Deutsche Warns: 86% of FX Pegs Fail, Stablecoin Risks High

Key Takeaway

• Deutsche Bank's study of 334 currency pegs since 1800 shows only 14% survived, predicting a grim future for most stablecoins.
• Tether's dominance in the stablecoin market is concerning due to speculation and transparency issues, alongside its history of misleading claims about reserves.
• Successful currency pegs and potentially stablecoins require credibility, ample reserves, and control against speculative forces.

Stablecoins Under Scrutiny

Deutsche Bank Research analysts have cast a shadow over the future of stablecoins, predicting a grim outlook for these digital currencies pegged to fiat currencies like the dollar. Their comprehensive study of 334 currency pegs since 1800 reveals a stark survival rate of only 14%, a statistic they believe applies to the stablecoin market as well. Despite stablecoins' role in providing a buffer against the volatile crypto market, the analysts argue that most lack the necessary credibility, reserves, and controlled systems to maintain their pegs long-term. This skepticism is particularly directed at Tether (USDT), the largest stablecoin by market cap, which has faced criticism for its alleged opacity and speculative nature.

Tether's Dominance and Controversies

Tether's position as a cornerstone of the crypto trading and derivatives market is underlined by its significant daily trading volume, surpassing even Bitcoin. However, Deutsche Bank's analysts express concern over Tether's "monopoly" and the potential market-wide implications of its speculated lack of transparency. The stablecoin's past misrepresentations regarding its reserve holdings, which resulted in $41 million in fines from the Commodity Futures Trading Commission, only add to these concerns. Despite Tether's efforts to improve transparency through quarterly attestations of its reserves, the analysts remain wary of the stablecoin's stability and its critical role in the crypto ecosystem.

Historical Parallels and Future Implications

The report draws parallels between stablecoins and historical currency pegs, noting that both require substantial reserves and issuer credibility to withstand speculative pressures. With 49% of fixed currencies failing and a median lifespan of 8-10 years for those that did not survive, the outlook for stablecoins appears challenging. The researchers emphasize the importance of macroeconomic factors, governance, and speculative dynamics in determining a peg's sustainability. Tether, in response, criticized the report for its lack of concrete evidence and clarity, defending the stablecoin's role and stability in the market.

Street Views

• Deutsche Bank Research analysts (Neutral on stablecoins):

  "Some may survive, although most will likely fail... The few successful pegged currencies that survived did so because they had credibility, were backed by reserves and operated in tightly controlled systems — three things many major stablecoins lack." "The 30% de-peg rate among some stablecoins is therefore hardly surprising, and many more defunct stablecoins are hard to account for."

• Marion Laboure, senior strategist at Deutsche Bank Research (Neutral on the comparison between currency pegs and stablecoins):

  "We chose to compare stablecoins to peg currencies because historically their similarities make them a close proxy as both are pegged currencies. Both require ample reserves and credibility from issuers, are exposed to speculative forces, and the majority of both stablecoins and historical currency pegs track the USD." "Macroeconomic factors are key to determining a peg sustainability... Issues around governance and speculative forces could also indicate when there’s a possibility of de-pegging."