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Category: Soap Box

Soapbox: Searching for stability

One of the most peculiar developments in the cryptocurrency universe – or should that be metaverse? – is the creation of so-called...

17 May 2022

Gary Mead

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One of the most peculiar developments in the cryptocurrency universe – or should that be metaverse? – is the creation of so-called Stablecoins. Peculiar, because many of these digital tokens are directly pegged to a fiat currency, usually the US Dollar. The question arises – why hold digital tokens instead of the real underlying asset? Stablecoins are typically used by crypto traders who want to keep their money invested on a crypto exchange and deal in different crypto investments without paying high fees. They are also used for cash transactions between crypto businesses.

According to the DeFi Rate website, a site that compares different decentralized digital tokens, “stablecoins present a new paradigm to navigate the endless opportunities blockchain protocols provide without having to worry about ever-changing prices. For the average user, stablecoins provide much-needed comfort in terms of a reliable medium of exchange”.

That “much-needed comfort” was in short supply last week. In what several commentators have called “the craziest week in crypto ever” a leading Stablecoin, UST, an algorithmic digital token without reserves but which was designed to stay pegged to $1, fell to 13 cents. The UST Stablecoin is the creation of Terra, a blockchain protocol that “supports price-stable global payment networks by using stablecoins backed by fiat currency”.

Its value is linked to a South Korean-based cryptocurrency called Luna, formerly a top 10 coin by market capitalisation. From its peak of around $120 last month, Luna collapsed to zero; in a ripple effect, more than $200 billion was wiped from the cryptocurrency market in 24 hours. Shares in Coinbase, the largest cryptocurrency exchange in the US, dropped to just above $40, 90% down from its debut price of April 2021. The collapse was brought about by a technical change – the interest rate on Terra’s savings account, an astonishing 20%, has been steadily dropping since March and was expected to fall further. Investors in the Terra network took note and headed for the exit – which rapidly became jammed and exchanges started pausing withdrawals, which ratcheted up the panic.

Amid high inflation, inverted bond yield curves (higher rates for the two-year US Treasury bond than for the ten-year, showing that investors are reluctant to commit their money to a long-term outlook) and growing noises about the inevitability of a recession, the search for stability in a very uncertain market is growing. A yield curve inversion is widely seen as signalling that a recession is ahead; a yield curve inversion has preceded every single US recession since 1955, according to the Federal Reserve Bank of San Francisco.

Down but not out

There have been industry-shaking moments in cryptocurrency before, the spectacular Mt Gox hack being perhaps the most memorable. At its peak in 2013, the Mt Gox cryptocurrency exchange, based in Tokyo, handled 70% of all global Bitcoin transactions. Hackers accessed and stole 740,000 Bitcoins from Mt Gox customers and another 100,000 from the company and it was bankrupt by the end of February 2014, leaving many people nursing huge losses. Cryptocurrency fans were not deterred by the Mt Cox debacle; neither will they be by the implosion of Terra’s UST. Some suggest the fidelity of cryptocurrency’s supporters is irrational and more akin to religious faith than rational asset allocation – Mark Mobius, the emerging market fund manager, has said that “crypto is a religion, not an investment”. There is a ‘Church of Bitcoin’ , which says it has “a simple and clear mission. We want to free the world from the oppression that is currently enabled by government and central bank control over exchange. We believe that any two consenting parties should be able to freely exchange or trade without any governing body or third party interfering with their transaction. We believe that bitcoin will enable us to achieve that reality” and its “prophet” is Bitcoin’s supposed creator, Satoshi Nakamoto.

The biggest Stablecoin, Tether, pegged to the US Dollar, also briefly broke that 1-to-1 Dollar peg, dropping to 95.11 cents on Thursday last week before recovering. Tether claims to have $80 billion of assets backing its 80 billion coins in circulation, although it refuses to detail how these apparently massive reserves are managed.


Like Christianity in ancient Rome, or drinkers in 1920s Prohibition America, cryptocurrency will survive and change not because of its quasi-religious adherents but thanks to its central mission – to by-pass a system (banking) that has lost respect. Commercial banks and central banks have yet to regain the trust they sacrificed in the wake of the 2008 Great Financial Crash. Nakamoto hit the nail on the head when he wrote that what “is needed is an electronic payment system based on cryptographic proof instead of trust”.

But that may not be true for Stablecoins

In the US, there is nothing new about privately produced money; the so-called Free Banking era existed between 1837 and 1864. “That system was curtailed by the National Bank Act of 1863, which created a uniform national currency backed by US Treasury bonds. Subsequent legislation taxed the state-chartered banks’ paper currencies out of existence in favor of a single sovereign currency”. The financial instability of the Free Banking era, with its numerous bank failure, meant the Union felt it necessary to take charge of money, its issuance and circulation. Could a similar fate be in store for Stablecoins?

The US Federal Reserve, the Bank of England, the European Central Bank and the Bank for International Settlements (BiS) have all warned about the current unregulated status of Stablecoins. The BiS wrote in 2019 that Stablecoins that “reach global scale could pose challenges and risks to monteray policy, financial stability, the international monetary system and fair competition”. The Financial Times, which generally has a hostile view of cryptocurrencies, says that “Stablecoins can prompt banklike runs yet enjoy the scant regulation of the cryptosphere” and that the risk of continued regulatory “inaction is that financial stability is threatened by stablecoins’ next, bigger wobble”. Janet Yellen, US Treasury Secretary, commented on the Terra US flop: “I think that simply illustrates that this is a rapidly growing product and that there are risks to financial stability and we need a framework that’s appropriate”. In its Financial Stability Report published last week, the US Federal Reserve repeated its view that Stablecoins are vulnerable to runs. With this kind of multi-directional onslaught it is increasingly likely that Stablecoins will become subject to US regulation this year. Central banks everywhere regard Stablecoins as a threat to their plans for Central Bank Digital Currencies (CBDCs), to their power over the circulation of money. As we have long argued, those banks are unlikely to cede that power to private money such as Stablecoins – especially if they prove not to be ‘stable’ after all. They can use the ‘consumer protection’ argument to regulate and stifle them.

Meanwhile, the search for stability is becoming more intense, as inflation erodes the purchasing power of fiat currencies, cryptocurrencies appear more and more a speculative asset (when speculation is no longer in vogue), and leading stock markets either approach or already are in a bear market (falling 20% below their previous peak).

In this overall gloomy economic context gold, which in US Dollar terms has dropped from $1,829.34/ounce at the end of 2021 to $1,811.68/ounce – i.e. less than 1% – is a haven of stability. In Pound Sterling terms, gold has more than held its own, up by more than 9% since the end of 2021 (£1,351.76/ounce) and today (£1,477.45/ounce).

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isnt 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

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