While cryptocurrencies have great potential to excel, the volatile nature and constant price fluctuations are some of the greatest criticisms directed towards the crypto market. After all, a useful currency should provide a store of value and unit of account, both of which require balance. As a result, there is a growing desire to bring stability to the cryptocurrency market, which is now being done through the implementation of “stable coins.”
Stable coins – also known as the “holy grail of cryptocurrency” – are price-stable cryptocurrencies, with a market price that is pegged to another stable asset, like the U.S. dollar. Stable coins share many of the features of Bitcoin, yet are far less volatile. In theory, this makes stable coins ideal and usable as a store of value and a basic medium of exchange.
“Stable coins are one of the keys to bringing the benefits of cryptocurrencies to everyday people, both in terms of price stability and decentralization of capital,” said Rafael Cosman, the founder and CEO of TrustToken, a startup that has just launched trading for TrueUSD, an independently verified fiat-backed stablecoin that is redeemable for U.S. dollars.
Yet controversy surrounding the legitimacy of stable coins has become an issue. One of the most well known stable coins on the market is Tether (USDT). The creators of Tether claim it is pegged to the U.S. dollar, meaning a person would pay $1 for one Tether coin. However, a number of concerns have arisen.
One of the main areas of concern is that the cryptocurrency exchange, Bitfinex, is issuing more USDT than it has U.S. dollars in the bank. This could be in an attempt to drive up the price of Bitcoin.
It’s also concerning that Bitfinex shares leadership with Tether, causing critics to further question the legitimacy of Tether. There has been a constant lack of transparency, as the company has not yet had an external audit performed on its cash reserve. At the end of January, the company ended its realationship with its auditor before an expected audit was to be released. Interestingly enough, however, Tether issued $300 million worth of new tokens just last week.
Learning From Tether’s Mistakes
While Tether remains questionable, other companies are looking to bring new stable coins to the market – and they seem to be learning from Tether’s mistakes.
For example, unlike Tether, every person who holds TrueUSD tokens is a beneficiary owner of the escrow account in which the funds are held. In order to comply with Anti-Money-Laundering regulation and keep TrueUSD safe for its users, users complete a Know Your Customer/Anti-Money Laundering (KYC/AML) process before purchasing or redeeming tokens for the US Dollars in the escrow account. This ensures that TrueUSD is legally compliant.
Once ownership in the TrueUSD account is recognized through smart contracts, TrueUSD tokens are issued, which acts as a redeemable certificate of ownership for $1 USD in the escrow account. TrueUSD is also publishing regular attestation reports from Cohen & Co. to show the TrueUSD in circulation is fully collateralized by U.S. dollars.
Every TrueUSD is always fully collateralized by US Dollars and held in a professional trust company’s escrow account, Cosman told me. Our smart contracts, which undergo public attestations, mint TrueUSD when U.S. dollars clear the escrow accounts. We then burn TrueUSD when U.S. dollars are redeemed to ensure a 1:1 parity between the TrueUSD in circulation and U.S. dollars in the escrow accounts.
Moreover, Cosman claims the TrueUSD token can withstand market volatility. Earlier this month, TrueUSD launched on Bittrex, one of the largest cryptocurrency exchanges in the United States. According to a chart from CoinMarketCap, the price/value of TrueUSD has remained stable at around $1 USD since it launched on Bittrex.
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 where they rest, knowing that the price will be the same the next day, Cosman said. With TrueUSD, we set out to build a simple stablecoin, without the need to trust a company’s obscure bank account or special algorithm.
Another stable coin making headlines is “Saga.” The Swiss non-profit Saga Foundation announced last week that it is developing a new non-anonymous stablecoin that will be backed by a “variable fractional reserve” pegged to the International Monetary Fund’s special drawing rights. Also known as SDR, this is an international reserve asset created in 1969 to supplement member countries’ official reserves for the purpose of expanding global trade.
In terms of regulating the market, the platform will also use smart contracts. These contracts will generate Saga tokens (SGA) as needed to meet demand. In turn, SGA tokens will be destroyed when the price falls. And unlike other cryptocurrencies, users would sell their tokens back to the network, rather than to each other.
In order to limit the impact of market fluctuations, SGA tokens will be kept in reserve for times when liquidity is difficult to come by, acting as a buffer. However, according to the company’s white paper, most tokens are expected to be converted to fiat currencies.
Like the TrueUSD token, The Saga Foundation will also require holders to complete Know Your Customer and Anti-Money Laundering requirements under Swiss law.
Having a stable cryptocurrency that can be used as a practical payment system in the real world would be ideal for crypto enthusiasts and traders. Yet why would anyone want to spend U.S. dollars to buy a cryptocurrency whose value is pegged to the U.S. dollar?
“Unlike cryptocurrencies such as Bitcoin, which are highly volatile, stable coins provide people with the pragmatic, helpful benefits of a cryptocurrency, without having to worry about distressing price changes since they are grounded in the real world,” Brigitte Luginbühl, CEO of SwissRealCoin, told me.
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