The world of cryptocurrencies has been faced with increasing criticism because of the volatility encountered by multiple cryptocurrencies as of late. In 2018 so far, Bitcoin has shed its price by more than 50 percent at times from its year end price of $13,000 in 2017. This is ironic, given that part of what cemented cryptocurrencies on the map has been this volatility itself – Bitcoin, for instance, made its mark as a 'get rich quick' scheme with its value increasing exponentially last year.
As the value fluctuation takes an increasingly downward route, this very volatility is taking cryptocurrencies further away from their ultimate goal of replacing fiat currencies, and has also called into question their usefulness as investment assets. Financial Institutions, including Goldman Sachs, have also begun re-thinking the feasibility of introducing trading desks involving cryptocurrencies. After all, a useful currency should provide a store of value and a unit of account, both of which require balance. When traders rely on Bitcoin as their primary cryptocurrency holding, they never know if it will rise or fall overnight. They need to hold their funds somewhere while they rest, knowing that the price will be the same the next day. As a result, a growing desire to bring stability to the cryptocurrency market echoed across all stakeholders – a demand which paved the way for the advent of 'stablecoins'.
Stablecoins soon became known as the "holy grail of cryptocurrency." Aiming to be a usable store of value as well as a medium of exchange, these price-stable cryptocurrencies pegged their value to another stable asset, such as fiat currencies. These stablecoins retained the benefits of cryptocurrencies including decentralisation and accountability, whilst introducing price stability and liquidity to the equation.
Yet, the legitimacy of stablecoins soon began to be called into question. Well-known, dollar-backed cryptocurrencies have been criticised for their increasing lack of transparency and for creating false value by issuing more coins than the US dollars needed to back them. Simultaneously, these cryptocurrencies have received similar criticism for not undergoing external audits on their cash reserves while continuing to issue new coins, calling into question the actual level of 'stability' these coins have to offer.
Simultaneously, doubt has been cast over the stability of fiat currency itself as of late. The pound is expected to fall to a 31 year low if Brexit occurs without a deal in place. The ongoing collapse of emerging market currencies is also constantly making headlines, with the effects of the economic meltdown in Turkey and Venezuela far from contained. Dramatic currency volatility is a cause for concern around the world and has left people at the mercy of central banking policies and political instability.
Although the concept behind stable coins may be taking cryptocurrencies in the right direction, pegging it to fiat currencies may not be the best way to proceed. The answer may lie in taking a few steps back to the age old stability of precious metals, particularly gold and silver. These precious metals are imperishable, portable and have always played an important role in the international monetary system.
Gold has been valued by all civilisations around the world for thousands of years, maintaining its status over time as the most effective store of value the world has ever seen. Although cryptocurrencies have also positioned themselves as store of value, they are unable to provide the stability gold has to offer. Simultaneously, cryptocurrency transactions can be slow – often making people choose to hold it more than spend it as it simply cannot be used for day to day transactions. A system that is able to bring together the pros of both gold and cryptocurrencies, while minimising the negative consequences, can revolutionise money as we know it.
Introducing a stable coin with a 1:1 allocation to gold and silver can offer the stability and liquidity required in the cryptocurrency space. Each stable coin minted would represent a physical bar of gold/silver secured safely in vaults around the world, subject to stringent third-party audit and quality assurance processes. Not only will this assure investors of the stability of value of their investments, it also allows them to be able to demand the exact value in precious metals when physically needed. This will usher in a new era in the cryptocurrency market, not only putting cryptocurrencies back in the game as a secure investment option, but also ensuring they're well on their way to achieving their ultimate goal – the development of a decentralised and internationally usable replacement to the current fiat-based monetary system.
Thomas Coughlin is the CEO of Kinesis