How Stablecoins are Moving Safe Havens On-Chain

stablecoins

Last year, the Bundesbank completed the transfer of 300 tons of gold from the US to Germany. It took them four years to move the gold, and on the day that it was completed there were rumours that it was not the same gold that Germany supposedly stored in the US. Gold has traditionally been one of the world’s safe havens – a refuge to invest your money in market downturns, but is it as safe as it used to be?

There are other safe havens too, including the US dollar, treasury bonds, defensive stocks, and currencies from stable countries, for example the Chinese yuan, the Japanese yen, and the Swiss franc. All safe haven assets have the same problems: accessibility, the cost of physical delivery, vulnerability to fraud.

To that end, several companies have tried merging safe havens with cryptocurrency in a new asset: stablecoins!

Classic Safe Haven Assets

Investors tend to buy and hold safe haven assets during periods of uncertainty, since these assets tend to be less risky and often appreciate even during the worst of times.

Classic safe havens (except for gold) draw their strength from four qualities:

  • Economic growth
  • Strong country finances
  • Stable political systems
  • Liquidity (i.e., the ability to easily sell the asset without impacting the price of that asset)

Historically proven assets

Cash

cashAlthough the world has 185 currencies, the most popular safe haven currencies are the US dollar, the Japanese yen, the Chinese yuan, the euro, and the Swiss franc.

The dollar is the dominant currency, making up 64 percent of central banks’ reserves. In fact, as recent as last year (2017), banks in Japan, Germany, France, and Britain held more assets in dollars than in their own currencies. About 65 percent of US dollars are used outside the United States. Seven countries have adopted the dollar, while others kept their currencies in a tight trading range relative to the dollar. In foreign exchange trading, the dollar makes up more than 85 percent of its dealings, so foreign banks require a significant amount of dollars to keep afloat.

The yuan, yen, euro, and franc gain their trust because their particular regions demonstrate historic stability, low unemployment, and a high trade surplus versus minimal debt. The franc, specifically, attracts investors because of its low rate of inflation, the sterling reputation of the Swiss banking system, and Switzerland’s neutrality from war and the E.U.

Treasury bills

Treasury billsUnited States treasury bonds (or t-bonds) reflect the strongest income market in the world, which, despite its huge debt, generates 22 percent of the global income. The U.S. government is the only global entity that issues a promissory note to its immense income stream. Europe has no such liability. China issues bonds, but their economic data and financial instruments are non-credible.

The safety of t-bonds is shown by the recent Brexit fiasco that staggered stock markets all over the world but barely touched U.S. government bonds. Moreover, while NASDAQ fell 4% and the Nikkei dropped 8%, US government bonds actually rose, since people perceived the bonds as a safe haven. These statistics, among others, made finance professor Arvind Krishnamurthy, of the Stanford Graduate School of Business, conclude that in times of economic uncertainty, U.S. government bonds are one of the most bullet-proof investments one can make.

Defensive stocks

stocksDefensive stocks that provide staples like food, beverages, utilities, tobacco, healthcare, biotech (like gas and electricity), and consumer goods are another top pick. Why? Because regardless of the state of the market, consumers always need food, basic home supplies, and health products.  Industries such as these are also called “non-cyclical” stocks, since they have no correlation with the business cycle. Such industries tend to perform better than the market during recessions, and they generate a steady cash flow and predictable earnings during strong and weak economies. They also pay dividends, which can cushion the stock’s price during a market decline. Investors consider well-established companies like Procter & Gamble Co., Johnson & Johnson, Philip Morris International Inc. and Coca-Cola Co. to remain good investments.

Gold

goldPeople across the world love gold because of its anonymity and because it is easily portable (at least in the form of jewellery and coins) when fleeing countries. Gold has been valued since the beginning of humanity. It is one of those fungible, timeless assets.

Investors mostly love gold because it is not fiat or legal tender, meaning gold is physical in contrast to currency that retains its value only because of government say-so.  Because gold is not fiat, its value is also not impacted by interest rate decisions made by a government. The negative correlation between gold prices and US stock market performance is the main reason why gold is used to hedge against market downturns.

Gold has been valued since the beginning of humanity. It is one of those fungible, timeless assets! Click To Tweet

In adverse times, investors tend to pile their funds in gold, which drives up its price and increases its value. For instance, during  the 2008-2009 Financial Crisis, when the S&P 500 dropped from $1,450 in Sept, 2008 to nearly $685 in March 2009 – a drop of over 50%! – gold prices steadily increased, jumping from a low of $890 to over $1,400 in 2010, an increase of almost 60% as shown in the table below:

Even if its price went up just a little bit in 2008, it shot straight up when there were rumors that some countries economies would collapse. This is the power of gold – it’s the ultimate insurance in an investment portfolio!

Who’s taxing them out?

taxesDon’t think you’re getting all the returns from your safe havens. Governments dig in their forks, too, and then there’s brokers, lawyers, and third-party entities such as exchange marketplaces. All of them (depending on who you use) get a piece of your pie, too. At the end of the day, you’re left with less in your pocket.

Although free from state and local taxes, U.S. Treasury bills are fully taxable at the federal level.

Bonds, too, are taxed both on their income and on any gains if the investment is sold for a profit. Tax on income is generally straightforward: The investor is taxed on that income in the year it’s received. In regards to capital gains, namely bond investment sold for a profit, the tax implications could become tricky.  

Gold

Gold is typically not taxed directly. Although, it does come with its own costs.

There are three types of costs you should consider when investing in gold:

  1. Buying and selling costs
  2. Storage and insurance costs
  3. And opportunity costs (i.e. gold doesn’t pay any dividend or interest, so while you hold it you will be missing out on the income that other assets could provide you.)

Fiat (USD and other currency)

Fiat – like USD, euro, yen, and the like -money  is taxed depending on how you’re keeping it. Most people will keep it in bank deposits, and depending on which country you live in the interest will be taxed. Even if there are no taxes, you are bound to lose value through inflation.

So there are drippings from your safe havens in the end no matter what. We’re talking about a range of safe havens with different situations and individuals who get taxed differently according to federal, state, and local factors; tax bracket, income level, deductions and credits, additional taxes, among other factors. Investors may also adopt any number of heuristics, such as sheltering in an offshore account to minimize their deductions. Suffice it to say, only the shrewdest of investors are left with a tempting yield for their dough.

Dripping on the way

Additionally, you collect other drippings along the way, depending on whether or not and to which extent you enlist the services of third-party agencies such as consultants, broker, attorney, notaries, exchange markets, and so forth.

Investors are willing to pay more for a “real” independent depository to store their treasures Click To Tweet

Take gold – possibly the most expensive investment – as an example. Gold buyers are recommended to forage for a reputable gold dealer. Of course, the better your gold dealer the more you’ll likely have to pay. You’ll also pay a higher premium contingent on your “spot.” (“Spot” is the price for very large accounts, trading in 400 oz. institutional bars). The smaller your “spot,” the higher your price. Some investors spend extra to have their bullions examined for tungsten counterfeits. Investors also pay for a “real” independent depository to store their treasures.

Collateral Backing: A Stablecoin

For all intents and purposes, it seems as though cryptocurrency may provide the solution. Not cryptocurrency per se, but rather a section of cryptocurrency known as stablecoins, but it is closer to a crypto asset than a coin.

stablecoin

The stablecoin aims to provide price stability through market downturns by backing itself to a stable haven like gold or the USD, thereby producing a unit of value. In this way, you hopefully have the best of both worlds! The benefits of a tokenized asset are that it can be transferred to anyone in a fast, transparent, secure, and cost-efficient way, along with it being a reliable unit of value that remains steady in a volatile world.

A tokenized asset can be transferred to anyone in a fast, transparent, secure, and cost-efficient way Click To Tweet

But there are also concerns regarding stablecoins. The top concern on this list is the lack of transparency and lack of audits.

Most stablecoins are really centralized companies that issue digital tokens based on assets they store in a bank account or vault. Their digital tokens have alleged value because they’re pegged on an asset (such as gold or fiat) that is considered valuable. The problem is that these tokens require trust in the issuing party – that these entities actually own the alleged reserves and that they will honor their IOUs.  

Tether, for instance, is a cryptocurrency pegged to USD, to euros, and to yens, all held in accounts under Tether’s control. There have been major concerns  about the legitimacy of Tether’s reserves and as to whether the company intends on honoring their promise of audits. In fact, a CoinCentral review eluded to allegations of money laundering, collusion, and fraudulent Tether “printing.”

In 2017, Goldmint ran through a string of eight stable crypto coins and showed how each of these coins lacked transparency and had audit concerns in multiple areas.  OroCoin, for instance, lacked a white paper, GoldBlocks lacked information on how the coin is secured, Digix and Xaurum have just one vault that is vulnerable to disaster,  OneGram is completely non-transparent, and the list goes on.

Hedging Instruments Available Right Now

Here are three trustworthy blockchain-based projects who are trying to bring you collateral backed stablecoins you can add in your portfolio right now:

GoldX

hellogoldGOLDX aims to provide the modern day crypto-investor with the world’s oldest stablecoin. Its press release says, “The USD 500 billion cryptocurrency market has been searching for a viable stablecoin – a cryptocurrency whose price is stable – that is both liquid and shows reserves transparently. GOLDX provides both.”

GOLDX is a fully operational token backed by 99.99% investment-grade gold, independently vaulted in Singapore. Operations backing the gold are based on the best practices from SPDR GLD, the world’s largest gold ETF, and include an independent audit of reserves, a ledger of all gold held by customers, and the serial number of all the bars that HelloGold holds on behalf of its customers (which can be verified by the independent vault provider.)

Purchased by using either Bitcoin (BTC) or Ethereum (ETH), GOLDX provides cryptocurrency investors with access to physical gold as an investment class. In short, GOLDX achieves its stability by pegging itself on gold.

HelloGold, the company that backs GOLDX, wants to expand the availability of products that help the underserved and unbanked in emerging markets in order to have better and more affordable access to simple financial products. Based in Singapore and Kuala Lumpur, where it runs its first consumer-facing app-based operation in Malaysia, the company is partnering with Aeon Credit Services, Axiata, and is backed by 500 Startups and TheFinLab, a joint venture between UOB (one of the largest banks in South East Asia) and SGInnovate (a Singaporean government agency). All of which are adding up to the company’s trust, a very important aspect in the space of stablecoins.

Augmint

Augmint offers digital tokens pegged to the euro, to integrate digital currency  with the stability of a nonvolatile unit.

Augment aims to merge the benefits of fintech with the benefits for stable currency to produce a securely stored and decentralized stable crypto token that is conveniently, reasonably, and instantly transferable worldwide.

Augmint attempts to improve on central banks by adjusting the supply of each Augmint token in a transparent, decentralized, and secure fashion.  The company replicates the way banks work in that Augmint tokens are issued when a new collateral-based loan is created. Tokens are then burnt upon repayment. The entire process is executed in an automated, cryptographically secure, and decentralized way. Augmint also transforms its digital coin into a stable crypto token by pegging it to the euro.

The Augmint white paper is still in progress with great pockets of unclarity and gaps. Its white paper, for instance, says that “The project will be maintained by an open  community of financial and technology experts, financed by the stakeholders,” but I found no details about the credibility of the Augmint executives governing this open community.

Maker’s Dai

makerDai is a cryptocurrency whose price is stabilized against the USD  to maintain its purchasing power. Put simply, one Dai is one dollar, so MakerDAO says, “it will always retain its purchasing power.” Dai is created by the Dai Stablecoin System, a decentralized platform that runs on the Ethereum blockchain.

Dai has the same ambitions as Augmint, but this time in relation to the USD instead of the euro. It aims to integrate the best digital currencies with the benefits of a stable haven, so that investors have the transparency, cheapness, convenience, and security of the blockchain and a stable source of income in all market circumstances.

Many financial products such as hedging, leveraging, longs, and shorts rely on a central trusted actor to hold your contract. This takes the power out of your hands, aside from making it more expensive for you. Additionally, your assets can be hacked or stolen. The Dai blockchain platform is secure.  With Dai, you can take long positions in ETH in a completely decentralized manner, so you know what’s happening to your assets so you can control their journey from beginning to end.

Additionally, stablecoins like Dai are not closed systems and can, therefore, not protect us from the vagaries of inflation that happen to all assets.

Conclusion

There’s no doubt that stablecoins found a definite pain need: governments like Argentina experience economic crisis,  leaving citizens hunkering in the chaos of inflation, confusion, and starvation. There are unbanked countries with citizens unable to send or receive money, while remittance to these countries is vastly more expensive and unsafe.

Stablecoins are moving safe haven assets to a token that can be safely bought and sold anytime, anywhere Click To Tweet

People all over the world are open to the vagaries of unexpected market downturns and can lose their money in an instant. Traditional safe havens promise them an investment that will retain, and possibly even increase its value, in times of market turbulence. But in times of crisis most people don’t have access to these assets in a safe and cost-efficient way. Cryptocurrencies, especially stablecoins, can easily solve the problem by moving safe haven assets to a token that can be safely bought and sold anytime, anywhere.

SAY WHAT YOU THINK

Related