The launch of stablecoins is viewed as a palliative measure to decrease the impact of the recent crisis with Bitcoin, some have even described it as ETFs replacement for a short time. However, Barry Eichengreen, a professor of Economics UC Berkeley has said that stablecoins are not the way to fix the problem.
Despite digital currencies being backed by another currency, the US dollar, or anything that has value (even gold), they are used for everyday transactions due to their worldwide usability, low volatility and that Stablecoins aren’t owned by a central bank.
However, Eichengreen placed Stablecoins into three separate groups, fully collateralised, partially collateralised and uncollateralised. He said that they aren’t the wisest of investments because of specific weaknesses which are unique to each group. He said that stablecoins which are ‘fully collateralised’ are expensive in that they need a reserve that is at least equal to or more than the coins in circulation in order to make sure the market stays stable.
This is Eichengreen’s thoughts on the matter, who also believes that this isn’t affordable for most organisations and makes it almost unacceptable for a proper regulation by the government.
The professor then went onto discuss partially collateralised stablecoins and said:
“Investors may not be confident enough to put their money where only 50% of the circulating coins are backed by a fiat reserve, a situation that can lead to the collapse of the peg, if the company wants to retain the value of the stablecoins by buying them back from investors with the limited reserve.”
According to Eichengreen, the worst class of stablecoins is those which are uncollateralised. This essentially means that these stablecoins haven’t got any collateral (US dollar) supporting them and the firm only has confidence in the law of demand and supply to keep the coins valuable.
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