Today Tether, dropped down to 85 US cents on some exchanges. Tether is far from living up to its name! Of course, many will claim “It’s just FUD!” (Fear uncertainty and doubt) spread by a fake email purporting to be from Binance.

Of course, it was FUD. The email was a fake. However, we believe that it doesn’t matter that it was only FUD.

If you received an email about Bank of America being insolvent and depositors losing all their money, you wouldn’t believe it. But why?

Firstly, we know the banks are regularly audited. Tether has never been audited. Although it is possible a GFC2 may happen, we largely know that the bank has at least some of the money they say they have. Tether’s trust is essentially blind-faith, and this faith has been rocked multiple times in the past.

Secondly, if a bank were to actually fail, the deposits are insured (how much it is insured varies by country). Tether on, the other hand, is a depositor at a bank/banks, opening it to even more counterparty risk than a regular bank deposit.

Given the next bear market may be triggered by the downfall of a large and trusted stablecoin, it is important that all cryptocurrencies and exchanges take this threat seriously. So what do we need?

Some say that we need decentralised stable coins. While this would be best, the reality is that a third party is needed to keep the value of such a token pegged to the value of the dollar.

This is where banks (or central banks) can step in. Banks (or a central bank) could offer bonds, tokenized to a blockchain, and redeemable by sending the token back to the bank’s address. There are benefits for the bank as well. By tokenising fiat, they can take the deposits that back the bonds, and use it to invest into other interest generating products like home loans, potentially with the confidence that the government will bank those bonds in a similar way they may back deposits at a bank. The time is now for a regulated financial institution to get serious about cryptocurrency (rather than just talk about it as they have done for 5 years) and create bank-backed stable coins which are truly stable and FUD resistant.

We believe that this stable coin should be traded on top of a trustless, distributed blockchain, that hosts a cryptocurrency and possibly other tokens. This doesn’t mean that the stable coin will be completely trustlessly traded. Banks will still need to conform to KYC and AML laws in their country. Rather, a stable coin should be built on top of a blockchain that allows stable coin transactions to occur on permissioned addresses, while being free to trade between the stable coin-backed fiat and the underlying cryptocurrency and tokens seamlessly.

This story was co-written by Hill (Jiuyuan) Tan.