Stablecoins May Be Just as Vulnerable as Traditional Banks

The problem with insufficient backing for deposits made with banks seems to be more and more pressing with each passing week. Several countries have struggling banks amidst the global recession and an intricate geopolitical situation with significant threats of widespread military conflict between nuclear-wielding countries. China, Russia, the UK, the US, and many other countries are struggling at the moment with their monetary ecosystem.

The biggest examples are still in the East

China has seen multiple protests that revolved around the inability of certain regional banks to hand out what they owed to deposit holders from multiple provinces. Banks could not find funds to pay back and queues in front of their doors quickly turned into riots. The Chinese government was able to stabilize the situation and even promised refunds to deposit holders, but a series of protests against mortgage payments put more pressure on the banking system.

Russia has been dealing with the financial crisis by increasing interest rates to previously unseen highs and reducing foreign exchange trading for individuals to $10,000 per year creating more conditions to keep the Ruble afloat despite sanctions from western countries. However, the problem with overwhelming liabilities held by banks is more than apparent.

Even the UK has the same problem with borrowing growing by 5% just this quarter to reach the high of the 2008’s financial crisis.

People should not think that stablecoins will provide “stability”

Many people are using USD-pegged cryptocurrencies and stake their assets to gain profits. However, the problem with stablecoins that are pegged by fiat is that they work much like traditional banks that follow the fractional reserve system. Stablecoins can issue as many cryptocurrencies as they want and not have sufficient funds to back their tokens.

While many promises to never do such things, we already have a couple of really bad stories like Terra Luna and now USDC. It is important to remember that stablecoins are only exchange mediums that should not be used as storage of coins. Use your Tether to purchase Bitcoin instead.

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