Teething troubles for alternative monies

UST, a so-called stablecoin that’s meant to maintain a $1 peg, plunged to as low as 26 cents Wednesday.

Many sceptics will argue that any currency or cryptocurrency that is pegged to the dollar with insufficient reserve back-up is doomed to fail – just as TerraUST seems to have done. That’s a fair point, although we could argue that many of the factors that have given rise to the popularity of alternative monies have actually played out which makes their weakness somewhat perplexing.

There are many reasons for the popularity of crypto currencies. Some might seem quite nebulous, such as traders’ desire for a currency that’s hugely volatile and can be traded seven days a week. The more serious justifications for such alternative monies seem to revolve around two main factors.

The first is that central banks cannot be trusted to responsibly issue fiat money given how this trust has been betrayed by massive money printing through quantitative easing.

A second justification for an alternative to fiat money is that issuance of the dollar, euro and more comes with a set of rules for how, and with whom, transactions in these currencies can be made. “We dare say that crypto supporters will argue that there are many more reasons to use crypto currencies and – if you don’t like the volatility – stablecoins, but these are the two that we want to focus on”, Mr. Steve Barrow, Head of Standard Bank G10 Strategy, said.

Part of the reason for this is that these two issues have really come to the fore recently in the shape of the surge in global inflation and the ‘weaponisation’ of the dollar in sanctioning Russia. On inflation, we know that factors such as energy price strength and supply chain dislocation are all the rage in discussing the surge in global prices. But we take the view that central bank monetary largesse, going back over many decades, has been a key element as well.

De-linking the dollar from the price of gold unleased significant global monetary growth in the 1970s – which was accompanied by surging inflation – and now the post global financial crisis period has seen a similar surge in monetary growth – and a similar surge in inflation.

“We dare say that many will disagree with this view and it is certainly not the whole story. But when it comes to crypto currency it does seem to us that the surge in global inflation in the past year or so has, in many respects, strengthened the case for alternative monies, not weakened it. So, the fact that crypto currencies have performed poorly and TerraUST collapsed is notable. On top of this, we have seen increased weaponization of fiat currencies – primarily the dollar – when it comes to Russian sanctions (and Iranian sanctions before that). Freezing a large component of Russian reserves and kicking its banks off the SWIFT messaging system all seem to be arguments, in theory at least, for eschewing fiat currencies – or at least the dollar – in favour of other monies that might be out of the reach of the authorities”, Mr. Steve Barrow empharsized.

Howver, theory has not turned into practice, just as it has not when it comes to the surge in inflation. Perhaps that’s because all of this is happening in the midst of surging volatility in financial assets and that’s left crypto investors scared for now; something that will turn around when volatility settles down.

In short, it is still early days and the teething problems we have seen with crypto currencies and stablecoins will likely end at some point, allowing crypto currencies to appreciate against fiat currencies and stablecoins to hold their value a bit better.

However, there is an alternative view, which is that, if crypto currencies and stablecoins experience this trouble when the environment actually seems quite supportive, then their future looks as bleak as those who suggest they are ultimately worthless would have us believe. A corollary of this, of course, is that the dollar’s position on the global stage – and not just its level – has been enhanced by all this, not reduced.