However, while the purist crypto evangelists have long – even if misguidedly – spruiked their independence from the official finance world, one category of cryptocurrencies, so-called stablecoins, have attempted to straddle both.
Stablecoins are cryptocurrencies but they are “tethered” to use the popular term to real currencies, whether the US dollar or a basket of currencies. Theoretically, that should fix their value to the pegged currency.
Spoiler alert: it didn’t for the latest high-profile collapse, TerraUSD.
But this is why it’s important to be discerning in this new DeFi world. Not all crypto assets are the same and, critically, not all stablecoins are the same. Indeed, in a time of stress like we are experiencing, with risk aversion surging, it’s important to understand there are very important differences.
It comes down to how stablecoins are structured. TerraUSD is not actually backed by cash or cash-like assets. It is backed by an algorithm, the nature of which is the special sauce. It is supposed to constantly manage assets so each TerraUSD can be redeemed at any time for a dollar. Which it did.
Until it didn’t.
Exactly the same lesson in reality – that a tether or “cash-like” are not actually cash when the acid bites – happened to American money market funds during the 2008 global financial crisis. These funds managed their investments for higher yields but on the premise each unit would never be worth less than a dollar.
However, at the peak of the crisis, as financial markets froze, cash-like was suddenly oh so close but not enough. In the search for that extra yield, these funds introduced an element of risk which before the crisis had never been recognised. Then, in the vernacular, they “broke the buck”.
So too with stablecoins. A tether, however clever, is not tangible asset backing.
Technically, TerraUSD is an unbacked, “algorithmically stabilised”, USD coin which is used in unregulated DeFi venues. It is known as a Non-Custodial coin.
However, other stablecoins, including the A$DC recently minted by this bank, ANZ, are backed by hard “fiat” currency. And, equally critically, the institution doing the backing, in this case ANZ, is a fully regulated and prudentially licenced financial institution. In Australia this category of organisation is called an “approved deposit taking institution”, an ADI. A$DC is a Custodial Coin.
This structure, and its location within a highly regulated ring fence, makes for a stablecoin which is different in kind, not just degree, although that distinction has only become visible as risk aversion has peaked.
This point was made clear by ANZ Banking Services lead Nigel Dobson at the bank’s half year result.
“Because this stablecoin is backed by ANZ – with our AA credit rating and government deposit insurance – it does not face the same risks of a ‘run’ on redemptions which have caused some concerns with more volatile versions of stablecoins,” he explained.
“We have also been clear in discussions with the Australian Prudential Regulatory Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Australian Transaction Reports and Analysis Centre (AUSTRAC) that we are only exploring custodial stablecoins that are 100 per cent backed by cash and we have no intention of pursuing algorithmic stabilisation mechanisms.”