulation against such risks. In fact, truly stable cryptocurrencies promise to bring hundreds of millions of previously sidelined people into the global economy. Cryptocurrency, if it is indeed stable and usable, can expand global populations’ access to secure, stable money beyond manipulation of their governments and safe from confiscation. It opens up vast new possibilities for remittances, cross-border payments, micropayments, stores of value, bank-like services, and so much more.
Blockchain enables brand new stability options
One approach Eichengreen doesn’t consider is the possibility of new, blockchain-specific money control mechanisms. Though the first generation of asset-less stablecoin projects certainly failed to account for the possibility of extreme decreases in market demand, the next generation has contingency plans already built in. The “burning” or destroying of crypto has been previously used for speculative reasons, but anti-volatility projects are increasingly turning to this feature as a way to reduce the money supply in the face of declining demand.
The ability to autonomously and transparently mint and burn coins whenever prices jump or fall removes the need for bond holders as well as for continuous market cap growth. In this framework, the most important challenge at hand is to convince consumers to pay a “burn tax” just as they might today pay sales tax at the register. Conceptually, this simple approach should be much easier for users to grasp.
Though stablecoin criticism is healthy and necessary as the industry works to fine-tune the technology, it’s reckless to assume there is no utility for an industry already worth billions, and we should be open to new technological approaches that make what was previously impossible possible.
Eiland Glover is CEO of stablecoin project Kowala.