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Goldman Backed ‘Stablecoin’ Hopes To Curb Crypto Volatility

Wall Street

Since its early days, bitcoin enthusiasts have celebrated and even aggrandized its power to shape the world and relegate fiat currencies like the dollar to the scrapheap of history. On the extreme end, hordes of critics have labeled it a fraud whose days are numbered.

Nearly a decade after launch, the reality lies somewhere between that utopian and dystopian future. Bitcoin is still going strong, but nowhere near becoming a mainstream medium of exchange let alone replace any currency.

Extreme Volatility Slowing Crypto's Advance

Despite growing acceptance, bitcoin's use in commercial transactions remains laughably low. There are a couple of reasons why many businesses won't touch cryptos with a 10-foot pole. The biggest include exorbitant transaction fees, lengthy transaction times and, worst of all, mind-boggling volatility.

Bitcoin transaction fees have lately been coming down. Meanwhile, not much can be done about lengthy transaction times short of redesigning the entire blockchain. Excessive volatility, however, is the main deal-breaker here. Starbucks might be a prominent bitcoin cheerleader because it's cool, yet it won't accept bitcoin because there is no way of telling whether the 40,000 satoshi it receives for a cappuccino today will still be worth $3.20 a week from now or closer to $1.60.

And, that's not a hypothetical scenario: at the time of this writing, bitcoin is down nearly 10 percent in the past 24 hours alone.

(Click to enlarge)

Source: CoinDesk

A Wall Street-Backed Tether Look-Alike

(Click to enlarge)

Source: CoinMarketCap

The chart above looks like no other in the crypto universe.

First off, the exchange rate between Tether, the cryptocurrency it represents, and the U.S. dollar has remained remarkably constant even during the mad crypto rally of late 2017 and subsequent fall in 2018.

Second, Tether's market cap has increased sharply at a time when other cryptos have been decimated.

That's because Tether, unlike any crypto in the market today, is pegged to the U.S. dollar. In fact, Tether is supposed to be backed one-on-one with the U.S. dollar meaning that Tether Ltd, the company that owns Tether, should hold one dollar for every Tether it issues pretty much the way the Fed backstops dollars with gold.

The main idea here is to have a cryptocurrency that enjoys the relative price stability of the dollar but with the added advantage of the operational ability of crypto.

This looks like a brilliant idea. Tying up a crypto to the dollar means doing away with the crazy volatility that has been the bane of cryptos. Indeed, buying Tether has become a popular way to lock in crypto profits especially when the markets get choppy.

There's a small problem though: How do we trust that Tether Ltd actually has sufficient dollar reserves to back up every Tether out there? After all, this is a cryptocurrency we are talking about and we all know there's little in the way of regulatory oversight in the space. Related: The Battle For Shkreli's $2 Million Wu-Tang Record

Tether has a market cap slightly north of $2.5 billion, meaning Tether Ltd should be holding a similar amount in dollars. But what if it does not? That could prove disastrous for many cryptos given Tether's central role.

This is not another hypothetical scenario, either. Many cryptos tanked wildly in late 2017 when rumors emerged that Tether Ltd does not hold sufficient currency reserves to back up its claims. This led to the CFTC issuing subpoenas for Tether Ltd and Bitfinex since the management teams of both companies share many members.

Enter a new “stablecoin”, a Tether look-alike that is backed by a Goldman Sachs-backed fintech startup called Circle. Circle's stablecoin is being billed as a “compliant alternative to Tether” because Circle customers will be required hold $1 for every USD-pegged coin.

The main attraction here is the fact that Circle is backed by one of the country's largest banks, which gives it a more credible face, something that's likely to be attractive to institutional investors.

Circle has received a $110-million round of funding from Bitmain, another giant crypto exchange, thus valuing it at around $3 billion. Circle says it’s mulling a move to launch more fiat-pegged cryptos for the euro and the pound. Just don't hold your breath for an Asian currency-pegged crypto any time soon.

By Alex Kimani for Safehaven.com

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