The danger in letting crypto platforms create tokens that mirror a countries currency

Let’s imagine a fictional crypto trading platform called Bincoin.

There are two types of crypto trading possible on a platform like Bincoin - one is called P2P and the other is called Spot Trading.

In P2P trading, a buyer posts an offer on the website that they want to sell an asset for a certain price - e.g N1000 for 1USDT. A seller accepts this offer, then the buyer transfers N1000 to him. 1 USDT is then released by the platform to the seller.

This is a market-driven, and good way to buy crypto. All the buying and selling is done via normal bank accounts, there is no manipulation going on.

But there is something else called Spot Trading. In this case, anybody can go to Bincoin, and offer to sell 1USDT. Bincoin will execute this sale, and then deposit 1000NGN in their account.

But what exactly is this 1000NGN that they see in their dashboard. Is there actually 1000 Naira stored somewhere, ready to be paid out?

Sometimes there is, but there is no NEED for it to exist. Bincoin can simply tell this user than he has 1000 Naira based on an entry in their database, even if Bincoin does not actually have 1000 Naira available. Bincoin can claim that they do this because they have USDT that they can convert to Naira at anytime.

But here is where the danger comes in. Imagine that Bincoin tells this user that they have 1000 NGN, but what Bincoin is holding is 1USDT (Bincoin never converts the USDT to actual Naira). If the user comes to ask for his 1000 NGN, and the Naira has depreciated by half now, then Bincoin can convert 0.5USDT to NGN and pay the user out. Bincoin then makes 50% of the money.

But what if the opposite happens - the Naira gets stronger? Bincoin would then have to pay more to the user. But here is the clever thing, Bincoin does not actually pay out from its own money. Rather, it uses a network of merchants, who pay out based on current prices.

That means if the Naira appreciates, then Bincoin can transfer that internal NGN it has to those merchants, in exchange for the merchants paying those users out in real Naira. Bincoin loses nothing then.

What makes this possible is that Bincoin (and other crypto platforms) are allowed to create their own token that mirrors a real currency, but is not back by that currency. This is a risk free way of benefiting anytime the currency depreciates, and pushing the loss to their merchants anytime the currency appreciates.

I am not saying that Bincoin is doing this, but it is possible for any crypto platform to do this. That’s why major crypto trading platforms should not be allowed to have tokens that mirror a countries currency, except they are also maintaining real balances of that countries currency.