By John Sarson, Managing Partner, Sarson Funds
The announced launch of JPM Coin (JPMC) last week did more than just complete an immutable reversal in Jamie Dimon’s public cryptocurrency stance. Unveiling their non-public stable value coin for internal money transfers, JP Morgan’s hopeful embrace of the blockchain revolution may have marked the moment when the market witnessed “Peak Stable Coin”.
As a bank too big to fail, embracing the future means committing to an uncomfortable level of uncertainty. Despite forward-thinking banks like Broadridge Financial enjoying a 4-year head start in delivering blockchain powered operational efficiencies, JP Morgan’s courageous decision to make an attempt at evolving almost reaches the commendable threshold.
What is a Stable Coin?
A class of digital assets, stable coins behave in a manner similar to an ETF. Like an ETF, new shares get issued and withdrawn from the public markets in an attempt to replicate the performance and stability of a specific fiat currency pair, usually the US Dollar (USD).
Stable coins claim a matched issuance basis of 1:1 with fiat holdings held as collateral in a traditional bank account.
Why Stable Coins Matter
Not all cryptocurrencies participated in the bloodletting that was 2018. As souring public sentiment and plunging prices captured headlines throughout the year, one class of cryptocurrency enjoyed a banner year – the stable coins.
Tether (USDT) leads the stable coin segment with $2.02 Billion in total assets. Launched in 2015, Tether effectively “tethers” it’s price to the US dollar at $1.00 per digital token. The introduction of Tether offered crypto market participants a new investment option within their cryptocurrency exchanges. It gave crypto speculators the option to move assets out of plunging cryptocurrency markets without making a trip back to their traditional fiat currency bank – something few crypto traders with large taxable gains in 2017 where very excited to do.
Throughout the various selloffs of 2018, stable coins proved very useful for investors for looking to temporarily exit cryptocurrency market volatility. Assets invested in Tether (USDT) grew from $320 Million in September 2017 to $2.8 BILLION by September of 2018.
Tether’s enormous growth, which occurred despite high profile concerns about accounting irregularities, prompted a slew of additional market entrants such as USD Coin (USDC) (launched in October in a collaboration between Coinbase and Goldman Sachs backed cryptocurrency exchange Circle), True USD (TUSD) and the Winklevoss twin’s Paxos Standard Token (PAX), the only boasting a charter from the New York State Department of Financial Services).
The Future for Stable Value Coins?
Despite occasional use by some market participants in 2018, questions remain over the future importance and usefulness of stable value coins. Sound cryptocurrency asset managers should try to avoid using stable coins. These digital assets introduce unnecessary counterparty risk and execution volatility into the investment process – something we seek to avoid. Stable value coins also lack insurance and do not pay interest.
Useful as a 2018 stop gap measure while improving and opening crypto-to-fiat, we predict reduced future appetite for stable coins as these traditional and well-developed channels possess notable maturity.
Realizing the Regulatory Reckoning
Cryptocurrency speculators and tax dodgers sour the stable coin outlook further. Hoping that cryptocurrency gains would remain off the tax man’s radar until the money returned to the bank, these market manipulators have now sobered to the reality that digital asset income shielding will not work in their favor.
The blockchain’s immutability delivers transparency and cryptocurrency traders now more readily understand the ease of discovery for activity on a US-based cryptocurrency exchange by financial and regulatory authorities. This April 15th the tax man cometh to crypto, stable value coins or not.
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Disclosures: Not investment advice. It should be assumed that Sarson Funds or its affiliated managers hold positions in all projects that are discussed. It is not possible to invest in any project directly through Sarson Funds, Inc. or its affiliated managers. Any investment product offered by managers affiliated with Sarson Funds should be assumed to be only available to Accredited Investors and subject to the individual terms and conditions of that offering including but not limited to those eligibility requirements associated with U.S. Securities Regulation D, section 506c. Talk with your financial advisor before making any investment decisions or have them contact Sarson Funds directly at [email protected]
