Another Day, Another Dollar: Why Gemini Can't Solve The Stablecoin Problem
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Volatility is probably the second-biggest barrier to cryptocurrency adoption. Appreciation is an even bigger obstacle; no one’s going to spend a cryptocurrency if they think it’s going to be worth more tomorrow, and consequently the only places where crypto is regularly used are those where fiat is even more volatile.
Now, there’s a new token offering the stability of a dollar, which you can move and hodl as easily as a cryptocurrency. No, not that dollar token. Or that one or that one. Today’s stable offering is from Paxos, a trust company which was recently approved by New York State’s Department of Financial Services, CryptoSlate reports.
It’s the first new stablecoin since, well, yesterday, when the Winklevoss brothers announced a dollar token for the Gemini Exchange. Unlike previous dollar tokens, the Gemini Dollar (GUSD) has oversight from the NYDFS, as well as pass-through insurance form the FDIC—making it the first cryptocurrency whose value is backed by the US government, albeit very indirectly.
Never Say Tether Again
It should not need saying that the new coins are like a liferaft for a market desperately treading water. Crypto-markets have spent the past fifteen months imagining up conspiracies involving Tether and Bitfinex, none of which have been conclusively disproven.
Instead, a long-awaited awaited audit was repeatedly cancelled, and the company released a one-time “report” to verify the balance of its bank accounts. “The bottom line is an audit cannot be obtained,” Tether’s lawyer told Bloomberg. “The big four firms are anathema to that level of risk.”
The GUSD launch should leave Tether a bit red in the face. Gemini did not secure a “big four” auditing firm, but they have promised monthly reports on its dollar reserves from independent accountants. The first such report has already been released.
A Stablecoin-Shaped Hole
Before we get into the problems with stablecoins, let’s get one thing clear: if your currency relies on a third party to maintain its value, you’re probably better off trusting government-regulated Gemini over Panama Papers-hiding Bitfinex.
However, there’s still a big, dollar-shaped hole in the crypto-economy, and most stablecoins fill it very poorly. As long as stablecoin systems rely on banks and central actors, they will continue to be a weak point.
A big part of Bitcoin’s appeal is its decentralization—you don’t need the permission of any bank, or government, or other regulatory body, to use or own bitcoins. That’s not the case for centralized stablecoins, whose dollar reserves are bound by all the regular banking and money transmission rules.
It’s not hard to imagine circumstances where this would cause damage. Suppose, for example, that Brad Sherman found his way into the presidency and began abolishing crypto trading. If Paxos or Gemini lost their regulatory status, or rules changed, the financial guarantees behind those tokens would quickly dissolve.
There have been some efforts at creating stable coins through decentralized smart contracts. Currencies like Nubits and Maker rely on complicated math and game-theoretic approaches to keep tokens at level values, but these mathematical pegs haven’t fared much better than their real-world equivalents.
At some point, the crypto community might be able to pool their brainpower and devise a token that’s both stable and decentralized, which can reliably hold value while also qualifying as a true cryptocurrency.
That hasn’t happened yet, but until then, a polycentric solution—many stablecoins represented by individual companies—might be the next best thing.
The author is invested in Bitcoin.
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