What To Expect In New Crypto Moves For 2019
Without a doubt, much of 2018 has been a roller coaster year for cryptocurrency with the last several months actually resembling the forceful, downward trajectory of the log flume rides found at most amusement parks. Yet during this turmoil, there’s been a rising fervor around stablecoins, the hybrid digital currency touted as crypto’s more sensible, clean-cut brother that offers all the promise of an envisioned new digital currency world backed by the reliability of the old school tradition. But what's behind such a trend, and could it truly have legs for 2019 and beyond?
Mom, What's A Stablecoin
So, the Argon Group, an investment bank with a focus on digital finance, wrote a reasonably clear definition of stablecoins not long ago in a post on Medium.
Lukas Schor from the company wrote, “In their most simplistic form, stablecoins are simply cryptocurrencies with stable prices measured in fiat currency." He goes on to explain that all fiat currencies, even our own, are subject to fluctuating exchange rates, inflation and more but that the changes are so small that they can be used on a day-to-day basis.
Thus, the new trend now from devotees to this arena is to mimic such stability in a digital form by backing it with fiat currency, gold, silver, oil, algorithms and/or a mix of any number of elements depending on the vision of the founder of which start up one speaks to today who believes he (mostly all males at the moment) has hit upon the eureka proposition.
The race for dominance in the sector is palpable as enthusiasts in the space flock to invitation-only gatherings such as the recent Future of Finance event produced by an organization called Becon which was held during Consensus: Invest 2018 conference. In association with Bloq and the Stablecoin Foundation, Becon offered a day chocked full of back-to-back presentation and panels, the latter of which often times resembled debates, solely dedicated to the technology, government and legal services and more as it pertains to stablecoins.
The place was packed and clearly indicative of issuers growing by leaps and bounds in a space which is projected by professionals in the the stablecoin arena to perhaps even double during 2019. Indeed, attorney and entrepreneur Steven Nerayoff explains, “With crypto’s attributes of immediate and final settlement, no third-party fees along with its network effects, the stablecoin industry can grow slowly at first then explode faster than many realize. Within five years I see global adoption."
Why Proponents Love The Concept
Ron Quaranta, Founder and Chairman of the Wall Street Blockchain Alliance adds, "Certainly payments and remittances, leveraging a less volatile cryptocurrency medium such as stablecoins, are areas of opportunity."
But if there is truly that much fortuity, others already deeply entrenched in finance wouldn’t be far behind. In other words, what would prevent banks and others from jumping in? They already possess systems that could simply be expanded. They also offer trust and brand value. Or a behemoth such as Amazon could deepen its digital offering. Why make a bet on an unknown?
“It’s an interesting question," remarks Quaranta. "Our perspective is that stablecoins will need to offer a significant economic advantage over what might be offered over, say, a major retailer, for example." He says that great interoperability and interchangeability with platforms will be key for future competitive advantage.
Indeed, Gregory Klumov, founder and CEO of STASIS is betting on such openings. He represents the fierce engineer in the game with a die-hard focus. Currently, STASIS is the only euro-pegged stablecoin on the market, EURS. In terms of competition he says, “As the market becomes more saturated with stablecoin projects, user acquisition costs will rise, making it difficult for new entrants to compete. Our growing network of exchanges and payment platforms also gives us a significant competitive advantage."
Klumov makes the claim that EURS is one of the very few stablecoin projects globally that is both fully compliant and audited by an external accounting firm, both of which are necessary for long-term success.
Compliance, Compliance, Compliance
Indeed, so much of the success of this trend is reliant upon looming standards, government policies, agendas from various associations in the space as well as founders who will all tip the balance of power in this new space one way or the other. And it's a web of complexities, to say the least.
Adds Quaranta, "As a non-profit trade association with a mission to guide and promote comprehensive adoption of blockchain technology and cryptoassets across global markets, we see our role as that which continues education and adoption of blockchain and cryptoassets for our members, including the possible uses of stablecoins."
And education about laws around such, no doubt. Indeed, Congressman Warren Davidson (R-OH) is focused on introducing legislation on the space that will directly impact the stablecoin arena, and it should hit the floor on Capitol Hill soon.
His spokesman Matthew Henderson told me, "Congressman Davidson believes there is a great need for legislative clarity in the U.S. ICO market. Regulatory uncertainty, and the threat of onerous regulation is driving innovation overseas and away from the U.S. Congressman Davidson is planning to introduce a bill in Congress to clarify and provide certainty for future innovation in the U.S., open a thriving new multi-trillion-dollar market for businesses to grow and phase in a series of light-touch regulations to pump new life into the very spirit of enterprise that America lives on.”
However many in the sector say that it will not be an easy task due, in large part to perspective and definition that varies wildly. “There are indications that dollar-pegged stablecoins are going to be classified as commodities and therefore regulated by the CFTC. But digital assets, including stablecoins, are a unique type of asset and need to be regulated as such; existing commodities regulation is insufficient in terms of protecting consumers while also supporting technological and business development," explains Klumov.
Adds Nerayoff, “There’s an intrinsic tension between crypto and regulatory frameworks. Crypto allows value to flow like water, regulations are intended to control that flow. Currently, some view stable coins to fall under money transfer laws, which prevents the use of their full potential."
But even with the ironing out of such legal complexities, many are just simply against the stablecoin concept in its current form because it is believed that they are not as stable as they claim to be.
Houston, We Have A Problem
Some are just not quite convinced of the hype. Others are flat out against the current manner in which stablecoins work due to a little thing called economics. Explains John Ryding, Economic Advisor to KoinEra and a former economist at Bear Stearns says, "There are three types of broad structures for stablecoins: fiat-collateralized, backed one-for-one with the underlying asset, say U.S. dollars; crypto-collateralized, backed with other cryptocurrencies; and non-collateralized. Each type of structure has its drawbacks."
He continues, "The fiat-collateralized structure requires a central custodian that holds the underlying currency and issues the token. In a sense, such a structure is like a digital bank deposit with the custodian issuing and buying back, however many tokens people wish to buy and redeem. The system lies in the complete trustworthiness of the custodian, who must subject themselves to audit. The question is how can such a structure make money?"
Ryding says that anks make money by lending out deposited money but we know that banks can be subject to runs. Just think back to the financial crisis. Ultimately bank deposits in the U.S. are guaranteed by the FDIC. Crypto-collateralized structures have to over-collateralize to absorb price swings and in many ways are similar to a tranched mortgage-backed security with a stablecoin tranche and an even more volatile residual component.
However, if a price drop in the crypocurrency that backs the stablecoin is too large, then the structure breaks down.
"Finally, the uncollateralized structure is essentially purely fiat private money that is expected to trade at a stable value and the issuers have to buy and sell the stablecoin as its price falls or rises," explains Ryding. "A successful uncollateralized stablecoin issuer would profit from buying low and selling high to maintain the value but, like pegged currencies, these would be vulnerable to speculative attack and devaluation. To me, the ultimate stablecoin would be one that is backed by the central bank of the underlying currency to which the coin is tied."
Indeed, Patrick M. Byrne, CEO and Founder, Overstock.com and Executive Chairman, tZERO concurs. "The whole point of crypto is to replace trusted institutions with trusted math." He continues, "Stablecoins reintroduce the need for a trusted institution, a firm which may or may not be running a 100% reserved stablecoin, and thus we are not excited about them."
Byrne adds that the ultimate stablecoin will occur when central banks around the world start issuing their national currencies directly as crypto-coins. "Our Barbados firm, Bitt, is building the technology to let central banks do just that," he explains. Bitt is a portfolio company of Medici Ventures, Overstock’s wholly-owned blockchain subsidiary.
Yet as 2019 begins to take shape, only time will tell who will be the real winners in the space. Right now it's anyone's game. But one thing is certain, talk around this trend won't subside any time soon.