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April 19, 2022 04:49 pm

Cutting-Edge Crypto Coins Tout Stability. Critics Call Them Dangerous.

A new breed of cryptocurrencies is seeking to replicate the stability of the dollar. But critics say they are a disaster waiting to happen. From a report: So-called "algorithmic stablecoins" have surged in popularity in recent months, spurring debate over whether they are good for the crypto industry. They are the edgy upstart sibling of conventional stablecoins -- digital currencies that seek to maintain a one-to-one relationship with a traditional currency, usually the dollar. Issuers of conventional stablecoins say they hold cash or bonds so each of their digital coins is backed by a dollar's worth of real assets. But algorithmic stablecoins aren't necessarily backed by any assets at all. Instead they rely on financial engineering to maintain their link to the dollar. Some have failed, saddling investors with losses. "It's a lot more dangerous than taking a T-bill and tokenizing it," said Charles Cascarilla, chief executive of Paxos, the issuer of Binance USD, a popular stablecoin that uses the asset-backed approach. "It's a recipe for something really bad to happen." Proponents say algorithmic stablecoins are better than the conventional kind because they aren't run by a single centralized entity. Instead they run autonomously on blockchain-based networks, relying on traders who could be anywhere in the world to keep them tied to the dollar. Such a design makes it more difficult for regulators to control algorithmic stablecoins, often seen as an advantage in crypto circles. U.S. regulators have stepped up their scrutiny of stablecoins in recent months but have largely focused on asset-backed coins. Algorithmic stablecoins are getting better at keeping their link to the dollar and could eventually overtake their conventional peers, said Sam Kazemian, creator of Frax, an algorithmic stablecoin partly backed by crypto assets.

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