Cryptocurrency has proven to be a volatile beast in the past year. As of April 2018, Bitcoin has fallen from its peak of $20,078 in December 2017 to $7,076. With this price volatility and the recent spotlight on regulators to regulate cryptocurrencies, there has been an increasing demand for more stable forms of digital currencies that can be used for daily transactions.

Enter the “stable-coin”

Stable-coins are digital currencies whose value are pegged to fiat currency. In contrast to popular cryptocurrencies such as Bitcoin, whose price is subject to large price fluctuations, stable-coins are much more stable. The idea is that the digital token has value based on the fact that there is a claim on another asset that has defined value.

There are a few fiat-backed cryptocurrencies that have been developed to date. Tether, MakerDao, and Basecoin are few attempts to create a stable currency by converting their own cash reserves into digital currency, tethering the value of the digital currency to the US dollar on a 1:1 basis.

Proponents of cryptocurrency contend that there are four key characteristics for an ‘ideal’ cryptocurrency: price stability, scalability, privacy, and decentralisation. These currencies, therefore, meet the price stability factor that is missing from popular cryptocurrencies like Bitcoin and Etherium. In saying that, the concept of pegging cryptocurrencies to fiat-currencies introduces another limitation – the supply of these stable-coins are limited to the amount available in cash reserves.

The future of fiat-backed cryptocurrencies

With Cambodia and Venezuela moving toward the adoption of national cryptocurrencies, government-sponsored fiat-backed cryptocurrencies do not seem far off in the future. Whilst fiat-backed cryptocurrencies are still in its early stages, with time and maturity, they could evolve to again disrupt the global economy more so than cryptocurrency already has. Multicoin capital proposed that the “decoupling of governments and money could provide an end to hyperinflationary policies, economic controls, and other damaging policies that result from government mismanagement of national economies”.

However, for this scenario to play out, fiat-backed cryptocurrencies must face challenges from both an adoption and conceptual perspective. To understand the future adoption of fiat-backed cryptocurrencies, we must understand the history of other payment systems. Credit cards are a recent example: 60 years after their introduction, not all businesses are willing to accept credit cards. Extrapolating that situation to cryptocurrencies, fiat-backed or not, may hold a similar outcome.

Fiat-backed cryptocurrencies also face another two conceptual challenges before it could become successful. We briefly talked about the key characteristics of an ‘ideal’ cryptocurrency – whilst blockchain has provided the ‘decentralised’ aspect, and fiat-backing has overcome the hurdle of price stability, these fiat-backed cryptocurrencies must also address scalability and privacy to allow these currencies to serve as a digital currency that can also provide a guarantee of privacy to protect business and personal interests.

The process of development and adoption of fiat-backed cryptocurrency will be an arduous process, but the concept will pave the way for long-term changes in the global economy.