IBM Partners with Stronghold to Launch Stable Coin, but is it a Good Thing?

IBM has entered the cryptocurrency space thanks to a recent partnership with the tech company behind stable coin Stronghold USD. Announced on July 17, the deal will see computer giant IBM look at ways to integrate the new token into business networks. The aim of the project, according to Stronghold founder Tammy Camp, is to offer an alternative to cash, credit cards and wire transfers for businesses and consumers.

“The token allows folks to do payments, foreign exchange between companies in a very seamless and frictionless and more secure way,” Camp said in an interview with Reuters on July 17.

Stabilizing Tokens with Traditional Assets

At its core, stable coin will operate in slightly different fashion to traditional cryptocurrencies. Unlike Ethereum, which operates as an independent, decentralized network, stable coins will be linked to established assets such as currency, gold and silver. Known technically as an asset-backed token, stable coins will be available to users at a rate of 1:1 on the US dollar. This dynamic has been made possible by Stronghold’s relationship with a Nevada-based bank, Prime Trust.

To use the token, businesses have to make a deposit with Prime Trust at the even money exchange rate. Once acquired, the stable coins can be used to pay other users for goods and services. For IBM and Stronghold, the system is a way to not only speed up transactions but offer a stable product. Over the last 12 months, anyone tracking the price of Bitcoin will have witnessed the seemingly inherent volatility of the crypto market. With an unstable technological base and an unclear future, Bitcoin and its altcoin peers have endured wild swings in recent months.

For investors, volatility has kept the crypto market alive. With coins offering the promise of potential riches when they surge, professional and amateur traders alike have poured money into the market. However, for businesses and governments looking to utilize cryptocurrencies, such unpredictability doesn’t make it a viable long-term proposition. Stable coin aims to address the underlying concern from its base on the Stellar blockchain. However, for crypto purists, the new technology may raise some red flags.

Do Stable Coins Pose Practical and Philosophical Problems?

Tether was created in 2015 and was linked to the price of the US dollar. Despite its value hovering around the $1 mark, its stability came under scrutiny after industry insiders suggested that

Tether was issuing more USDT than it had USD in the bank. The allegation was, and to some extent still is, that Tether is being manipulated in order to bolster the value of Bitcoin. Friedman LLP was originally contracted to audit Tether’s account to ensure the ratio of coins to dollars matched up. Although not ideal, the manual audits are the only way to ensure both parties, i.e. investors and Tether, are fulfilling their half of the exchange contract.

However, with Friedman LLP and Tether parting ways, the question of whether there is enough cash in the bank to cover the number of USDT tokens remains in place. Beyond the issue of counterparty party risk, Stronghold’s stable coin raises a philosophical question as to the nature of cryptocurrencies. Traditionalists will go back to Bitcoin’s original white paper and contend that the technology will only work if it stays true to the original decentralized structure. Being linked to a government-back commodity such as currency goes against this ideal and, for some, could damage the cryptocurrency market.

Is the Market About to Split?

In reality, stable coins are a hybrid system. Much like Ripple is finding a home with banks because it offers a more centralized blockchain, Stronghold’s product is a little more palatable for business. For the long-term success of stable coin, that’s all that matters. However, for the industry as a whole, this could be an issue unless people acknowledge the market is undergoing something of a split. On the one side, there will be pure cryptocurrencies that run decentralized, anonymous and independent blockchains. On the other, crossovers that take the best bits of blockchain technology and link them to existing systems are offering new opportunities for businesses.

Whether this emerging dynamic is problematic remains to be seen. In the short term, the fact IBM is now working in the crypto space will be seen as a positive. What’s more, a stable coin could be the perfect vehicle to show more businesses, politicians and consumers that crypto technology not only works but that it doesn’t have to be a scary proposition. Indeed, as the recent report from Imperial College London and eToro has suggested, cryptocurrencies will only replace fiats if they can prove the volatility test. Stronghold and IBM are working to address this. Does that mean stable coin will be the answer? Possibly not, but it could be the start of a trend that can alter the industry for the better.