Stable coin risks spur the digital currency of the central bank

The author is an economic professor at Rutgers University

One of the major misconceptions in the crypto world are stable coins. These digital assets are said to enable a safer crypto exposure, whereby coins are bound by value residues such as dollars or gold to limit price fluctuations and to facilitate transactions.

But they are anything but stable. My research has shown that the 2016 and 2019 vintages had a failure rate of 100 percent and 42 percent. The problem for general financial stability is that even the successful coins that have recorded explosive growth have defects.

The bidet government has recognized the risks and a working group that advises the US government this month has issued a number of recommendations that are urgently required in view of the rapid expansion of the sector.

There are five stable coins with a market capitalization of more than 5 billion USD - Tether, USD Coin, Binance USD, DAI and Terrausd. A total of around $ 140 billion is pending. In terms of asset, the market corresponds to a top 30-US bank.

StableCoins were used in the second quarter of 2021 for transactions of $ 1.77 trillion. During this sales, still less than 10 percent of the payment volume of $ 18.4 trillion in the same quarter about automated clearing, the most important system for electronic money transfers in the United States, StableCoin The transactions have increased by more than 1,100 percent per year.

A main problem is the transparency and quality of the collateral for stable coins. If doubts about the securities that support the coins trigger a withdrawal tower, this could damage the entire payment mechanism and the prices of assets such as Bitcoin and Ethereum with a combined market capitalization of more than $ 1.5 trillion.

Tether, the stablecoin leader with around $ 75 billion in coins, was accused in the past to make misleading claims about the assets supporting them. Last month, it was true to pay a penalty of $ 41 million in order to enclose an indictment of a regulatory authority, which had incorrectly presented that their digital tokens were completely covered by dollars. At the beginning of this year, Tether and a connected Bitfinex stock exchange also agreed to pay a penalty of $ 18.5 million after the Attorney General of New York accused them of covering up "massive" financial losses.

The support of the USD Coin, a stablecoin leader founded by a consortium, which includes the Cryptocurrency Exchange Coinbase and the technology company Circle, was also put to the test. In the past, the coin base website has claimed that every coin was covered by dollars that were kept in state-supported US deposit institutions. It now says that his coins are "covered by fully reserved assets".

DAI supports its stable coin with secure debt positions in Ethereum-Netzwerk-Assets, but according to the data from Coinmarketcap, it seems to have deviated from its bond during the quick changes in ether prices. DAI-which should be traded with a equivalent of $ 1 asset backup-fell under $ 0.97 on February 20, 2020 and rose to $ 1.11 on March 13, 2020.

The report of the bid administration recommends that stable coin emitters are covered by insuranceing the US Federal Deposit Insurance Corporation. While some coins such as Binance USD are partially secured by bank deposits that are secured by the FDIC, the applicable law may only protect the issuers, not the coin holder.

Apart from the collateral, the stable coins pose additional risks. Driven by high frequency trading, more than $ 100 billion is implemented on Tether on the stock exchanges every day. This is a level that is comparable to the trading volume of the NYSE.

Unfortunately, the infrastructure for stable coin trading is not as robust as some hope. The two largest stock exchanges, Binance and Coinbase had platform failures on May 19 when China banned the most crypto payments and Bitcoin prices fell by more than 30 percent. Investors have little regulatory protection against the consequences of such incidents.

There are also risks because the number of stablecoin blockchains diversified. Most stable coins come from the Ethereum network. But fee increases inspire the migration of tokens to other platforms. Median fees for the transfer of stocks in the network have increased by more than 3,500 percent for Tether in the year. This is due to the fact that the fees are set in Ethereum and the price in the year until June 30th has risen from USD 226.31 to $ 2,274.55.

The payment mechanism must be modernized and blockchain technology that underpins cryptocurrencies is made safer and cheaper. A central bank that has published digital currencies with large financial institutions as an intermediary can achieve these goals.