In a recent opinion article titled "The Stable Coin Myth," Barry Eichengreen, a professor of economics at the University of California, Berkeley, throws some shade at stablecoins. To him, stablecoins purportedly address the problems associated with conventional cryptocurrencies, such as price fluctuation and instability as stores of value, but despite these qualities, he does not believe stablecoins are "viable."
Eichengreen identifies three types of stablecoin: fully collateralized, partly collateralized, and uncollateralized. Under the first model, a stablecoin operator would hold reserves equal to or greater than the total value of the coin in circulation. As an example, he mentions the stablecoin Tether, which is pegged to the US dollar at a one-to-one ratio, though he notes that one Tether may not really be worth $1.
Even if Tether were perfectly pegged to the US dollar, Eichengreen points to the large expense of maintaining reserves for the coin, which has a "questionable backing" and "is awkward to use" anyway. He asserts that money launderers and tax evaders may see this financial setup as attractive, but other individuals will not. According to him, this uncertainty and awkwardness mean "it is not obvious that the [Tether] model will scale, or that governments will let it."
Regarding a partly collateralized stablecoin model, a system in which an operator holds reserves equal to a fraction of the coin's total market capitalization, Eichengreen sees the possibility of a bank run. If coin holders doubt the reliability of the peg, then they might sell their assets, leading the financial institution to buy them using money from its reserve fund. Then, "other investors will scramble to get out before the cupboard is bare," ultimately causing the peg to collapse.
The final type of stablecoin, one that is uncollateralized (not backed by a fiat currency), is also unviable, according to Eichengreen. An uncollateralized stablecoin issuer may offer customers bonds that could theoretically increase in value through interest. However, this setup relies upon the future growth of the coin's platform, something that may not materialize.
Increased doubt about the coin would lead to a decrease in bond prices, which the issuer would try to address by issuing more bonds and, in doing so, increase the difficulty of fulfilling interest obligations for its bondholders. Eichengreen notes that people may not want to purchase the bonds anyway because of the uncertainty surrounding the coin, ultimately leading the peg to collapse.
Apparently, these perceived issues with stablecoins are "familiar to anyone who has encountered even a single study of speculative attacks on pegged exchange rates." Although these flaws may appear obvious even to novice bankers and economists, Eichengreen concedes that software engineers and investors may not recognize them (which is probably why he wrote the opinion article to begin with).
Still, it is important to note that these arguments are predicated on theoretical situations and expectations of consumer behavior. Considering fully collateralized stablecoins, for example, individuals other than money launderers and tax evaders may find the financial setup to be attractive. The model could scale, and governments might let it, especially if adoption continues to move forward. The snowball effect could certainly work in a direction opposite to what Eichengreen describes.
The critique is understandable, to be sure, but it should be considered in the context of the greater stablecoin environment and the work that has been done to advance the technology.