Stablecoin: Is It Such a Good Idea?


Another “stablecoin” has launched recently, with American multinational company IBM providing significant amounts of support. The idea behind a stablecoin is to produce a cryptocurrency that has a stable value. In this case the new cryptocurrency, USD Anchor, will have its units backed by US dollars. Those dollars will then be held in FDIC-insured accounts, so that users of the cryptocurrency have faith that the government will bail them out in the event that the financial institution holding those dollars goes under.

The first problem with that scheme is, of course, that one has to have faith that the US government will not destroy the value of the US dollar. With the Federal Reserve’s monetary policy over the past few decades, however, that isn’t assured. And as many countries that have pegged their currencies to the dollar over the years have discovered, pegging a currency to the dollar doesn’t guarantee stability. That’s strike one against stablecoins such as USD Anchor.

In fact, the reason Bitcoin was created was to overcome the problem of a central bank creating unlimited new units of its currency. Bitcoin was created as a result of the Federal Reserve’s monetary policy during the financial crisis when it looked like central banks around the world were prepared to inflate their currencies into oblivion.

USD Anchor users also have to trust that their tokens are actually being backed by dollars and that those dollars are being safely stored. That trust problem is strike two against stablecoins. Here again Bitcoin is superior. When you own Bitcoin, you know that you own it. You have a wallet with Bitcoin in it and your holdings are published on the blockchain so that everyone else in the Bitcoin network knows it too.

Finally, those dollars are stored in an FDIC-insured bank. You have to trust that in the event of a bank failure the US government would pay back those dollars. Given that the Deposit Insurance Fund is woefully tiny compared to the total size of the accounts it is supposed to insure, in the event of a systemic crisis that money will likely be lost or bring at most pennies on the dollar. Strike three against stablecoins. Once again, Bitcoin is superior because it isn’t dependent on the legacy banking system.

Savvy investors know that Bitcoin is a transformational technology that has the potential to revolutionize the financial world. Through investments such as Bitcoin IRAs, they are able to invest in Bitcoin and reap its benefits, which have yet to be surpassed by more conventionally-minded cryptocurrencies such as stablecoins.

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