The Delicate Psychology of Stablecoins

There's an early scene in "It's a Wonderful Life," that stalwart of holiday season TV viewing, that provides one of the most insightful on-screen depictions of the core challenge of banking: maintaining trust.

Stablecoins, which promise that their token will trade at a fixed value relative to another asset such as the U.S. dollar or gold, face similar challenges in terms of building community-wide trust in their operations.

It's contingent upon a complex, multifaceted array of signals that, often, come down to a sense of character, a concept that, in the corporate world of today, we could define as "a trusted brand."

At first glance tether's trust challenge seems different from that of old-fashioned savings and loans like the fictional one in Frank Capra's film.

Just as Bailey found that his community's beliefs about him and his bank could be undermined by swirling stories and rumors and by a wider economic context that fueled fearful herd behavior, so too must stablecoin issuers consider a wide array of external forces that can shape trust.

In the parlance of Wall Street, their quota of trust must be able to withstand a "Stress test."

Importantly, the real test of trust can't be judged on current circumstances, at a time when many of these new stablecoins are enjoying such an influx of tether refugees that their market price has, from time to time, actually traded above par.

For reserves-backed stablecoins, this includes practices such as: naming the banking relationship so that users can properly assess the underlying counterparty risk; committing to independent security audits of the underlying code to show that tokens are destroyed when funds are redeemed; holding regular attestations of the firms' balances by trusted third-party auditors.

These multiple measures are necessary, says the white paper released by the Gemini Trust Company - led by Tyler and Cameron Winklevoss - because "[b]uilding a viable stablecoin is as much of a trust problem as it is a computer science one.

Still, the fact that trust is hard to establish and easy to lose means that considerations must go beyond even these seemingly robust measures.