Libra book cutting room floor: Libra as “stablecoin”; the early history of stablecoins

I wrote an extremely abbreviated history of stablecoins for the prospective Libra book, but I decided it was a bit of a digression, and didn’t really answer the question about Libra, which is always: “why?”

So I’ve posted it here for your amusement instead.

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A stablecoin is a cryptocurrency that keeps a more-or-less steady value — in contrast to Bitcoin or most other cryptos, where the price can go up and down wildly.

The earliest use I can find of the term “stablecoin” in its present sense^* is in a May 2014 article by Tim Swanson¹ — though Swanson tells me he saw people talking about “stable coins” in early 2014 in the Ethereum Skype chat room, and the idea was very much in the air in Bitcoin circles at the time.

The first stablecoin seems to have been BitShares’ BitUSD in 2014 — which was freely traded, but tried to use fancy algorithmic trading tricks to keep the market price steady at $1, rather than being backed by anything. The mathematical peg failed about five days after launch.²

Tether was founded as “RealCoin” in July 2014. Tether was (supposedly) backed one-to-one by US dollars on account — the tethers were just representations of dollars (this is called e-money, though Tether doesn’t use the term), and buyers were told they could redeem them for dollars any time. They were traded freely, but the price stayed very close to one dollar.

Tether went on to become hugely popular in crypto trading markets — because tethers kept a stable value, but moved around the world at the speed of crypto. Much faster than moving actual money around — hampered as it was by all those tedious regulations. For a while, Tether openly touted evading regulation as its advantage.³

In the 2017 Bitcoin bubble, people started questioning Tether’s backing — Tether didn’t seem to have a steady bank account, redemptions seemed not to actually be possible, regulators seemed absent, and tethers seemed to be issued whenever the price of Bitcoin needed a bit of a pump.⁴

By 2019, Tether admitted that tethers weren’t fully backed by dollars, and some of the backing was loans, or maybe bitcoins — though there wasn’t evidence of this either.

So other stablecoin initiatives started — more regulated versions, with audits, whose marketing point was pretty much “we’re not Tether.” These were mostly intended for the crypto trading market — not as money for consumers.

Libra the currency is not quite as stable as these currency-pegged coins — it’s backed by a basket of multiple currencies, which can go up and down. But the term “stablecoin” now seems to include basket-backed coins of this sort.

When a crypto trader says “stablecoin,” they mean something like Tether — but when a central bank says “stablecoin,” it’s always a euphemism for Libra.

Libra is also the first stablecoin aimed squarely at the everyday consumer.