Why Tether and Other Stablecoins Don’t Work in Case of a Debt Crisis


Trading in the global market is always risky. Even owning assets is a risky endeavour. Let’s take the current market climate as an example. The rate of growth on all markets slowed down significantly; the US stock market dropped 10% from September’s all-time highs, and the main drivers of this growth, tech stocks such as Apple, dropped even worse – 27%.

market meltdown
Source: https://www.bloomberg.com/markets/fixed-income

At the same time, the Fed’s interest rates began climbing up. This means that the era of cheap money comes to an end. Borrowing money, such as loans and mortgages, will become more expensive, requiring paying a higher interest, spending more money on debt repayment. This money could have been spent on buying goods and services, thereby boosting the local economy. That’s why the global economy will be slowing down more and more, after the new interest rate hikes.

Germany, the leading economy within the European Union, is experiencing some problems as well: its industry output is losing growth momentum and there are no signs that this will change in the near future.

If you are skeptical enough, all these can be seen as signs of an upcoming crisis. In times of crises, investors usually tend to move their belongings to assets that would stay relatively stable despite any disturbances in the market. Such assets are precious metals. Recently, with the development of the crypto market, investors were given yet another option – stablecoins. These are assets backed by real cash and real commodities, such as gold and silver.

Cryptocurrencies penetrate global financial markets because it’s easier to buy and sell them today than it was three years ago. They have become more liquid, so there’s almost no difference between crypto assets and all other assets. Stablecoins are becoming a part of the global financial world. However, not all of them are trustworthy, and we’ll see why in this article.

What are the issues behind current fiat-based stablecoins?

Stablecoins may look like a derivative of fiat currencies and precious metals in the crypto space, but that’s because they are exactly that. The problem is that being a derivative adds another layer of risk to the system.

The fiat currencies of the world’s leading countries (USA, Britain, Eurozone) are a lot more stable than stocks or commodities in the case of a serious economic downfall. One dollar is the standard unit of measuring wealth across the world. The US dollar is a safe haven for investors; they can sleep well in times of crisis because their investment portfolio would keep the same value, while everything else would lose the value. The only exception could be the devaluation of the US dollar itself – which can happen in case of a debt crisis. In this event, we’d see the rise of value for precious metals, because it’s the only asset with long history that has kept its value through centuries (although its price has also fluctuated at times).

In this situation, fiat-backed stablecoins may be regarded as both a stable and dangerous asset. Traders should remember that by placing their trust in stablecoins they have to deal with their issuer, and the stability of these assets depends only on the stability of the company, backing them. Because of this, by owning stablecoins investors take on additional risks:

  1. the risk of the main asset, the economic situation in the world
  2. the risk of the stablecoin backed with this asset, its stability, and the trustworthiness of the company issuing it

If these precautions are ignored, some unlucky investors could find themselves in a situation when issuers can’t maintain liquidity because the tokens have nothing backing them.

Source: https://xkcd.com/

How it this be fixed?

No one can ever completely avoid risk when dealing with the financial market. Not any trader, nor any investor. According to the Black Swan theory developed by Nassim Taleb in his book with the same name which was marked as one of the twelve most influential books since World War II, there are types of events of great magnitude that nobody is able to predict until they occur – like the existence of the black-colored swan, World War I, 9/11, or the US housing crisis of 2008.

These events greatly impact the market, and even if one stays in cash, no one can be 100% certain that by tomorrow that pile of cash won’t be worth 10 times less than it was today. Yes, that can happen, just like it happened in Russia in 1998 or in Venezuela in 2010 (this one is still going on).

Source: https://en.wikipedia.org/wiki/Crisis_in_Venezuela

This can happen with the US dollar as well, since the US debt is now worth 105% of its GDP, although it’s very unlikely at the moment. Suffice to say, dollar-based stablecoins won’t keep their value if something were to happen to the dollar itself. So, to trust in a stablecoin you must trust in the underlying asset and the company behind its issuance.

Let’s define a set of qualities for a relatively safe, defensive stablecoin:

  1. It must be backed with a real, physical asset – Precious metals are a good candidate that fits this bill. Gold, silver, platinum, they have all been around for thousands of years – a gold coin, minted in Egypt 3,000 years ago, still retains value aside from being a historical object. There’s the strong possibility that our descendants 500 years later will value gold as much as we do. Thus keeping funds in gold-related assets is a safe idea.
  2. The company behind the stablecoin is very transparent in regards to its operations – The funds must be audited by a third-party and the audit report must be available to everyone. Let’s not forget Tether and the shady practices they tried to get away with. The general public still hasn’t received any audit report, which means that their tokens may not actually be backed by anything real.
  3. It must be converted freely to its backing asset – Which means that the backing company should have the infrastructure to redeem the tokens in any situation.

The stablecoin that incorporates all three of these qualities has a chance to be considered a safe asset that could withstand the storms of the markets.

Real examples

Most stablecoins are backed with fiat currency and we are currently seeing an emergence of the stablecoins market, as a lot of them get listed on the exchanges. The only difference between them is, mostly, the issuer company. The value of the token is the same in every case because it’s pegged 1:1 to the US dollar.

Source: https://coinmarketcap.com/currencies/trueusd/
  • GUSD is a stablecoin by the Gemini exchange. Auditing reports about their funds are published from time to time.
  • USDC, a stablecoin by the crypto startup Circle, is backed by Goldman Sachs. Their funds are also audited periodically.
  • TrueUSD, from TrustToken and accounted by Cohen & Co. Anybody can tokenize his/her dollars by sending them to TrustToken and receiving TUSD in their Ethereum wallet. The dollars can be redeemed in a similar process – sending tokens and receiving dollars. The company currently plans to issue a euro-backed stablecoin.
  • HUSD is issued by the Huobi exchange.

precious metals

These tokens are the best solution for keeping the dollar value of any investment portfolio, but as we have seen, it could be dangerous in case of a debt crisis. So now we’ll turn our attention to stablecoins backed by precious metals.

  • Digix, a gold stablecoin project, is the first major Distributed Autonomous Organization on Ethereum. It was founded in 2014, and two years later they organized the crowdsale and the tokens were issued in 2018 after building the proper infrastructure. The vendor of the tokens, ValueMax Singapore, is a publicly listed company that sells London Bullion Market Associate certified gold bullion bars. The bars are stored in the Custodian Vault, the Safe House, in Singapore. They get audited every quarter by an independent auditor, the Bureau Veritas Inspectorate. Every token represents 1 gram of gold. Every DGX owner can exchange 100 tokens to 1 bar of gold by receiving it in person or requesting it to be sent to another country. It requires paying fees for storing gold – an annual 0.60% fee and 0.13% for transactions. Anyway, it’s backed by real gold and it could be a great asset for investors who don’t feel comfortable with the dollar.
  • Kinesis money are digital currencies based on two precious metals – gold and silver, KAU (Aurum – gold) and KAG (Argentum – silver). They are backed by the Allocated Bullion Exchange and have already partnered with many exchanges such as the Jakarta Futures Exchange and MBAex. Each coin is pegged to a gold or silver bullion at a 1:1 ratio, so the only volatility they are exposed to is the volatility of the precious metals, and in case of great uncertainty they tend to grow.

The benefits of Kinesis are the network fees that are divided between all token holders. Five to fifteen percent of all fees go to those who hold and spend KAU and KAG. That’s a type of bonus or dividend that makes owning the gold- and silver based currencies an even more attractive option for investors in every market condition. Also, they plan to issue crypto cards that would work at any point-of-sale device where VISA and MasterCard are accepted. So, in addition to hedging risks, investors can also spend a part of their holding at anytime. This adds a new degree of liquidity to precious metals.

  • Tiberius Coin (TCX). This coin acts as a basket of both precious and general purpose metals. Each token represents:
    • 25g copper
    • 5g tin
    • 25g aluminum
    • 6g nickel
    • 1g cobalt
    • 3mg gold
    • 1.5mg platinum

Even if silver isn’t included, keeping a collection of these different metals might be a good idea, because all technologies of the future – electric cars, smart devices – are made of these metals. (Every computer chip even contains a small amount of gold!) However, in case of a severe economic crisis, gold is the safest asset.


“The first goal of money management is to ensure survival. You need to avoid risks that can put you out of business. The second goal is to earn a steady rate of return, and the third goal is to earn high returns – but survival comes first.” – Dr.Alexander Elder, Trading for a Living

debt crisis
Source: https://dilbert.com/

During the hard times, investors tend to lose their appetite for risk, choosing those assets that help them not lose money. One of the most important rules of being a successful investor is to prioritize saving money over making profits. So, a defensive asset, backed by a real-world commodity, might just be the thing that the current market needs. Fiat is also good, but not with these levels of debt around the world. Who knows what event could trigger the domino effect of crashing markets around the world. It’s time to be cautious.

Thanks to the Howtotoken Agency experts for the information and comments provided for this topic.

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