Stablecoins will have to reflect and evolve to live up to their name

In the case of stablecoins, unfortunately, the name is so far a misnomer. The fact that stablecoins are pegged to a "real" asset does not equate to stability. Traditional underlying assets are not exempt from market fluctuations, and with most fiat-pegged stablecoins, they can be just as unstable.

However, the name could be aspirational, something that stablecoins could still live up to if they can be tied to a solid foundation.

Where did all the stability go?

At the risk of confusing the metaphors, stability is the currency of the day. Markets are volatile, debt levels are high, and inflation is soaring following the COVID-19 pandemic and ongoing supply chain issues. Cryptocurrency markets have benefited as investors have sought alternative stores of wealth. But prices keep going up and down unpredictably.

Seeking a solution to volatility, the crypto community has gravitated towards stablecoins for the perceived stability provided by their fixed relative valuation. A recent report from the Hong Kong Monetary Authority (HKMA) verified this trend, showing a explosive expansion of the stablecoin market since 2020 in terms of market capitalization. Payment companies are also jumping on the bandwagon, with PayPal recently announcing plans to launch your own paypal coinwhich will be backed by the US dollar.

Related: Investor Fear Not: Finding Stability Amid Crypto Market Volatility

And therein lies the problem. Stablecoins are often backed by increasingly unstable fiat currencies. Governments have printed $17 trillion of new money into the global economy amid widespread quantitative easing, simultaneously raising global debt levels and devaluing the purchasing power of currencies that back stablecoins.

As such, the growing trend towards stablecoins, while in many ways a step in the right direction, needs to be reconsidered if they are to deliver on the promise of their name.

A solution worth its weight in gold

With governments printing more and more fiat, we cannot afford to walk away from the potential of truly stable asset-backed stablecoins. For stablecoins to live up to the promise of "stability," there needs to be a broader, more widespread move away from being backed by inflation-prone fiat currencies toward more reliable physical assets.

Gold is the most logical choice. Throughout all the turbulence that 2021 brought, the price of gold was stable between $1,700 and $1,950 an ounce, proving both its stability and its value.

But pegging a currency to a hypothetical gold reserve is not enough. The underlying asset must be fully allocated and redeemable: one gram of gold per token. That prevents the currency from distancing itself from the reality of the asset it represents and prevents the currency from contributing to debt growth.

Related: Why betting on gold-backed stablecoins is a losing game

If the owner of a stablecoin can directly redeem the asset, it can provide an effective store of value and medium of exchange, beyond even the capabilities of modern monetary systems.

New calls for regulatory oversight

Such currency would only be possible in a fully audited system, which is where the importance of regulation comes in. Ironically, a massive migration to stablecoins based on a somewhat unfounded assumption of stability could be the straw that topples Jenga's economic tower.

Recent controversy surrounding Tether (USDT), the most widely used stablecoin backed by the US dollar, the company allegedly ruled out that it did not have the dollars to back its coin and remains unverifiable due to being essentially unregulated and unaudited.

Related: Stablecoins Under Scrutiny: USDT Stands Firm on 'Commercial Paper'

The revelation contributes to a growing number of questions about how “stable” stablecoins really are and what is being done to protect investors.

Regulators around the world must continue to provide more oversight and double down on their focus on increasing transparency. In fact, a year ago the Governor of the Bank of England, Andrew Bailey, made his own declaration in Davos warning that cryptocurrencies lacked “design governance and arrangements for a durable digital currency” and that “people need the assurance that their payments are made in something with stable value.”

A way out of the inflation crisis

Despite their shortcomings, the potential of stablecoins to help us out of a post-COVID-19 inflation crisis should not be underestimated. They have the ability to preserve wealth and provide a stable store of value while offering traditional investors more certainty than other digital assets.

As such, resolving the stablecoin's misnomer could be essential to our economic survival.

To truly reap their benefits, they must be tied to a solid foundation in the form of a fully redeemable physical asset, such as gold or silver. This would create a virtuous circle of stability, driving further institutional support towards digital assets and further stabilizing the market and economy.

Related: Wyoming State Stablecoin: Another Brick in the Wall?

The volatility of cryptocurrencies prevents many businesses, large and small, from adopting this type of payment method. Stablecoins may hold part of the answer, but their supposed "stability" is far from inherent. Assets like gold and silver, on the other hand, will continue to provide stable foundations on which to build for years to come.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.

The views, thoughts, and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.