The Great Inflation: Rising Cost of USD Could “Destabilize” Stablecoins
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The Great Inflation: Rising Cost of USD Could “Destabilize” Stablecoins

Is crypto really a safe haven from fiat inflation, or does the industry need to adapt?
Neither the author, Kai Morris, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

Throughout this year, US inflation has been on the increase. The consumer price index (CPI) rose by 0.3% in August and although this is lower than it has been in some recent months, it is still worryingly high. 

If inflation continues to rise and proves itself uncontrollable, it could have huge implications for the crypto industry. In particular, if the US dollar becomes unstable and drops significantly in value, it will also drag with it any stablecoins pegged to its price. Considering the importance of stablecoins in the crypto-sphere, this could have huge implications for the future.

Is the US Dollar Still Trustworthy?

Economists and organizations have been voicing concerns about the dollar throughout the year, with Deutsche Bank disapproving of the Federal Reserve’s activity, and even BlackRock’s CEO questioning whether this spike in inflation is truly transitory

Essentially, this stems from institutional figures worrying the Federal Reserve is mismanaging the dollar, and pushing it into unchartered territory. In a nutshell, they have been trying to stimulate the economy as the COVID-19 pandemic halted many aspects of the economy. One method the Fed has been using is printing and distributing more money via stimulus cheques.

For the most part, the Fed has insisted this inflation will be transitory, but in early August, even Fed Chair Jerome Powell changed his mind on the matter, suggesting it may not pass as speedily as he had initially anticipated. While this debate around inflation rages on between economists, the average person is suffering, as the consumer price index reveals the cost of living is on the rise.

In particular, it is affecting housing. Bill Adams, senior economist at PNC Financial in Pennsylvania, noted that:

“The biggest upside risk to inflation in the next six months is from the potential pass-through of higher house prices to the CPI shelter component”.

These worries about persistent inflation may have even been the driving force for some institutions turning to cryptocurrency. For instance, the investment firm, Neuberger Berman, has recently gained direct exposure to digital assets, and has even stated that: “Bitcoin might be employed to mitigate [USD] inflation risk”. 

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Stablecoins Could Bring the Industry Down

Cryptocurrency is often thought of as a safe haven against fiat risk, but this may not be entirely true. If the US dollar falls significantly, then it could drag the crypto industry down with it. Brian Armstrong, CEO of Coinbase, raised this issue himself, noting stablecoins could very easily become “inflation coins” if the dollar collapses.

The most significant issue here is that stablecoins are instrumental for traders and are oftentimes the first port of call when it comes to adoption efforts. In other words, they are a necessary element of the industry as a whole. 

If the dollar destabilizes, then stablecoins destabilize, too. Projects like USDC, Tether, and Dai have been extremely helpful in bringing crypto to the masses and helping day-traders avoid volatility, but they may be a double-edged sword. Perhaps it is time we look for alternatives. 

With the existence of live, real-time blockchain oracles, it is theoretically possible to peg a coin to any asset, or even a basket of assets (as Armstrong suggests). The Bitcoin analyst Willy Woo chimed in on the discussion and argued for an “index that is built into wallets as a standard unit of account”. 

He likens this to the bygone era when seashells were used as currency. Seashells have been viewed similar to money throughout human history, but of particular interest to this discussion is their usage during the Great Depression. Around 1933, people began distributing and trading with shells as a means of keeping the economy moving even when the official dollar was falling apart.

Essentially, Woo is urging the crypto community to look beyond standard concepts of money. There is one project currently employing something similar to what Woo and Armstrong are suggesting – Ampleforth .

Ampleforth is a cryptocurrency designed to hover around the price point of the US dollar’s purchasing power circa 2019, as represented by the consumer price index. 

It is not pegged to anything, but rather it algorithmically changes its supply to match the desired price (this is known as having an elastic supply). Arguably, it is not a stablecoin as it is not backed by any fiat reserves, but in many ways, it is designed for stability. 

With fears of inflation not going away any time soon, we may see more projects trying out other methods of stability. It could be that in the next few years, dollar-pegged stablecoins become a thing of the past, as the community learns to “de-dollarize” itself and focus on its own native and independent projects.

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Do you think stablecoins will become harmful to the industry if USD inflation becomes uncontrollable? Let us know in the comments below.