Stablecoins in Conventional & Islamic Finance
Can a fixed-price cryptocurrency benefit everyone?
One of the leading arguments against investing in cryptocurrency in conventional and Islamic finance is that the market is too volatile. At this writing, the price of Bitcoin fell 10% since last week (though it’s still up 154%, more than doubling, since this time last year). Some investors relish risk, taking big wins and losses over their career, but there are many people who lost their savings, borrowed money, or traded for a handful of lesser “altcoins” which are now worthless.
A new family of cryptocurrencies called “stablecoins” now has captured users’ interest. These coins or tokens have a fixed exchange rate to an existing currency (e.g. the US dollar or Chinese yuan) so you know that your savings will maintain value, and businesses can set prices, accept purchases, and conduct business with the benefits of digital payments and without the instability. In a HackerNoon post, Haseeb Qureshi calls developing a stablecoin “the Holy Grail of the cryptocurrency ecosystem”:
Stablecoins: designing a price-stable cryptocurrency
A useful currency should be a medium of exchange, a unit of account, and a store of value. Cryptocurrencies excel at…
Not just printing money
Strategies for launching a trustworthy stablecoin revolve around technical, legal, or organizational methods to build trust in the founders keeping “real money” in their reserves:
TrustToken, the creator of TrueUSD, writes:
we’ve partnered with professional third-party fiduciaries and banks, who manage access to the escrow account that holds the US dollars backing the tokens. As a TrueUSD token holder, you can redeem your TrueUSD tokens for US dollars…[you] exchange USD directly with an escrow account — we never touch the funds…
a price-stable cryptocurrency with an algorithmic central bank… when demand is rising, the blockchain will create more Basis. The expanded supply is designed to bring the Basis price back down. When demand is falling, the blockchain will buy back Basis. The contracted supply is designed to restore Basis price.
Tether is currently under US CFTC investigation and recently discontinued working with their auditor, but according to their site and an FSS report:
Every tether is always backed 1-to-1, by traditional currency held in our reserves
bitCNY and bitUSD store another cryptocurrency as their collateral:
bitUSD is an asset that is not backed by real dollar in someone’s bank account. The reasons for this is trust. We cannot trust anyone to hold and secure a physical asset so that people can redeem it eventually…
… behind any bitUSD, there are
xamount of BTS that cannot be touched, traded or otherwise moved. These BTS are locked in a smart contract and serve as collateral.
MakerDAO’s Dai works as a type of loan against Ethereum holdings:
when Dai is worth over $1 USD, ETH holders are incentivized to create more Dai and sell it, as it’s free money.
When Dai is worth less than $1 USD, [collateralized debt position] owners can pay down their debt at a cheaper price! source
In 2018, Y-Combinator backed the AnchorUSD stablecoin:
Secure Escrow: All funds are stored in an escrow account, for the sole purpose of allowing redemption by holders.
Verified Funds: We work with public accounting firms to publish regular audits of our reserves.
In older coin launches (though I can’t find recent examples) there was a concept known as Proof of Burn, where you sent Bitcoin to an unusable address, and received coins in return. This made it impossible to return your coins for the original money, but did avoid dependence on a real or virtual bank to store everyone’s collateral.
Do stablecoin prices stay put?
I searched for launches and startups which had received significant publicity for their stablecoins, and looked up values on CoinMarketCap, Stablecoin Index, and CryptoSlate (see CryptoSlate’s stablecoin tracker).
- TrueUSD has traded between 0.99 and 1.02 in the past month. $14.3M volume in 24 hours.
- bitCNY traded between 0.63 and 0.85 and moved $11M.
- Dai has traded between 0.97 and 1.03. $1.2M volume in 24 hours.
- bitUSD has traded between 0.95 and 1.16. $0.3M volume in 24 hours.
- Tether was priced between 0.99 and 1.01 and moved a reported $1.7B (with a B), about 65% of its total market cap. Because of how this is calculated, Tether can sometimes move > 100% of its market cap in a day.
Stablecoins to trade every currency
After reading about several coin and token launches, something seemed to be missing. I Googled “stablecoin Euro”. There is a “bitEUR” project with market cap less than $150,000.
Why are we only trading in only a few currencies?
One answer is that cryptocurrency is no longer a lawless “wild west”. Any stablecoin founders with collateral in the bank must have lawyers and business plans and headquarters in countries with financial regulations. Governments have been known to set fixed exchange rates, ban exporting their currency, and shut down private exchanges. Cryptocurrency code may keep on running, but if the founders lose access to their bank account, or you can no longer return your tokens for “real money”, then the stability is no more, and the bottom falls out.
The US and China are not even that friendly to cryptocurrency, but their currency and legal systems are profitable and documented enough that founders are convinced that dealing in dollars and yuan is worth it. As cryptocurrency use spreads, maybe we will see other countries’ currencies?
Potential benefits to Islamic Finance
The rules of Islamic finance guide investors away from uninformed contracts and speculation. Warnings against Bitcoin have come from Kuwait’s central bank, Turkey’s Directorate of Religious Affairs, and multiple authorities in Egypt.
This is a debated opinion in Islamic finance, as cryptocurrency initiatives continue to thrive with shariah approval in Dubai, Southeast Asia, and Afghanistan. One mosque in London accepts zakat donations in multiple cryptocurrencies. The question “is Bitcoin halal?” has been shouted so loudly that it drowns out the more nuanced question “how might this technology benefit people?” Or to those who would ban Bitcoin, “what if there were another option?”
There are even gold-backed coins based in Dubai and Southeast Asia which specifically cater to Muslims:
There are now gold-backed cryptocurrencies for Muslims
Cryptocurrency is not great for your blood pressure. With prices soaring and plummeting on a weekly basis, there is a…
It’s possible that awareness of stablecoins could convince the skeptics to re-evaluate cryptocurrency as a whole. People living in countries with unreliable currencies and banks could store savings in US dollars (or rials or dirhams or dinars or rupiyah… if their countries will allow local innovation). There is no interest/riba on the account, as would be applied by a conventional-finance bank. Remittance fees and currency controls could be eliminated by smart contracts. It’s possible for this to happen with fairness and transparency and without jumping onto the Bitcoin roller coaster.
2020 Update! I made an eBook: islamicfinance.github.io
Disclaimer/disclosure: this post is written as part of my microfinance education, and does not represent views of my employer. I hold Bitcoin, Ethereum, and less than $100 of a gold-backed cryptocurrency linked in the article.