Betting on gold-backed stablecoin is a losing game says STASIS CEO
By FF Newsroom · 19 February 2020
By Gregory Klumov, CEO of STASIS
Gold has been regarded as an eternal value since times immemorial. It’s still a measure of wealth that layers any world’s powerhouse foundations, leverage that caused wars and changed the global political landscape throughout the ages.
The last century, however, has brought more changes within the existing world monetary system than all the previous millenniums. Following the national fiat currency advents, over the past 20 years the digital world with electronic money has stepped in and we have come close to the days when E-money 2.0 is being established with the help of emerging blockchain technology. Nowadays we witness an asset fusion process taking place: digital currencies are backed not only by public interest and hype but also by the particular assets or commodities. But the question is, can the past merge with the future success to provide better financial solutions?
Choosing the underlying asset for stablecoin
Many stablecoin projects haven’t produced the value and strength anticipated a few years ago when more and more companies concluded that unbacked cryptocurrencies couldn’t lead the future of the digital market. Out of all the projects ever launched, the Stable Report data indicates that more than 150 stablecoins are either inactive or dead. Moreover, more than 40 stablecoin projects that were backed by gold have already closed up the shop.
According to Blockdata, it’s vital that fiat-backed stablecoins have some type of centralized entity controlling the security and that gold-backed assets have to be able to prove that the gold reserves exist and are stored somewhere safe. If a stablecoin is backed by gold reserves, it should be solid enough to survive the extreme market movements often experienced by other digital currencies.
However, gold itself is not a stable asset - it’s a public store and a way of accumulating value over the long run. Therefore, how can such an asset be the ultimate measure of value in the future?
The business model of stablecoins is built around the fact that the issuer receives interest income from money market rates which allows them to pay back the audit, board of directors, and engage in business development. Regardless of issuing a gold-backed stablecoin, it is necessary to pay extra for the storage of collateral, plus it is impossible to audit.
Moreover, gold is a metal that can be faked by using tungsten. The main reasons for tungsten fake gold bars are to protect the wire from corrosion or to solder it to other metals. Tungsten fake gold saves energy and poses no pollution threat to the environment, therefore it’s sustainable.
Maintenance of huge amounts of gold results in a negative carry - a condition where investments cost more than they return over the short-term. This is very expensive and therefore even while they maintain the price of gold, per unit, gold-backed tokens are doomed to decaying value.
The rotten foundations of gold-backed stablecoins
While companies jumped on the crypto bandwagon in droves following Bitcoin Core’s (BTC) meteoric price increase in 2017, the logical choice would have been for these projects to follow suit.
The reality of last year’s market states that gold is not the best option to choose for the currency of the future. As many gold-backed stablecoin projects have failed, there are specific reasons behind this outcome:
- Gold-backed stablecoin is derivative for an action that changes in price and, therefore, can be classified as a security.
- Millennials or the new generation do not and will not rely on old-world values such as gold. Which is nothing but a relic of the past for them.
- Current Bitcoin generations rely on crypto to pay for their everyday Latte or shopping rather than gold coins.
- Gold has a potentially unlimited supply, which is not a feature of the Bitcoin or other crypto assets with a fixed amount of coins that could be mined.
- We don't know the exact (or even close) numbers of gold assets held by governments, which are not likely audited - even Fort Knox was never ever audited!
Choosing the solid ground for a stablecoin project
Thus, we can conclude that by using gold as the underlying layer to stablecoin, its creators increase the chances of a project failure.
However, it’s unlikely that these statistics are reviewed by many of the industry’s finest; the Tether, a controversial but significant platform issuing stablecoin, has recently announced its plans regarding the launch of a digital asset providing exposure to physical gold (XAU). There have been reports that there are other crypto-based platforms that are also working on similar products - such as Coin Shares, that has been exploring the possibility of launching a gold-backed cryptocurrency. While Bitcoin has often been regarded as ‘digital gold,’ only the future will tell whether either ‘Tether Gold’ or another similar project becomes the most successful in this particular field.
Despite the fact that the possible benefits of fusing both physical and digital assets may look lucrative, this is not the timely innovation in crypto ecosystems, Tether is infamous for having a problem with the audit of fiat, which can easily be audited in the electronic form. Moreover, with an audit of gold that can be easily replaced with tungsten only more problems arise.
Gold represents everything that the new generation stands against. In these circumstances, the new-age global money transfer system can't be built upon gold since governments confiscated gold in the 1930s globally. They still control the majority of this precious metal and are able to influence the market for gold through their sales and lending.
We can’t say that gold can be 100% replaced by digital assets, as it still represents difficulties. Despite general misconceptions regarding it, it still offers the most lucrative investment opportunities - despite some fluctuations, gold constantly increases in price over time.
The world needs a next-generation E-currency designed to provide better options for trading, payments, and transfers. In the fastly-developing world, where digitalization and speed are vital, it is only a matter of time before such an asset can be created. When new stablecoin is being designed, not only the particular underlying assets matter but also a careful calculation of the steps before the launch to avoid legal and governmental pressure projects like Libra are experiencing. Ultimately, gold is not the asset stablecoin issuing companies should look up to, but there are possibilities to tie cryptocurrency to other assets - such as the Dollar or Euro.
In fact, Euro is a solution that is already digital-ready. Fiat-backed stablecoins might just be the efficient solution to shortcut payments flow in low competitive markets, like acquiring in tourist-heavy destinations, where merchants are being charged high single-digit percentage fee to process foreign credit cards.
Moreover, it can be used to fix the gap between the classical financial industry and steadily maturing digital assets. And along with hundreds of announced and failed projects, EURS developed by technology provided STASIS is one of a few game-changers that has been crafted by constantly checking regulations. Initially launched from Malta almost two years ago, it’s the biggest ex-USD stablecoin nowadays, where users experience the majority of the benefits like legality, transparency of the reserves and more.
And it’s not the only one solid player on the market these days. For example, Aximetria, a next-generation fintech company that offers a crypto-centric mobile finance app for exchange, remittances and passive investments offers a powerful link between fiat and crypto banking experiences. Aximetria is leading the “third wave” neo-banking, building no-excuses solutions that could turn the world into a more competitive marketplace. International transfers, liquidity, and quick settlement are no longer just for large institutions. Empowerment is the promise of cryptocurrency and blockchain in the first place, but to date few firms working in space have managed to remain true to the mission of “banking the unbanked.”
Bicoin may not be the digital currency, which can ultimately replace cash - the concern has recently grown as Elon Musk has recently joined the camp of crypto critics who do not believe in digital money taking over. We cannot be sure whether the day of its dominance over cash payments ever comes, but we can definitely say that gold-backed stablecoin will never have a future.