Will Fiat-Backed Cryptocurrency Ever Work?

After a year of wild growth and rampant speculation, the cryptocurrency market abruptly crashed last weekend. Bitcoin and Ethereum prices plummeted, leading to despondent investors and vindication for critics who have been predicting a market crash ever since cryptocurrency first boomed. Not everyone, however, is so quick to give up on a technology that some believe has the potential to usher in a more democratic, data-driven future.

Though the market may be flawed, cryptocurrency true believers argue that the concept of a currency free from government and institutional control is fundamentally sound. The original dream of bitcoin, first developed by Satoshi Nakamoto after the financial crisis of 2008, was that of a fully decentralized economic system, one where money was not controlled by the whims of any large institution but firmly in the hands of the people. In a hypothetical cryptocurrency economy, instead of relying on banks or other large financial institutions, anyone would be able to have full control over their own money, with safety and privacy guaranteed by the neutrality of the blockchain.

Searching for a way to insulate cryptocurrency from speculators’ whims, some companies have turned to fiat-pegged coins to provide the stability needed for practical use. A fiat-pegged cryptocurrency’s value is linked to that of fiat money and therefore immune from the turbulence of the market. While other coins are vulnerable to investor skittishness, a mercurial market and “pump and dump” scams, fiat-pegged cryptocurrencies remain steady. Ideally, a fiat-backed coin would have the best of both worlds, both stable and decentralized.

For a while, Tether seemed like the solution. Founded in 2015, Tether promised that each one of its USDT coins was matched by actual US dollars they kept in reserve. In theory, that meant that any investor could sell their USDT back to Tether for an equivalent amount of US dollars at any time. However, despite claiming their USDT was backed by US dollars, Tether had no proof, and refused to undergo external audits. A rising amount of criticism came with a subpoena by the US Commodity Futures Trading Commission: bad news for Tether, and proof that investors wouldn’t — and shouldn’t — take a startup’s promises at its word.

Tether’s troubles meant proponents of fiat-pegged cryptocurrencies found themselves with a new problem to solve: needing to prove a fiat-backed coin’s actual value and avoid the ire of understandably suspicious regulators. Some are seeking salvation in state-funded coins. Kyrgyzstan and Venezuela, among other countries, have plans for national cryptocurrencies in the works. However, many cryptocurrency advocates balk at the idea of handing over control of a concept meant to free the public from large institutions to very centralized national governments, especially ones with histories of inflation.

So is fiat-pegged cryptocurrency doomed to only ever be an nice but impractical idea? Not while companies are still willing to try. XPA, a decentralized financial services ecosystem, launched a new line of fiat-pegged XPA Assets last week. We believe that innovative financial mechanisms will be what finally makes fiat-pegged cryptocurrencies viable: XPA Assets are generated via smart contract based on the amount of XPA or other major cryptocurrencies users mortgage, meaning that users can see the origin of every XPA Asset right on the blockchain.

What it all depends on is whether cryptocurrency fans are willing to put their trust into another fiat-pegged coin, even one more transparent than Tether. And even if they are, are companies and ordinary people ready to make even comparatively more stable fiat-pegged coins viable for daily use? Investing in a hot new digital asset is one thing, but using it to buy groceries is another. Whether cryptocurrency will become part of daily life still remains to be seen, but one thing is certain: its supporters are determined to make Satoshi Nakamoto’s dream of cryptocurrency in circulation come true.

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