After Gemini Dollar [GUSD], an economist from UC Bekeley tells why stable coins may not be the cure

On 11th September, Barry Eichengreen, a professor of Economics at the University of California, Berkeley published his views on the relationship between stable coins and Bitcoin’s stability. He believes that cryptocurrencies similar to Tether, despite being backed by the dollar, have big flaws.

The professor challenged the fundamentals on which a stable coin is built and trusted upon. In the op-ed, he described three categories of stable coins and the consequences tied up with each of them.

The first type mentioned by him was the coin that is fully collateralized. Here, the value of one coin is pegged with one dollar where the reserves held by the operator are either equal to or more than the value of the coin in existence.

The second type is a partially-collateralized stable coin wherein the value of one dollar is supposedly placed at 50% of the value of the coin in circulation.

The last type of stable coin mentioned by Eichengreen was the one that is uncollateralized. Here, along with crypto-coins, the platform also issues crypto-bonds that are an attraction for the investors, causing a price hike.

With each of them, there were some unappealing flaws presented by Eichengreen. He stated that when a coin is pegged one-to-one to the dollar, such as Tether, the expense of doing so is high. For instance, the issuance of one dollar worth of USDT will demand an investment of one dollar from the market. This is unlikely as one may not want to give up on liquid money, legitimately backed by the US government to buy a cryptocurrency with a disputed history and questionable use case.

In the historical records of Tether, the cryptocurrency has been criticized several times for its dubious claims of holding a dollar reserve. Subsequently, the Tether ecosystem has also been alleged of Bitcoin price manipulation multiple times. However, the community was able to refute these accusations by releasing a three-page transparency update earlier this year.

Furthermore, according to Eichengreen, this kind of money might appeal to transgressors but not the regular users. Therefore, the possibility of the cryptocurrency being used at a scale or by the government is minuscule.

In the case of partially collateralized stable coins, the problem occurs due to the low amount of reserve held with the platform in comparison with the liability. When the investor decides to sell the holdings, the operator supports the price of the cryptocurrency by purchasing it from its dollar reserve. This impacts the holdings of other investors as the dollar reserve is diminishing, increasing the investment risk. Eichengreen defined this situation to be the equivalent of a bank run.

Lastly, he stated that the issue with uncollateralized stable coins is that the crypto-bonds promise a payment with interest to the bondholders. This leads to the situation where the operator has to pay the bondholders from the future earnings scraped from the issuance of that coin.

Earlier this week, post the rejection of the Winklevoss Bitcoin ETF, the brothers launched their own stable coin known as the Gemini Dollar [GUSD]. The idea behind the crypto-coin is to ‘send and receive U.S. dollars like e-mail’.

A Twitter user interested in the cryptocurrency space, Cezary Graf, on the launch of Gemini commented:

“Relying on the dollar wouldn’t be the real goal of crypto/bitcoin though. But this is certainly helpful for the market and investors, and much better than Tether.”

Matt Borchert, a blockchain enthusiast replied to the above comment and wrote:

“Yeah basing something on the dollar isn’t here or there, but does serve as an interesting way to improve the tech by gaining mainstream adoption as simply a unit of transfer. I don’t think the tech as it’s used right now will be “the future” so to speak. A road to it!”

In the favor of the launch of the Gemini Dollar token, some believe that GUSD is likely to pull in institutional support, replacing the need for an ETF. Since Tether and TrueUSD are unlicensed, GUSD will act as a trusted resource, given that it is to be audited in the US and licensed by the NYDFS [New York Department of Financial Services].

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