Are Stable Coins Stable?

Abstract

Stable coins attempt to resolve the problem of wide volatility in dollar-denominated prices that characterize most cryptoinstruments, by “pegging” their value to fixed amounts of traditional monetary instruments. This discussion paper considers the challenges faced by “stable coin” cryptocurrencies, at different levels of collateralization, through comparison with pegged currencies, which follow a similar dynamic in terms of maintaining support for a given monetary value. The paper suggests that the novelty of cryptocurrencies should not detract from observing what are fundamental difficulties in constructing pegs to traditional currencies.

Keywords: Cryptocurrencies, Bitcoin, Tether, Volatility, Exchange Rates, Central Banks