Sorry, but there is nothing stable about Bitcoins OR Stablecoins

How quickly we forget that bitcoin and cryptocurrencies were charged as a response to centuries of fiat currency volatility. The latter is worth noting for several reasons, including a recent interview of Milken Institute senior counsel Michael Piwowar on money. Let’s start with Piwowar on bitcoin.

Piwowar observed that “The problem with Bitcoin is price volatility. The price of Bitcoin can change dramatically – sometimes within minutes. This volatility can be attractive to traders and investors, but it makes Bitcoin poorly suited for everyday payments. If you’re trying to send money around the world, you don’t want the value to change substantially from the time you receive it to the time you receive it.”

Yes, he is right. While commonly ignored by the various financial religions left and right, no one buys, sells, borrows or lends with “money”. In contrast, products buy products while borrowing and lending is an exchange of products over longer periods of time in exchange for more products (interest). Money is only the referee. Bitcoin does not have the properties of money precisely because the bitcoin exchange is largely a moving target, so trading in the so-called currency is anything but.

Piwowar’s mistake is in his description of stablecoins, which derive their exchangeable value through their 1:1 relationship to the dollar. In Piwowar’s words, bitcoin’s problems “created stablecoins. The basic idea was simple: why not create a digital token whose value is pegged to the US dollar and backed by highly liquid, low-risk assets like bonds?”

Implied in Piwowar’s analysis is that the dollar is a fixed measure relative to the moving measure that is bitcoin, and that Treasury yields reflect the latter. There is no truth in this.

It is no doubt true that as evidenced by the acceptance and use of the dollar around the world, it can claim stable qualities that bitcoin obviously cannot. Just the same, there is a reason that there are approximately $10 trillion in daily currency trades with the US dollar participating in most trades. The latter is not an indication that the dollar is reliable in the market, but that it is not.

Further evidence to support the above claim can be found in the fact that prior to 1971 there was no currency trading. It didn’t exist because it didn’t need to. Without entering into a debate about the merits or demerits of the pre-1971 gold exchange standard, evidence that it imbued the dollar with stability could not be found simply in the fact that many of the world’s currencies had explicit or implicit pegs to a dollar set at 1/35^u of an ounce of gold, but that there were no markets for trading coins.

Which means that President Nixon’s decision to sever the dollar’s relationship with gold was not just an explicit policy of devaluation, it was also a policy designed to deprive the dollar of properties associated with stability as a measure. Yes, Nixon opened the dollar.

Which means that stablecoins, while once again derivatives of the dollar, are not stable in theory or in reality. Piwowar was wrong to suggest otherwise.

Why is this important for reasons beyond the challenges of currency price volatility? The answer may be found in cryptocurrency exchanges that store stablecoins and pay “rewards” on stablecoin deposits despite previous legislation intended to restrict crypto repositories from acting as banks.

Without defending the regulations that banks are under, crypto exchanges justify their efforts to act as banks minus the myriad rules that banks have to endure through the supposed stability of stablecoins in dollars and the supposed stability of Treasuries to fund customer “rewards”. Except the dollar isn’t stable, and by extension neither are dollar-paying Treasuries.

The existence of the cryptocurrency industry is a testament to this truth. See the opening line of this piece if you’re still confused.