A Crypto Startup Aims To Bring Stability To A Volatile Market

&l;p&g;&l;img class=&q;dam-image getty size-large wp-image-953781032&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/953781032/960x0.jpg?fit=scale&q; data-height=&q;638&q; data-width=&q;960&q;&g; A view of the Federal Reserve is seen on May 2, 2018 in Washington, DC. - The Fed is not expected to raise the benchmark lending rate later Wednesday when it announces its decision on monetary policy at the conclusion of a two-day meeting, but is widely expected to hike a second time in June. (Photo by Brendan Smialowski / AFP) (Photo credit should read BRENDAN SMIALOWSKI/AFP/Getty Images)

A new cryptocurrency startup, &l;a href=&q;https://www.reserveprotocol.com/&q; target=&q;_blank&q;&g;Reserve&l;/a&g;, with backing from investors including &l;a href=&q;https://cointelegraph.com/news/stablecoin-project-secures-backing-from-peter-thiel-coinbase-40-others&q; target=&q;_blank&q;&g;Peter Thiel and others&l;/a&g;, aims to solve one of the biggest challenges with cryptocurrencies. Namely, price stability and functionality as a true form of transactional money. These so-called stablecoins, which most crypto projects have tried to resolve by pegging to a hard fiat currency, such as the U.S. dollar, are far from widescale adoption. Whether Reserve fixes this remains to be seen, but the investor confidence, economic and regulatory advisory power arrayed behind Reserve, and its CEO Nevin Freeman&a;rsquo;s vision, makes it a project worth watching.

One clear focal point where stablecoins can have an enormous societal impact are in economies suffering from pernicious rates of hyperinflation, capital controls and failed fiat currencies. In Reserve&a;rsquo;s case they have identified 16 markets that meet one or all of &l;a href=&q;https://www.forbes.com/sites/dantedisparte/2018/04/15/in-a-real-war-can-virtual-assets-be-a-haven/#60259ad42a96&q;&g;these conditions&l;/a&g;. People in countries such as Venezuela are already leveraging the power of cryptocurrencies as an alternative or work around to failed government economic policies. Similarly, countries like Zimbabwe, which is notorious for stratospheric rates of hyperinflation, make for interesting test beds for monetary innovation. The biggest challenge with all of these examples, however, is whether a decentralized cryptocurrency can thrive without an implied central government or bank blessing and whether they will be broadly accepted as a form of payment. Cryptocurrency friction-fighting powers notwithstanding, the challenge of broadening market adoption for stablecoins may require working within the system, rather than around it. This much is true in &l;a href=&q;http://www.caribbean360.com/business/bitt-founder-to-advise-bermuda-government-on-digital-currency&q; target=&q;_blank&q;&g;Gabriel Abed&a;rsquo;s&l;/a&g; drive to link Caribbean central banks and island nations using &l;a href=&q;https://www.bitt.com/?_ga=2.188931305.397593989.1529697558-978223586.1529697558&q; target=&q;_blank&q;&g;Bitt&a;rsquo;s technology&l;/a&g; platform as a settlement and exchange engine and blockchain as a common thread.

While original cryptocurrencies, with Bitcoin being the archetype, continue to defy &l;a href=&q;https://www.forbes.com/sites/dantedisparte/2017/11/28/bitcoin-an-asset-currency-or-collectible/#127700e6300e&q;&g;classification&l;/a&g;, their shortfall as a high-velocity transactional currency is clear. Indeed, there are many a case of spender&a;rsquo;s remorse wherein erstwhile Bitcoin holders have spent &l;a href=&q;http://www.newsweek.com/bitcoin-pizza-day-2010-10000-bitcoin-would-now-be-83-million-938206&q; target=&q;_blank&q;&g;$83 million on buying pizza&l;/a&g; and other items of decidedly lower value. This price volatility in cryptocurrencies has made them an attractive investor bet or store of value, but generally defied their utility as a form of M2 money supply &a;ndash; lest the cryptocurrency is merely a proxy, like cell phone air time, for a function carried out by a bank, such as remittances. To achieve this standard, price stability is a condition precedent and the greenback reigns supreme in the world of analog, physical currencies. One of the most attractive aspects of low-friction economics is how cryptocurrencies and blockchain fight high-cost intermediaries by flattening the relationship between buyer and supplier. When the functions (and &l;a href=&q;https://www.forbes.com/sites/dantedisparte/2018/05/28/our-economic-model-is-out-of-wacc/#3ac7b1d37395&q;&g;expense ratios&l;/a&g;) of a vertically stacked bank, insurance company or money transfer organization (MTO), such as MoneyGram or Western Union, can be performed horizontally, instantaneously and autonomously, opportunities and spending power are unlocked.

Perhaps the easiest way to create a true stablecoin, which can be used for high-velocity exchange over a calendar year, is to set a timer or a &a;ldquo;use it or lose it&a;rdquo; feature. After all, to quote the great &l;a href=&q;https://www.michaeljcasey.com/&q; target=&q;_blank&q;&g;crypto-chronicler&l;/a&g;, Michael Casey, cryptocurrencies being nothing more than computer code can be designed to perform certain functions, whereas a dollar cannot. By this measure a stablecoin could have a 12-month expiry date and a peg to the U.S. dollar driving up its utility as a form of currency, while driving down the behavioral urge to hoard the asset, which is true of more volatile cryptocurrencies. Doing all of this at a lower frictional cost than fiat currencies could spell the right combination of speed, utility and stability that currently defies the market of more than 1,600 cryptocurrencies.

Of course, the real challenge with cryptocurrencies and their broader adoption across the spectrum of consumption is how narrowly they are accepted by vendors and services providers. Part of the reason cell phone airtime has been accepted in many countries as an exchange of value is that the cell phone providers control a veritable closed-loop economy, where issues of scale were resolved at the outset before an economic proxy was introduced. The same holds true for global credit networks, such as Visa, Master Card, American Express and fiat currencies for that matter. Who stands behind you matters greatly to how much confidence a vendor will have in accepting your payment. The question of ongoing utility post-transaction is just as important, as the question of economic interoperability. Against this backdrop, the fiat economy, which cryptocurrency enthusiasts have been railing against since Bitcoin&a;rsquo;s genesis block, has had a long head start, a few wars, incarceration powers and a monopoly on fear and coercion. Sadly, all of these seem to be preconditions for &a;ldquo;normalizing&a;rdquo; a global economy. What may be playing in Reserve&a;rsquo;s favor, as well as other stablecoin projects, is that a large swath of humanity has grown tired of &l;a href=&q;https://www.forbes.com/sites/dantedisparte/2018/04/26/why-blockchain-why-now/#4668b39d4f42&q;&g;one-sided institutional trust&l;/a&g;, for which the vacuum can be filled with innovative approaches to finance and economics.&l;/p&g;

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