Financial and Monetary Systems

What stablecoins can learn from history's currency pegs

view of lowering crypto market values on a screen in a blog about stablecoins

Recent volatility in the stablecoin market has historical precedents. Image: Unsplash/Maxim Hopman

Marion Laboure
Managing Director - Macro Strategist, Thematic Research, Deutsche Bank
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  • Recent volatility in the stablecoin market, like the collapse of TerraUSD, has raised concerns about the stability and reliability of these digital assets.
  • However, an extensive deep dive into 334 historical currency pegs since 1800 reveals valuable lessons for stablecoins facing challenges today.
  • By heeding the lessons of history, policy-makers and stablecoin issuers can work to build a more stable and trustworthy digital asset ecosystem.

The recent volatility in the stablecoin market, from the collapse of TerraUSD to the depegging of TrueUSD, has heightened concerns about the stability and reliability of these digital assets.

Our survey of over 3,350 consumers shows that these incidents have left many questioning the stability of stablecoins, with only 18% of consumers expecting them to thrive, while 42% expect them to fade.”

However, the challenges faced by stablecoins are not entirely new – a deep dive into 334 historical currency pegs – when a country's central bank or government fixes the exchange rate for its currency – since 1800 reveals valuable lessons.

Our analysis of this unique dataset covering more than 300 currency pegs since 1800 found that only 14% of currency pegs survived, with the median lifespan of failed or discontinued pegs ranging from 8-10 years.

Historical analysis of currency pegs

Among the remaining 51%, 30% were stopped, 6% joined the euro system and only 14% survived. Successful pegs were more often found in smaller, autocratic nations or oil-exporting economies with robust financial backing.

Status of currency peg
Status of currency peg Image: Deutsche Bank

Larger countries and more democratic regimes struggled to maintain durable pegs. Several factors contributed to the failure of historical currency pegs, providing a cautionary tale for stablecoin issuers.

Macroeconomic instability, such as high inflation and unsustainable public finances, often undermined a country's ability to defend its peg. Speculative attacks by traders, who sensed vulnerabilities, also regularly led to the collapse of fixed exchange rates.

These findings have clear parallels in the stablecoin market. Many stablecoins, like TerraUSD, rely on complex algorithms and secondary tokens to maintain their peg, making them vulnerable to speculative pressure and price swings in the underlying crypto assets. Even larger, more established stablecoins like USDC have faced challenges during times of market stress.

Transparency and credibility also emerge as crucial factors. Historically, currency pegs that enjoyed the highest survival rates were those backed by ample reserves, credible monetary policy, and a clear, rule-based framework. In contrast, opaque stablecoin issuers like Tether, with arguably questionable reserve practices, face an uphill battle in convincing markets of their long-term commitment to the peg.

The concentration of the stablecoin market, with Tether accounting for over two-thirds of the space, is another red flag. This mirrors the dominance of the US dollar as a global reserve currency, which increased the vulnerability of pegged currencies to wider dollar fluctuations. A crisis of confidence in Tether could have cascading effects across the entire crypto ecosystem.

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While the novelty of cryptocurrencies introduces new dynamics, the historical precedents are clear: Maintaining a stable currency peg is an immense challenge, and most attempts end in failure. Stablecoin issuers must heed the lessons of the past to have any hope of long-term viability.

Need for global standards on stablecoins

Comprehensive regulation will be crucial in this regard. Policies like mandatory independent audits, reserve requirements, and limits on issuance and redemption could help professionalize the stablecoin market and improve resilience. International coordination on these standards will be key, as the global nature of crypto makes national efforts alone insufficient.

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Of course, questions remain. How will regulators handle algorithmically-backed stablecoins? What role should governance play in ensuring issuers uphold their mandate? These are uncharted waters, but the historical record offers a clear warning: without rigorous safeguards, stablecoins risk falling victim to the same fate as countless failed currency pegs before them.

As the crypto industry matures, reliable stablecoins will be critical for mainstream adoption. But the path forward is fraught with challenges. By heeding the lessons of history, policy-makers and stablecoin issuers can work to build a more stable and trustworthy digital asset ecosystem. The alternative is a repeat of the volatility and contagion that has plagued past currency regimes.

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The views expressed in this article are those of the author alone and not the World Economic Forum.

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