Ultimate Resource On Stablecoins (#GotBitcoin)
Stablecoins are prevalent at all levels of crypto transactions these days, from the largest spot markets on exchanges like Binance to the trading pair of choice by many Hong Kong and mainland China OTC desks. The reason for the demand is simple: stablecoins provide a bridge between the fiat and crypto worlds. Ultimate Resource On Stablecoins (#GotBitcoin)
trusted and trustless stablecoins, with each referring to different levels of counterparty collateral risk.
@FranklinNoll In your opinion according to this excellent article (Does a Law From the Civil War Make Stablecoins Illegal?) .. which part definitively points to a clear violation of the law making Stablecoins illegal? The “scrip” part?
— Nanny Camera Rentals (@dplsurve) July 18, 2021
1864 law states: No one “shall utter or pass…any coins…intended for the use and purpose of current money.”
A stablecoin used for everyday retail transactions would be considered current money and be in violation.
— Franklin Noll (@FranklinNoll) July 19, 2021
We prefer trustless stablecoins as that model eliminates the counterparty risk of needing to trust a company, auditor, bank and humans in general.
HERE’S A NEW PAPER (Taming Wildcat Stablecoins) out of the Fed (+Yale) that lays out regulatory options for US dollar #stablecoins. Interesting–it was released yesterday (on a Saturday) & its first footnote references tomorrow’s big President’s Working Group meeting on the topic.????https://t.co/gfGWDbjjA4 pic.twitter.com/5VwMlnErHJ
— Caitlin Long ???? (@CaitlinLong_) July 18, 2021
Access to digital cash that’s publicly visible and under the ownership of the individual would eliminate these problems and this is what Bitspark has been pioneering with PHP, IDR, VND pegged stablecoins for our remote money exchange agents.
Unique Trading Opportunities
There are interesting trading opportunities here too. Exotic currencies around the world almost always depreciate against the US dollar with recent examples found in Venezuela, Argentina, Turkey, Zimbabwe and Iran.
A good trade here would be to short those currencies via placing a dollar stablecoin as collateral to back the issuance of these currencies and then selling them for dollars. Bitcoin traders, merchants, and individuals need to use these currencies everyday anyway, so there is a market of buyers to which issuers can sell to.
Over time as the issued currency depreciates, the collateral value backing it becomes more valuable relative to the issued currency, enabling the issuer to withdraw or exchange excess collateral. Having already sold their issued coins on Day 1, they have effectively shorted the exotic currency without having to deal with any questionable local custodian – that’s almost impossible to do within traditional financial services
At Bitspark, we are creating trustless stablecoins for every currency in the world having recently launched an exciting product with Stable.PHP, a stablecoin pegged to the Philippine Peso backed by BitUSD (the first and oldest stablecoin in existence) using the Bitshares protocol.
I will be discussing more about some of the trading opportunities in taking short positions on Stable.PHP at this year’s Invest.Asia conference in Singapore. For example, when your collateral is BitUSD and you are issuing an exotic currency like Stable.PHP, you can take a leveraged position long or short.
Our set of exotic stablecoins will only be expanding through the year enabling more people to access a digital financial system in their local currency.
G7 Says ‘Global Stablecoins’ Pose Threat To Financial Stability
The G7 group of nations has reportedly drafted a report which says that “global stablecoins” pose a threat to the global financial system.
According to the BBC on Oct. 13, a draft report from the G7 outlined the various risks associated with digital currencies. It also said that, even if member firms of the governing Libra Association addressed regulatory concerns, it may not get approval from the necessary regulators, stating:
“The G7 believe that no stablecoin project should begin operation until the legal, regulatory and oversight challenges and risks are adequately addressed. […] Addressing such risks is not necessarily a guarantee of regulatory approval for a stablecoin arrangement.”
The G7 also states that global stablecoins with the potential to scale rapidly could stifle competition and threaten financial stability if users lose confidence in the coin.
The report will purportedly be presented to finance ministers at an annual meeting of the International Monetary Fund this week.
Further Problems For Libra?
The BBC states that, while the report does not single out Facebook’s proposed Libra stablecoin project, it could spell further trouble for the already beleaguered proposed payments system.
Global regulators are increasingly leaning on the project, with the Bank of England recently establishing provisions with which it must comply before it can be issued in the United Kingdom.
Facebook CEO Mark Zuckerberg will testify before the United States House of Representatives Financial Services Committee about Libra later this month. The head of the committee, Democratic Representative Maxine Waters, has been a noted critic of the project. Earlier this year, the committee drafted the “Keep Big Tech out of Finance Act.”
Libra has seen several major partner firms of its governing consortium leave the project recently. On Oct. 4, major payments network PayPal withdrew from the organization and was soon followed by Visa, Mastercard, Stripe and eBay.
Furthermore, Finco Services of Delaware initiated a lawsuit against Facebook, alleging trademark infringement, unfair competition, and “false designation of origin” regarding the use of the Libra logo. The plaintiff is also suing its former designer, who did the logo work for Facebook, for reusing the design.
Bitcoin Has Failed But Global Stablecoins A Threat, Say BIS And G7
Bitcoin and other early cryptocurrencies have failed as an “attractive means of payment or store of value,” says a new report from the G7 and Bank of International Settlements (BIS).
However, the October report, argues that widely adopted asset-pegged cryptocurrencies, or stablecoins, such as Libra are a growing threat to monetary policy, financial stability and competition.
Widely adopted stablecoins, dubbed “global stablecoins” in the report, have the potential to reach an international audience and have “significant adverse effects” on the current economic system, it argues.
Meanwhile, “[first generation cryptocurrencies like bitcoin] have suffered from highly volatile prices, limits to scalability, complicated user interfaces and issues in governance and regulation, among other challenges. Thus, cryptoassets have served more as a highly speculative asset class for certain investors and those engaged in illicit activities rather than as a means to make payments.”
Stablecoin taxonomy – defined as a money equivalent, contractual or property claim, or right against an issuer for an asset – will remain a preeminent legal question for the time being, the report continues. The effects of stablecoins on incumbent money systems such as wire transfers have yet to be fully understood as well.
While stablecoins may offer faster, cheaper and more inclusive payments, they can “only be realized if significant risks are addressed.”
In a footnote, the G7 report says the Swiss Financial Market Supervisory Authority’s (FINMA) handling of the Libra Association, which falls under the regulator’s purview in Geneva, agrees with the G7’s stablecoin recommendations.
FINMA recently said Libra highlights the need for international coordination and “appropriate prudential requirements” for all services offered over that of a payment system.
The report on stablecoins was prepared at the request of the G7 in July, soon after the launch of Libra back in June. While obviously directed in part at the project, the report only mentioned Libra in one footnote.
Responding to the G7, the Libra Association sent out a memo Friday saying the stablecoin is “not intended to change the role and influence of central bankers,” adding:
“Wallets and other financial services operating on the Libra Network (including exchanges and other on and off ramps) will have to comply with regulations, such as local capital controls, which can be tailored to prevent large scale flights from local currency to Libra coins in emerging markets.”
Why The ECB Is Getting In On The Stablecoin Game
Welcome to The Breakdown with Nathaniel Whittemore. Starting off this episode we discuss European Central Bank (ECB) President Christine Lagarde’s comments on stablecoins that inflamed Crypto Twitter yesterday. She said projects in the space indicated clear demand even as she gave bitcoin a bit of a backhanded compliment.
Meanwhile, two hugely hyped projects – Orchid and Filecoin – have both resurfaced. What might this mean for the token narrative going into 2020? We’ll explore what the growth of these tokens means for the market in general.
Lastly, in her end-of-year piece for CoinDesk, Jill Carlson triggered an avalanche of commentary by arguing that crypto isn’t supposed to be mainstream because its primary use case is for censored transactions. We’ll go deep on that subject on today’s podcast.
Bitfinex Users Can Now Trade Tether Gold Stablecoin Against Bitcoin
After launching trading of gold-pegged stablecoin Tether Gold (XAU₮) last week, Bitfinex now allows users to trade Tether Gold against Bitcoin (BTC).
On Jan. 30, Bitfinex has rolled out three margin trading pairs for Tether Gold, a digital asset backed by physical gold, which was introduced by Bitfinex’s affiliate firm Tether on Jan. 23.
The crypto exchange exchange now allows traders to trade Tether Gold against Bitcoin as well as the U.S. dollar and dollar-pegged stablecoin Tether (USDT).
Margin trading — a feature that enables traders to borrow funds to increase leverage — will require an initial equity of 20% and provide a maximum leverage of 5x, Bitfinex noted.
Tether Has Been Accused Of Not Backing Its Usdt Token With Enough Dollars
Tether Gold is one of the stablecoins launched by major cryptocurrency firm Tether alongside the controversial stablecoin USDT. Known as the world’s leading stablecoin, USDT has been subject to multiple controversies as some reports suggested that Tether does not have enough dollars to back the token. The company has been struggling to convince the public that USDT is backed by the appropriate amount of dollar holdings.
Meanwhile, Tether Gold is claimed to be the “best way to hold gold” as its physical gold storage backing is purportedly held in a Swiss vault, adopting “best in class security and anti-threat measures.”
Tether And Bitfinex Are Facing A Lawsuit On Crypto Market Manipulation
On top of the controversy around Tether’s USDT, both Tether and Bitfinex have been accused of cryptocurrency market manipulation, with some ongoing lawsuits alleging that the companies caused Bitcoin’s 2017 bull run that lead up to the all-time-high of $20,000 per coin.
As the companies have faced multiple suits on the matter, a court in New York ordered on Jan. 24 to merge four lawsuits against Tether and Bitfinex. As recently reported by Cointelegraph, the consolidation of suits has raised questions regarding the plaintiff’s leadership.
Why Betting On Gold-Backed Stablecoins Is A Losing Game
Gold has been regarded as an eternal value since times immemorial. This shiny metal still acts as a store of value — especially in countries like India. Due to its exclusivity, gold is an essential element of the global financial system, and since this metal is not subject to corrosion, it has many areas of technical application. Unfortunately, the metal is heavy, its transportation is fraught with certain difficulties, and storage costs a lot of money.
The last century, however, has brought more changes within the existing world monetary system than all the previous millenniums. Following the national fiat currency advents, the digital world with electronic money has stepped in over the past 20 years, and we are now close to seeing the establishment of e-money 2.0 with the help of emerging blockchain technology. We are witnessing an asset fusion process taking place, where digital currencies are backed not only by public interest and hype but also by the particular assets or commodities. But the question is, can the past merge with the future to provide better financial solutions?
Choosing The Underlying Asset For Stablecoin
Many stablecoin projects haven’t produced the value and strength anticipated a few years ago when more and more companies concluded that unbacked cryptocurrencies couldn’t lead the future of the digital market. Out of all the projects ever launched, the Stable Report data indicates that more than 150 stablecoins are either inactive or dead. Moreover, more than 40 stablecoin projects that were backed by gold have already closed up shop.
According to Blockdata, it’s vital that fiat-backed stablecoins have some type of centralized entity controlling the security and that gold-backed assets have to be able to prove that the gold reserves exist and are stored somewhere safe. If a stablecoin is backed by gold reserves, it should be solid enough to survive the extreme market movements often experienced by other digital currencies.
However, gold itself is not a stable asset — it’s a public store and a way of accumulating value over the long run. Therefore, how can such an asset be the ultimate measure of value in the future?
The business model of stablecoins is built around the fact that the issuer receives interest income from money market rates, which allows them to engage in business development as well as pay back the audit and board of directors. Aside from issuing a gold-backed stablecoin, the storage of collateral comes at an additional and mandatory cost, and the stablecoin itself is impossible to audit.
Moreover, gold is a metal that can be faked by using tungsten. The main uses for tungsten fake gold bars are to protect wires from corrosion or for soldering to other metals. Tungsten fake gold is sustainable, saving energy and posing no threat of pollution to the environment.
Maintenance of huge amounts of gold results in a negative carry — a condition where investments cost more than they return over the short-term. Even while tokens maintain the price of gold, gold-backed tokens are doomed to a decaying value per unit.
The rotten foundations of gold-backed stablecoins
While companies jumped on the crypto bandwagon in droves following Bitcoin’s (BTC) meteoric price increase in 2017, the logical choice would have been for these projects to follow suit.
The reality of last year’s market suggests that gold is not the best choice for the currency of the future, as many gold-backed stablecoin projects failed. There are specific reasons behind this outcome:
* A Gold-Backed Stablecoin Is Derivative For An Action That Changes In Price And, Therefore, Can Be Classified As A Security.
* Millennials Or The New Generation Do Not And Will Not Rely On Old-World Values Such As Gold, Which Is Nothing But A Relic Of The Past For Them.
* Current Bitcoin Generations Rely On Crypto To Pay For Their Everyday Latte Or Shopping Rather Than Gold Coins.
* Gold Has A Potentially Unlimited Supply, Which Is Not A Feature Of The Bitcoin Or Other Crypto Assets With A Fixed Amount Of Coins That Could Be Mined.
* We Don’t Know The Exact (Or Even Close To Exact) Numbers Of Gold Assets Held By Governments, Which Are Likely Not Audited — Even The U.S. Bullion Depository Was Never Audited.
Choosing Solid Ground For A Stablecoin Project
Thus, we can conclude that by using gold as the underlying layer to a stablecoin, its creators increase the chances of a project failure.
However, it’s unlikely that these statistics are reviewed by many of the industry’s finest. Tether (USDT), a controversial but significant platform issuing stablecoin, has recently announced its plans regarding the launch of a digital asset providing exposure to physical gold (XAU₮).
There have been reports of other crypto-based platforms also working on similar products such as Coin Shares, which has been exploring the possibility of launching a gold-backed cryptocurrency. While Bitcoin has often been regarded as “digital gold,” only the future will tell whether either Tether Gold or another similar project comes out on top.
Despite the fact that the possible benefits of fusing both physical and digital assets may look lucrative, this is not timely innovation in crypto ecosystems. Tether is infamous for having problems with auditing fiat, which can easily be audited in electronic form. Moreover, as gold can be easily replaced with Tungsten, only more auditing issues arise.
Gold represents everything that the new generation stands against. In these circumstances, the new-age global money transfer system can’t be built upon gold since governments across the globe confiscated gold in the 1930s. They still control the majority of this precious metal and are able to influence the market for gold through sales and lending.
We can’t say that gold can be 100% replaced by digital assets, as doing so still represents difficulties. Despite general misconceptions regarding gold, it still offers the most lucrative investment opportunities. Despite some fluctuations, gold constantly increases in price over time.
The world needs a next-generation e-currency designed to provide better options for trading, payments and transfers. In a quickly developing world where digitalization and speed are vital, it is only a matter of time before such an asset can be created.
When a new stablecoin is being designed, not only the particular underlying assets matter but also a careful calculation of the steps before the launch to avoid legal and governmental pressure that projects like Libra are experiencing. Ultimately, gold is not the asset that stablecoin-issuing companies should look up to, but there are possibilities to tie cryptocurrency to other assets — such as the United States dollar or the euro.
In fact, the euro is a solution that is already digital-ready. Fiat-backed stablecoins might just be the efficient solution to shortcut payments flow in low competitive markets, like acquiring in tourist-heavy destinations, where merchants are being charged a high, single-digit percentage fee to process foreign credit cards.
Moreover, it can be used to fix the gap between the classical financial industry and steadily maturing digital assets.
Bicoin may not be the digital currency that can ultimately replace cash. Concerns have recently grown as Elon Musk has recently joined the camp of crypto critics who do not believe in digital money taking over. We cannot be sure whether the day of its dominance over cash payments ever comes, but we can definitely say that gold-backed stablecoins will never have a future.
USD Stablecoins Are Surging, But Zero Interest Rates Complicate Business Model
“There are decades where nothing happens, and there are weeks when decades happen.” Vladimir Lenin – allegedly
The last 30 days have been historic by any meaning of the word. The coronavirus is shaking up life as we know it, and has already caused unprecedented dislocations in both the traditional financial markets and the crypto market.
In the center of this financial turmoil was the U.S. dollar, which saw a “flight to safety” from many different assets, including ones deemed “safe” by traditional investors. As I write this article, the S&P 500 is down 20 percent against the dollar in 2020, crude oil down 62 percent, the British pound down 9 percent, and both the Russian ruble and the Brazilian real are down 25 percent respectively.
While the crypto markets have been insulated from the markets at large for a long time, this is no longer the case now that public blockchains have effectively become rails for the U.S. dollar in the form of dollar-backed stablecoins. Dollars on the blockchain represent the third largest asset in crypto after bitcoin (BTC) and ether (ETH) , ahead of XRP (XRP) and bitcoin cash (BCH). In terms of transactions volume, they are even encroaching on bitcoin itself.
And since they are backed by dollars, they are both affected by global changes in demand for the U.S. currency as well as the monetary policy of the Federal Reserve.
Since bitcoin fell from its $9,000 range all the way below $4,000 before consolidating around $5,000 in mid March, stablecoins as a group have seen net inflows of around $2 billion, a 33 percent increase. This represents the largest surge in demand ever, in line with the dollar’s demand surge in traditional markets.
Most of these inflows went to tether with +1.55 billion since the start of the year, but USDC and BUSD also gained +170m and +150m respectively.
As demand increases, investors bid up the price of a token beyond one dollar. That creates an incentive for arbitrage firms to step up and introduce more supply into the system until the spread closes. To give an example, a firm could deposit $10 million with tether to buy $10 million USDT tokens – for exactly $1 apiece. Then it sells these tokens for slightly more than $1 and pockets the difference as profit.
For the last month, USDT has consistently traded >$1 as a result of this increased demand, explaining the massive 1.55 billion inflows.
Why do investors want USD stablecoins now more than ever? I believe there are three main reasons for this surge in interest.
First, we have seen a flight to safety from risky crypto assets as the markets tumbled. I saw people who are bullish on cryptocurrency in the long-term divest for the short term as previously uncorrelated asset classes started to move down in lockstep.
Second, there is big demand for USD from emerging market currencies that are weakening against the dollar, as described in the intro. Due to its offshore nature, USDT in particular has become one of the best ways to dollarize in places like China, Indonesia, Russia and Brazil.
Finally, the physical reality of coronavirus quarantines and travel restrictions has made moving cash extremely hard for the time being, especially between countries. Dollars on the blockchain have some of the desirable properties of cash, especially in terms of permissionless access and privacy (if used correctly), and can act as a substitute – at least temporarily.
While dollar-backed stablecoins increasingly turn into “eurodollars lite,” they are also subject to the monetary policy of the dollar. On March 15, the Federal Open Market Committee (FOMC) lowered the federal funds rate by 1 percent to 0 percent-0.25 percent to soften the upcoming recession caused by the coronavirus.
This reduction actually has big effects on the business model of these stablecoin issuers. To understand why, we only need to look at how they make money. So far, there are two main ways.
First, by investing their reserves (usually by lending it to commercial banks, or buying AAA-rated fixed income securities like U.S. government bonds). Going into 2020, the largest stablecoins held a collective $5.5 billion of customer funds. At an interest rate of 1.25 percent, these deposits could have generated up to $68.75 million in revenue for them.
“Even with revenue from interest drying up, I see a big future for dollar-backed stablecoins”
Because the fed fund rate affects all commercial interest rates, the issuers of coins like tether or USDC now stand to make significantly less money from interest going forward. If the rates become negative, which is the case in Europe and Japan, then they might even have to pay in order to deposit money, turning their business on its head.
Due to the reduction in revenue, there are concerns that stablecoin operators could be pushed into riskier investments to pay the bills, for example corporate bonds. This dynamic could also explain why euro- or yen-backed stablecoins have never taken off.
As a second revenue stream, some operators (like Tether) already charge a fee, currently 0.1 percent, on deposits and redemptions, while others (like USDC) don’t. We might also see stablecoins explore entirely new business models to meet the new zero-rates reality. USDC seems to push into the direction of becoming a defacto commercial bank by providing APIs for payments (including from fiat credit cards), wallets, marketplaces and business accounts.
For now, it seems more likely that operators will try to build (and charge) adjacent businesses made possible by these stablecoins instead of passing on costs to retail users, e.g. via inflating the token supply relative to deposits as a form of usage tax, or implementing an additional transaction fee (PAX already does this for its gold-backed token.)
The latter brings its own challenges, as users are incentivized to wrap the original tokens in a trustless contract and transact in the receipts instead (similar to WETH/ETH.) Centralized exchanges could once again be the kingmakers in this situation, as they can decide to support the wrapped tokens or not.
Even with revenue from interest drying up, I see a big future for dollar-backed stablecoins, especially now that the opportunity cost for holding stablecoins has effectively gone to zero.
We’ll probably see even larger inflows in the future, both from places with negative rates in their traditional bank accounts as well as emerging markets with currencies that rapidly lose their value against the dollar. As long as users value the service offered by stablecoins, I see good odds that operators can develop new and sustainable business models.
How Zero Interest Rates In The US Will Impact Stablecoin Adoption
We are living through interesting times. At the time of writing, roughly half of the world’s population is on lockdown, with 90 countries in various forms of confinement and the pandemic crashing global stock markets.
Although we’ve seen some relief in certain parts of the world, the pandemic is far from over, and there is a tangible fear of a possible global recession. While several easing measures have been adopted by the world’s banks to contain the worst of the economic damage, the pandemic has created a perfect environment for crypto.
However, the new measures currently being taken by the banks may also create new challenges. There has been increasing concern from both the traditional and crypto markets about the effects that negative interest rates in the United States will have on the economy.
In fact, Bitcoin (BTC) whale numbers have hit a two-year high as fear-selling has created a mirror image of 2016 market conditions. But where does this leave the stablecoin market and its business model?
As with all forms of digital currency, popularity and adoption depend on how the currency stores its value and its means of payment. From USD Coin (USDC) to Facebook’s Libra, the rise of stablecoins can be accredited to their attractiveness as payment methods.
They have a global reach, low costs and no delays. They can also be embedded in digital applications or integrated into customer relationship management platforms due to their open architecture. They have also proved to be safe from the very popular data-hog crypto-mining malware.
At the moment, most stablecoin claims get delivered to the issuing institution or its known underlying assets with face value redemption guarantees. For example, a coin bought for one U.S. dollar may be redeemed for an actual U.S. dollar, but there is no government backing involved.
The U.S. government has rushed to the defense of American small businesses, pledging nearly $600 billion in loans as part of its Paycheck Protection Program. But many financial technology lenders have struggled to secure loans through the program.
Some businesses may make it through the application process, but a simple business loan calculation shows they would still be cash strapped in a matter of months. This doesn’t take into account the fact that the dollar would be devalued, lowering the relative value of any cash reserves. Stablecoin investments, on the other hand, should deliver high yields of interest if invested properly.
Trust is created by the issuance of safe assets against any stablecoins, and the settlement technology is usually based on a blockchain model. But its biggest attraction by far is the promise from networks to make transacting an integrated and social experience, as most of the models are designed by companies that have a user-centric approach.
With organizations bracing for cryptojacking and the pandemic currently encroaching on all the financial markets, Coin Metrics’s “State of the Network” report has shown clear indications of spectacular growth in the supply of all stablecoins, growing its market share at the time COVID-19’s impact on global markets started to become visible.
Looking At Interest Rates, Stablecoins And The Dollar
The dollar has always been seen as one of the safer currencies during troublesome times, as the recent market anxiety led by COVID-19 goes to show. Just as businesses want predictable revenue so that they can plan for the future, investors want a safe bet when it comes to their investments.
As panic started to make itself known, the dollar index grew from 94 handles to around 103 at the peak of the sell-off. The same movement can be seen when it comes to stablecoins. As the market started crumbling, U.S. dollar-pegged stablecoins such as USDC and Tether (USDT) were seen as safer crypto assets as compared to other cryptocurrencies.
As of March, the market capitalization of the biggest stablecoins has grown significantly. U.S. dollar-pegged stablecoins are linked to the demand of dollars by nature, and we cannot ignore the market’s view on the greenback or the Federal Reserve’s stance on interest rates when looking at their overall position in the financial sphere.
One of the biggest sources of revenue for stablecoin users has been the interest generated by stablecoin funds deposited into their traditional bank accounts by stablecoin issuers. As the Fed has cut its benchmark rates to 0.25% in light of the pandemic, banks will also lower their percentage yields on saving accounts to match the Fed’s move, leading to less income for stablecoin users.
If the rate goes any lower, like we’ve seen in Europe and Japan, stablecoin users will definitely be affected.
Stablecoins Will Continue To Flourish
The current low interest rates may trigger some stablecoin users to start collecting fees in some way or form or to pursue other crypto avenues, but stablecoin issuers will not be left out to dry. In fact, it may benefit them in new ways. Institutional interest, especially in the security transaction and money movement areas, is flourishing.
Several of the major investment banks are stepping up to take advantage of blockchain technologies, chief among them JPM Coin of JPMorgan Chase. To brighten the light at the end of the tunnel, it is not only the giants in the banking industry that want to take advantage of the technology, but the smaller central banks have also shown growing interest.
The People’s Bank of China is close to finalizing its central bank digital currency, or digital yuan, and according to reports the central bank believes that its digital currency will be “a convenient tool for its zero and negative interest rate.” At the same time, the Fed, the European Central Bank, the Bank of England and the Bank of Japan are also stepping up their efforts in this area.
Even though digital bank currencies and stablecoins do not work the same way, the growing awareness of blockchain and the technology’s disruptive nature could lead to fantastic collaborations. This could also boost trust levels among consumers since many of them still feel that stablecoins, like most cryptocurrencies, could easily serve as an enabler of their online privacy.
The decentralized finance and open finance movements can also be significant in the future growth of stablecoins. With rising national debts, demand for a U.S.-dollar centralized collateral within the DeFi system has been growing.
According to Paolo Ardoino, the Chief Technology Officer of Tether, “You cannot have algorithmic stablecoins relying only on the crypto-assets themselves.” Ardoino continued to state that centralized collateral of the U.S. dollar could provide a “safe set of shoulders” to the DeFi ecosystem. It may be worth our while to keep an eye on these developments.
Our current low interest climate may leave stablecoin users at a loss when it comes to managing their assets, but it should be seen in a positive light. When looking at the bigger picture, the concept of the “stablecoin” has established itself as an essential part of the crypto space, and its importance will continue to expand going forward.
Individual investors may find that stablecoins provide safety when we experience harsher market conditions. Investment options within the stablecoin space can always be reevaluated by traders and investors alike when the market becomes more competitive again.
The Stablecoins Movement — Toward Stability in Crypto Assets
Blockchain technology is becoming more and more common in the traditional finance market with stablecoins and CBDCs — could these bring stability for the crypto industry?
Stablecoins have become widely popular in the digital currency industry because they don’t have the volatility associated with other cryptos like Bitcoin (BTC) for instance. Despite their popularity, the first wave of crypto assets — of which Bitcoin is the most popular — is failing as a reliable means of payment or store of value in several ways. They are susceptible to complicated user interfaces, highly volatile prices, issues in governance and regulation, and limits to scalability, among other challenges. Thus, instead of serving as a means of payment, cryptocurrencies in the past have often served as a highly speculative asset.
In response, the emerging stablecoins offer the features of conventional crypto assets, while linking the coin’s value to a real-world asset or pool of assets, thereby stabilizing its price. This stabilizing mechanism at the core of this initiative determines whether the units issued can effectively maintain a stable value or not. What is a working stablecoins definition? Per the Bank for International Settlements:
“Stablecoins, which have many of the features of earlier cryptocurrencies but seek to stabilize the price of the ‘coin’ by linking its value to that of a pool of assets, have the potential to contribute to the development of more efficient global payment arrangements.”
Needless to say, since the stablecoin price is more or less stable, it has become increasingly important in the digital currency space. Days before the entire world went into full lockdown, stablecoins and CBDCs, their government-backed sibling, were a hot topic that we have discussed at length.
In this article, I outline some of the crucial aspects of this new promise, beginning with a comprehensive list of stablecoins. Also, I look at how the industry’s giants are competing to make the best of the opportunity.
And, as per my new collaboration series of articles, I reached out to some industry leaders to get their thoughts (consensus), which I included below.
A List Of Stablecoins
What are the best stablecoins? The most common ones are fiat or asset-backed where the stablecoins serve as a digital representation for a specific asset — say, one coin equals one United States dollar. A second type is known as crypto collateralized stablecoins. Here, several distinct cryptocurrencies, put together in one group, act as a collateral for an issued stablecoin. Then, there are algorithmic stablecoins that eliminate the need for economic markets — a digital authority is created to stabilize the on-chain currency. To simplify, let’s look at an example from each category.
Tether Stablecoins (Asset-backed)
Endowed with a significant first-mover advantage, stablecoins are among the first crypto assets to surface. Issued by Tether Limited, it operates on the Omni protocol as a token issued on the blockchain. Not only is it backed by the U.S. dollar (USDT) but Tether is also pegged to the euro (EURT) due to the control wielded by the European Union.
Additionally, it has launched a Chinese yuan-backed stablecoin (CHNT).
Tether crypto dominates the stablecoin market in terms of market capitalization and trading volume. In February 2019, it accounted for almost 90% of the entire market capitalization of stablecoins. While the market has been witnessing stiff competition, Tether’s quasi-monopoly remains unchallenged with its trading volumes hovering around 95% of the overall stablecoins market and the tether crypto price — which is pretty impressive. It also happens to be the largest tokenized stablecoin, with an average daily volume of $40,337,665,581 and a capitalization of $4,633,935,920, according to stablecoin CoinMarketCap.
MakerDAO stablecoins (Crypto-collateralized)
Even if a fully trustworthy audit was realized, any kind of regulatory issue is likely to jeopardize the convertibility of Tether. There are plenty of stable digital currencies available, but only one can claim to be widely used, decentralized and trustless — MakerDAO. The MakerDAO CDP portal is responsible for the generation of Dai (DAI), Maker’s in-house stablecoin. It offers an alternative that does not rely on existing models and, as a system, is largely analogous to a pawn shop loan. What is the MakerDAO price? It is backed by on-chain collateral, Ether (ETH), with a floating peg to one U.S. dollar.
The MakerDAO model leverages a dual token system comprising primarily of the stablecoins Dai and a secondary unit called Maker (MKR). Here, we’re looking at a Decentralized Autonomous Organization — that is, a decentralized organization represented by cryptographically encrypted “rules” controlled by all MKR holders on the network. They are responsible for carrying out various administrative tasks. As they are in charge of defining the risk parameters, they are also responsible for maintaining a stable Dai exchange rate.
NuBits Stablecoins (Algorithmic)
Building on Peercoin’s platform, NuBits (USNBT) has been operational since 2014 and is one of the oldest algorithmic stablecoins, with a peak capitalization of $674,584 and a daily volume of $13,176.59, according to CoinMarketCap. Although it recovered remarkably from a major loss of confidence back in 2016 and was additionally able to withstand temporary price fluctuations, the value of NuBits coins failed to recover after a drop in March 2018.
Its stability mechanism largely relies on a dual token design. Share token holders can initiate the creation of new NuBits. However, the share tokens are not pegged to any specific price; they have a fixed supply; and they can be used to validate transactions. The contraction of the NuBits supply is incentivized through dynamic rewards for locking NuBits.
Coinbase vs. Binance — The Race For Stablecoins
Of all the companies operating in the crypto market, none have grown as significantly in terms of the crypto market cap as these behemoths that have exceeded Morris Katz in painting a new industry. There have also been multiple claims about Binance being the fastest profitable startup to achieve unicorn status — a private company valued over $1 billion. However, Binance is not the undisputed king — Coinbase saw similar explosive growth when the exchange reached a valuation of $8B from $483M in just one year. Coinbase charts are thus looking great.
Binance, though, has a complete monopoly over the market in terms of the trading volume. On Dec. 18, the 24-hour trading volume was $1,448,959,110 (it was approximately $241,458,067 across all trading pairs on the Coinbase Pro exchange although it has significantly increased). Moreover, Binance has a very low fee of just 0.05% per trade for its Binance Coin (BNB). Once you purchase Bitcoin, Litecoin (LTC) or Ether, you can use Binance to convert one of those into nearly any altcoin.
Although Binance has overtaken Coinbase in many ways, it barred American users from its global exchange thanks to regulatory reasons. However, they opened a smaller exchange called Binance.US to continue serving American customers after receiving approval from the New York State Department of Financial Services.
However, days later, Coinbase announced the establishment of the Crypto Rating Council, of which Coinbase and Kraken were two of the founding members, along with other predominantly U.S. firms (Binance was, as you may have guessed, excluded).
Circle’s Entry Into The Stablecoins Movement
Although it had emerged as a behemoth of the industry in 2018, Circle, by the end of 2019, had discontinued its payments app and sold Poloniex to an Asia-based consortium. Thereafter, its footprint continued to shrink. The company’s strategic roadmap for the year 2020 involved the sale of its over-the-counter trading desk to Kraken for global expansion.
Kraken, the cryptocurrency exchange based in San Francisco, has been pursuing its expansion spree for a while with the acquisition of product-specific firms. This vital sale will help Circle not just to focus solely on its stablecoins but also to reorganize resources, improve team agility, achieve a specialized product portfolio and lower complexity in operations.
According to Cryptobriefing, it will perhaps soon assume a leading role in the stablecoin project’s infrastructure.
Blockchain consensus with industry leaders
Here’s What Other Industry Leaders Feel About This Important Topic.
Andy Cheung, The Founder Of Acdx And The Former Coo Of Okex:
“Stablecoins seem to offer the best of both worlds: utilizing blockchain technology and offering stable value. Personally, I see it merely as a branch of cryptocurrency and is developed to cope with regulations. The most successful model is fiat-backed stablecoin, yet it failed to align with the vision of Bitcoin — to liberate money from banks and giants. That said, it plays a crucial role in the mass adoption of cryptocurrency and bridges the gap between crypto and fiat.”
Paul Veradittakit, Partner Of Pantera Capital:
“Pantera is an investor in both Maker and Circle. I believe that stablecoins are important for payments, decentralized finance and other applications, and it will be great to see how they evolve and gain adoption. At the end of the day, one way folks can go out to market is having the right relationships and use cases such as payments, Eco and Luna are both great examples of that.”
Vincent Molinari, the founder, CEO and host of Fintech.TV and Digital Asset Report, and the CEO of Molinari Media:
“As the evolution of finance and technology continue to intersect globally, cryptography will continue to deepen its role in global capital flows. The advent of stablecoins, with underlying pooled assets, will continue to be woven into payment systems. This will perhaps see its most significant near-term adoption in the global securities settlement processes. This will create efficiency and scale between global counterparties and meaningful cost savings will be achieved in the cost of carrying capital between transacting syndicates and consortiums as continuous linked settlement and netting will occur via top tier stable coin usage.”
What Lies Ahead As Far As Stablecoins Are Concerned?
The coming years will possibly witness the advent of the second generation of branded stablecoin projects that would include secondary market liquidity, loyalty program integration and branding opportunities. Moreover, now that we have the much-controversial Facebook’s Libra, we might expect stablecoins from other major brands with a large customer network like Delta and Amazon.
Further, the Bank of Canada governor mentioned stablecoins in his 2020 vision. It’s true that just like any other invention, stablecoins offer as many conundrums as they do potential benefits. Yet, it’ll be wise on the part of policymakers to envision far-sighted regulatory regimes that will serve to meet the challenge and usher in a less fluctuating future for the stablecoin cryptocurrency.
Uphold Announces Expansion Of Its Stablecoin Portfolio
Digital payment platform Uphold launches a new Stablecoin Center to meet increased demand for digital dollar offerings.
Uphold, a digital money platform providing access to investments and payments using blockchain technology, has announced the expansion of its stablecoin offerings alongside the launch of a “Stablecoin Center.”
The Center, according to the announcement, will offer access to six stablecoins in the platform, including four of the most popular in terms of market volume: Tether (USDT), TrueUSD (TUSD), USD Coin (USDC) and DAI.
Uphold has also added coins from the Universal Protocol Alliance, such as UPUSD and UPEUR.
Writing To Cointelegraph, Uphold’s CEO, JP Thieriot, Praised The Recent Addition Of Stablecoins:
“Stablecoins are inherently less volatile than cryptos being pegged 1:1 to safe-haven currencies like USD and are quickly being adopted by central banks around the world.”
According to Thieriot, the goal of the new Stablecoin Center is to allow people to transfer value between stablecoins, traditional banking networks and crypto markets. He said:
“Stablecoins are ostensibly a measure of interest in crypto combined with the shortcomings of the legacy financial system. The units of account are still the Fiat units of account. Nothing changes on that front. Moving from bank USD to digital USD just means better velocity, more options and, perhaps most notably – higher interest yields.”
Thieriot also mentioned that the Stablecoin Center will help users determine which stablecoins are comparatively better than others in terms of transparency, auditability, liquidity, and available interest rates, adding:
“Stablecoins have generally come a long way from their inception, and some of the newer ones are clearly superior, in nearly every regard, to the older ones. Hopefully, users will overcome inertia and start to go with the best constructed alternatives.”
Key Features To Consider
On the key features of the Stablecoin Center, Uphold said that they relied on the principles of accessibility, connectivity, financial stability, and interest earning to expand their new product portfolio.
Thanks to the new “Center,” Uphold now offers users access to funds through debit/credit cards and bank accounts in more than 40 countries, together with wallets on seven crypto networks. Uphold currently supports over 50 different currencies including cryptocurrencies, national currencies and commodities.
Supported stablecoins will also be eligible to earn up to 10% interest via a third-party app, Cred Earn.
CEO of Cred Earn, Dan Schatt, mentioned that Uphold customers are receiving the most competitive interest rates available on stablecoins, commenting, “We’re excited to see this segment of the crypto-asset market maturing.”
Thieriot further noted that Uphold plans to provide support for any new stablecoins that prove to be legitimate and of public interest.
Stablecoins Provide Cover As Global Risks And Uncertainty Quake
As the global economy trembles, investors continue to find sanctuary in stablecoins, which have increased their market cap dramatically.
As the global economy trembles, investors continue to find sanctuary in stablecoins. In the most recent 12-month period (ending April 29, 2020), the three top stablecoins — Tether (USDT), Circle (USDC) and Paxos (PAX) — increased their market capitalization by 161%, 191% and 146%, respectively.
Kim Grauer, head of research at Chainalysis, told Cointelegraph that with the use of a different metric, “We can confirm a 250% increase in the amount of Tether moved on-chain in the past 12-months (ending March 2020),” and the growth isn’t all front-loaded, either.
As COVID-19 raged, President Trump declared a national emergency in the United States on March 13, and for that month, the three largest stablecoins each notched month-on-month on-chain growth of 50% or higher.
Elsewhere, on March 10, Binance’s new stablecoin (BUSD), created in partnership with Paxos Trust company, crossed the $100 million market cap threshold for the first time since its September debut. Dramatic growth continued through April. On April 29, BUSD’s market cap stood at $194 million, trailing only USDT ($7.52 billion), USDC ($726 million) and PAX ($244 million).
Talking to Cointelegraph, Binance chief compliance officer Samuel Lim shed some light on the likely causes of such growth. “Stablecoins have been used more frequently in trading due to huge market volatility in the past year,” he said, “but apart from that, we have also seen an increase in its public adoption and usage.” In reference to Tether’s growth in particular, Lim added:
“The issuance of USDT has increased greatly, but its market share is gradually decreasing, which means other stablecoins have been growing phenomenally — not to mention that it [USDT] may face potential competition from CBDCs [central bank digital currencies] or even the likes of Libra.”
Not So Surprising
Are other industry representatives confounded by the continued growth? “It’s not surprising to me,” Cred CEO Dan Schatt told Cointelegraph, “we’ll see more of this, with the current state of the financial markets. There is a strong interest in the dollar, and it’s much easier to acquire dollars through crypto assets.”
COVID-19 has done nothing to disrupt stablecoins’ advance on non-pegged digital coins (i.e., non-stablecoin crypto).
“Compared to the top 5 non-stablecoin assets (BTC, ETH, LTC, BCH, and XRP), the stablecoins we track saw higher month-over-month growth from February to March in terms of on-chain transaction volume,” Grauer told Cointelegraph. She elaborated, “The flight to stablecoins suggests that people may be deliberately looking to store value in traditional fiat assets, namely the USD.” Adding to this sentiment, Gregory Klumov, CEO of Stasis, which issues the EURS stablecoin, told Cointelegraph:
“You can track the outstanding circulating amount of issued stablecoins, and during the first wave of a crypto market correction in early March, there was a significant issuance of stablecoins. That’s exactly the outcome that is expected: people were relocating to stablecoins, reducing the volatility of their crypto portfolio.”
A flight to safety is one common explanation. But there may be other considerations amid the coronavirus pandemic, some even hygienic, as Klumov went on to add, “People may start treating things they touch differently. For example, they will prefer to make digital payments and perform cashless interaction.” This is a significant trend for stablecoins in his view. Users can download crypto wallet apps and “get a checking account in dollars or euros by receiving and sending the same stablecoins.”
Asked to explain the recent stablecoin upsurge, Preston Byrne, partner at law firm Anderson Kill, told Cointelegraph, “It’s because people want dollars, and stablecoins are one form of exposure to dollars in places that don’t have direct access to the U.S. banking system or the means of holding physical cash.” Not all stablecoins are created equally, though, “There are really two different types of stablecoins: audited schemes, like Paxos and Circle, and unaudited ones like Tether,” Byrne said, adding:
“Paxos and Circle have likely seen increased adoption by market participants looking for a crypto-native alternative to ACH [automated clearing house] to make payments and settle debts, or simply a quick and easy way to convert crypto to USD. Tether’s market cap has ballooned to the stratosphere, but until Tether passes an audit conducted by a reputable firm, prudence dictates that I can’t believe their numbers.”
Byrne has been critical of stablecoins in the past, especially crypto-collateralized stablecoins (such as DAI), which he once described as “the perpetual motion machines of modern finance.” He also wrote, “A stablecoin that is collateralized by itself is a complex and fragile ‘Nakamoto Scheme’ doomed to fail.” Asked about this, Byrne said, “Stablecoins that fail to do those things or which cut corners on regulatory compliance are a bad idea,” further sharing with Cointelegraph:
“DAI faces numerous compliance challenges, starting with money services business licensing and continuing to a total lack of investor protections, as seen in recent events where DAI CDP [collateralized debt position] holders got wiped out due to a black swan drop in the price of Ether and network failure. That wouldn’t happen with a Paxos or a Gemini.”
For the record, DAI’s market capitalization increased by 38% over the past 12 months, which would be enviable growth under most circumstances, though it now pales beside the increases exceeding 140% notched by the top three stablecoins over the same period.
Moreover, Alex Melikhov, CEO of Equilibrium — which issues EOSDT, a decentralized stablecoin — told Cointelegraph that centralized stablecoins like Tether, USDC and PAX have their own black swan risks. The banks that hold their currency’s cash reserves could fail. Decentralized stablecoins, by comparison, are transparently backed by cryptocurrency that is sitting in smart contracts.
Melikhov added, “These stablecoins are dependent only on the [underlying] technology and its embedded algorithms. They are free from third-party risk and may be even safer than their centralized analogs.” Tether, of course, remains the gorilla in the room, with a market cap more than eight times that of the number two stablecoin. Regarding Tether, Grauer noted:
“We see interesting technical and economic trends that may be related to this surge. Technically, most of the growth in Tether activity can be attributed to Tether on the Ethereum blockchain. In March 2020, over 90% of Tether transactions were settled on the Ethereum blockchain whereas just under 19% were settled there in April 2019.”
She added that 65% of Tether value was transferred in transactions that were over $100,000 each. “This confirms some speculation that a large source of the demand for Tether likely comes from professionals, probably based in China, where there is no fiat available to onramp into the crypto market.” Approximately 50% of Tether’s activity in March was sourced directly to China-based exchanges Huobi and OKEX, added Grauer, while Binance sourced nearly 30% of the Tether present on the Ethereum blockchain.
Could Regulations Stifle Growth?
What, if anything, could derail stablecoin growth? “Most of the Tether demand is coming from the Asia region,” continued Grauer, “so a future regulatory crackdown could be felt by stablecoin users. But we have seen a resilience to these types of moves in the APAC region.” When the Chinese government banned the use of yuan for crypto purchases, for instance, many users simply shifted to Tether. On the matter, Lim believes that:
“Either way we believe they [i.e., stable and non-stable coins] can coexist, as their target audience might even be different. And needless to say, the crypto market is still very small when compared to the traditional fiat market. All it takes is for a small percentage of the flow of funds from the traditional world to enter this space and we will see a tremendous explosion of growth and adoption in our industry.”
Schatt added that more stablecoins are now emerging with higher standards and that are truly substantiated 1:1 with auditable transparency pages. He went on to say, “Those that cannot obtain a certain level of liquidity, transparency and auditability will be more susceptible to market crashes.”
Speaking hypothetically, Melikhov believes that a failure of Tether could still have a drastic impact on the crypto sphere, “but the stablecoins market is slowly becoming more diversified as existing Tether alternatives become more mature.” In the future, a major stablecoin failure could simply result in the rise of an alternative stablecoin project — that is, one to take its place, he suggested.
Should the current run continue, can the stablecoins’ collective market capitalization eventually surpass that of Bitcoin, currently at $165 billion? “It’s possible,” said Schatt, “as we are already seeing more use cases for stablecoins — settlement of M&A and POS transactions. Connecting stablecoins to the several trillion dollar retail commerce market can significantly light up the prospect for stablecoins.” Lim, on the other hand, told Cointelegraph that “It is too early to tell,” adding:
“Stablecoins are a bridge between the traditional fiat world and the crypto world, and we are all aware the fiat world is significantly larger. There is certainly room for growth within the stablecoins space and we strongly believe demand will only grow larger as institutional interest begins to pick up.”
There is only a finite supply of Bitcoin, too — a restriction not imposed on stablecoins. Market cap, of course, has its limitations as a measure of size or success, especially if governments enter the stablecoin arena. “If China or the U.S. create their own stablecoin, you will see how it is easy for them to overcome the market capitalization of Bitcoin,” Paolo Ardoino, chief technical officer at Bitfinex exchange, told Cointelegraph.
“It is probably more meaningful to look at the amount of on-chain activity that we see, and right now stablecoins account for less than half of the activity of Bitcoin,” suggested Grauer. In any event, “the success of stablecoins and the success of other cryptocurrencies are not separate stories; they support each other,”she said.
Stablecoins Could Transfer Value Across Blockchains, Says Vitalik Buterin
Ethereum co-founder Vitalik Buterin suggested that stablecoins could serve as instant cross-blockchain bridges.
Ethereum co-founder Vitalik Buterin thinks that the stablecoin industry is missing a valuable opportunity to improve interoperability between different blockchains.
In a lengthy Twitter thread on May 20, Buterin suggested that stablecoins could enable users to move value across different blockchains:
“In the specific case of issuer-backed stablecoins there’s lots of things that could be done but aren’t, eg. every stablecoin could be an instant cross-chain bridge!”
Bitcoin (BTC) activist and independent developer Udi Wertheimer pointed out that something similar to what Buterin suggested is already possible with cryptocurrency exchanges. He explained that a user can deposit the Ethereum version of Tether’s USDT on crypto exchange Binance and immediately withdraw its Omni protocol or Tron (TRX) version.
Buterin, on the other hand, explained that he would be happy to see a bridge that does not require the user to move funds on an exchange:
“I would of course love it if they and USDC and the others could agree on a standardized API (perhaps a “bridge contract” ERC); so I don’t need to bother dealing with Binance accounts to move coins around!”
Users Do Not Care About Decentralization
Wertheimer admitted that, while industry insiders such as he and Buterin like decentralized solutions, users do not really care about how systems work as long as they are interconnected.
Tether’s chief technical officer Paolo Ardoino, on the other hand, is convinced that the lack of interoperability is a problem that concerns all digital tokens. He also argued that third parties should implement a system solving this issue, not stablecoin issuers:
“Tether is the issuer of the stablecoin. There are plenty of projects that are working on solving this problem already. This is a general problem that applies to all the tokens on all the blockchains. […] Now Tether is advising projects that are trying to solve this problem. […] So we have an active role in the process. We are just not developing the solution ourselves.”
A Tough Solution
Ardoino said that the biggest challenge in developing an interoperability protocol is developing a full understanding of the security implications of each blockchain involved.
Testimony to the difficulty of implementing interblockchain bridges is the incident earlier this month, in which a non-custodial Bitcoin to Ethereum bridge shut down just two days after its launch due to a bug.
Jagdeep Sidhu, a co-founder and lead core developer at Syscoin — which launched a Syscoin-Ethereum bridge at the end of January— commented on the challenges in developing interblockchain bridges:
“It is easier for projects to make sacrifices to fast-track solutions to market, or to base core interoperability on market-driven trading mechanisms or liquidity providers, only to experience multiple discoveries, or find enterprise adoption can hit roadblocks due to regulatory and legal requirements.”
Sidhu told Cointelegraph that Syscoin would be “most definitely” interested in collaborating with stablecoin issuers in implementing its bridge. Ardoino, on the other hand, suggested that third parties interested in bringing USDT onto new blockchains are free to port them independently:
“Tether is on public blockchains and communities can build and use these cross-chain products in order to move Tether from one chain to another. That is the beauty of it.”
Less Than 6 Accounts Control 80% of Wealth On Top Stablecoins
A report by CoinMetrics has found at least 80% of the entire capitalization of five top stablecoin projects is held in less than six accounts on each respective network.
A report published by CoinMetrics has found extreme wealth centralization among many top stablecoins, with at least 80% of the total capitalization for five top stable tokens being held in less than six accounts.
CoinMetrics found that most at least 20% of transfers made using most stablecoins are valued at less than $100, showing significant stable token adoption as a means of payment.
The report also found that more than 40% of transactions made using the Paxos Standard Token (PAX) are directly linked to a single multi-level marketing, or MLM, Ponzi scheme.
Stablecoins Show Extreme Wealth Centralization
The report found many stablecoins to exhibit extreme wealth centralization, with less than six accounts of the Gemini Dollar (GUSD), Binance USD (BUSD), Huobi Dollar (HUSD), Tether (USDT) and USDK networks representing over 80% of each token’s respective capitalization.
USDT issued on Ethereum comprised the most pluralistic stablecoin market by far, with nearly 1,600 accounts representing 80% of wealth. USD Coin (USDC) and TrueUSD (TUSD) followed with nearly 200 accounts each, trailed by Omni-based USDT with over 150.
Looking at the total number of transfers made using stable tokens, USDC comprises the second-most distributed stablecoin, with over 20% of wallets driving 80% of transfers, followed by Omni-based USDT and GUSD in the high teens, and TUSD with nearly 15%.
Paxos Reportedly Comprises Fuel For MLM Ponzi
At first glance, the findings appeared to show significant pluralism on the Paxos network, with nearly 50% of wallets representing 80% of the token’s total capitalization.
However, closer inspection shows that Paxos’ two most active accounts are directly linked to the MMM BSC Ponzi. The scheme has seen exponential growth in user activity over the past year — currently representing nearly 40% of all Paxos network activity.
CoinMetrics also found that the most active Tron-based USDT accounts were associated with “dividend” payouts, representing over 90% of network activity on certain days.
Sub-$100 Transfers Represent At Least 20% Of Stablecoin Activity
At least 20% of transfers made using eight of the 10 stable tokens examined by CoinMetrics are valued at less than $100.
Less than 4% of transfers are valued in excess of $100,000 for all stablecoins except for HUSD and BUSD — with transfers worth over $100,000 comprising more than 35% of HUSD activity and roughly 17% of BUSD transactions.
Tether Crosses $10B, Leaving Competing Stablecoins In The Dust
Tether, USD Coin, and Binance USD have posted triple-figure market cap growth this year.
Crypto market data aggregator Messari reports that the market cap of leading stablecoin Tether (USDT) has surpassed $10 billion for the first time.
Alongside Bitcoin (BTC) and Ethereum (ETH), Tether is now one of three crypto assets with an eleven-figure capitalization.
Tether’s reported $10 billion market cap comes after year-to-date growth of 144% — with Tether representing $4.1 billion at the start of 2020.
However, data aggregators are at odds on Tether’s capitalization, with CoinGecko and CoinMarketCap estimating USDT’s market cap to be just over $9 billion.
USD Coin And Binance USD Post Strong Growth
The second-largest stablecoin by market cap, Circle’s USD Coin (USDC) has also seen triple-digit growth since early January — increasing from less than $450 million to over $930 million today.
USDC has steadily grown since launching in October 2018 to currently comprise the 18th-largest crypto asset overall.
Since launching in September of last year, Binance’s USD stablecoin BUSD has quickly emerged as a major player in the stablecoin sector — currently ranking fourth among stablecoins with a market cap of nearly $166 million.
Binance has grown by more than 875% since representing roughly $17 million at the start of the year, now ranking as the 49th-largest crypto market.
PAX And TUSD Stagnate
After starting the year with a capitalization of $225 million, Paxos Standard (PAX), the third-ranked stablecoin by market cap, has seen its market cap stagnate at $245 million since April, according to CoinMarketCap.
CoinMarketCap ranks Paxos as the 37th-largest crypto asset overall. However, the data may not take into account PAX that have been issued on the Ontology blockchain since April.
TrueUSD (TUSD) has actually posted a drop in market cap since the year — falling from $155 million to $144.5 million as of this writing.
TUSD is the fifth-largest stablecoin and the 55th-ranked crypto asset by capitalization.
Coinbase And Circle-Backed Stablecoin USD Coin Breaks $1B Market Cap
Launched by the Centre Consortium in October 2018, USD Coin reached a $1 billion market cap in 21 months.
USD Coin (USDC), a stablecoin project founded by Coinbase and Circle, has hit a major milestone in market capitalization.
On July 3, 2020, USDC market cap broke the $1 billion threshold for the first time since the stablecoin was launched in October 2018. According to data from Coin360, the coin has seen sharp growth since March 2020.
USDC, the second-largest USD-pegged stablecoin after Tether (USDT), is ranked the 17th largest cryptocurrency by market cap as of press time.
Announcing the news on Thursday, the Centre Consortium — an organization co-founded by Circle and Coinbase — highlighted a number of factors that contributed to USDC’s notable growth. According to Centre, the demand for USDC in 2019 was mainly driven by the progress of the decentralized finance, or DeFi ecosystem.
Three Major Factors Brought Rapid Growth In 2020
Centre identifies three major developments that pushed the sharp growth of USDC: the coronavirus-fueled financial crisis, the increased demand for low-cost transfers among businesses worldwide, and the impact of massive growth in the Compound protocol, a major DeFi project. Centre added that it anticipates more growth in 2020:
“We expect USDC to continue growing rapidly throughout 2020 and help fulfill Centre Consortium’s mission of establishing an open standard for money on the internet.”
Stablecoins Post Massive Growth Over The Course Of 2020
USDC’s progress comes in line with overall growth in the stablecoin market. Tether, the largest USD-pegged stablecoin, crossed a $10 billion market cap on July 1 — a 144% growth from the start of 2020. The news came soon after Tether overtook major altcoin XRP to become the third largest cryptocurrency by market cap in March.
On June 24, the Centre announced a multi-chain USDC Framework, featuring the Algorand blockchain as the first network to power USDC on another blockchain.
Centre Freezes Ethereum Address Holding $100K USDC
Stablecoin issuer Centre has confirmed they froze an Ethereum address holding $100,000 USDC at the request from law enforcement.
Centre, the company that issues the stablecoin USD Coin (USDC) has blacklisted an Ethereum address holding $100,000 in USDC in response to a law enforcement request. In the first of its kind, the address had a “blacklist(address investor)” function called on June 16, 2020.
It’s not yet clear the reason behind the law enforcement request, but Centre Consortium — founded by Circle and Coinbase — did release a statement confirming the blacklisting:
“Centre can confirm it blacklisted an address in response to a request from law enforcement. While we cannot comment on the specifics of law enforcement requests, Centre complies with binding court orders that have appropriate jurisdiction over the organization.”
A Known Thief
Although Circle spokesperson Josh Hawkins, said he could not provide any specifics about the blacklisting, it appears the address could be involved in other cryptocurrency theft.
In the comment section of a different address, a user claims the owner of the blacklisted address stole other tokens from them:
“Hello unknown thief, you are in contact with this eth address 0xEeC84548aAd50A465963bB501e39160c58366692 and you stole 10,000 Loopring Coin (750 euros) from my wallet. I am now giving you a chance to send the 10,000 Loopring Coin back to me. You already know my eth address. If you do not do this, I will report you anywhere with your 2 known addresses.”
They’re All The Same
Last week USDC broke $1 billion market cap, making it the second-largest stablecoin behind Tether (USDT), and Twitter users likening stablecoins to centralized fiat currencies, suggesting what can happen to USDC can happen to any other stablecoin.
Another user stated that Dai (DAI) could fix this issue of centralized control, however they were also rebutted with the fact that DAI is backed by USDC and other centrally controlled digital currencies.
It’s All About Censorship
Normally funds held on the Ethereum blockchain are controlled by the address owner, however, in relation to USDC, an address can be blacklisted which restricts them from executing transactions (sending or receiving) through the USDC smart contract. Although technically reversible, Circle’s website warns that blacklisted addresses may be “wholly and permanently unrecoverable.”
This Has Raised Concerns Among The Community Surrounding Censorship With A User Lamenting On Reddit:
“Central government control and censorship is just going to get worse.”
Another user commented on Twitter saying the “C” in USDC “stands for censorable.”
‘Stablecoins’ Vulnerable To Criminal Abuse, Watchdog Says
The virtual currency, which aims to maintain price stability, could become more vulnerable to money laundering and terrorist finance risks, the FATF said.
A type of digital currency that aims to maintain a stable value relative to that of an underlying asset or benchmark has the potential for mass adoption, but that potential also makes it more vulnerable to criminal abuse, a global standard setter for anti-money-laundering laws said.
The Financial Action Task Force, in a report to the G-20 finance ministers, identified illicit finance vulnerabilities specifically with so-called stablecoins and said risks should be analyzed and mitigated before such digital currencies are launched, particularly if they have the potential for mass adoption.
The value of stablecoins can be pegged to a variety of assets or benchmarks, such as the value of a fiat currency, or a basket of assets that could include investment securities and commodities. Some existing stablecoins include Tether, USD Coin and Paxos. Proposed ones include Facebook-backed Libra and Gram.
Stablecoins so far have only been adopted on a small scale. But their promise of price stability could make them more likely to reach wider adoption than some existing virtual assets, particularly if they are sponsored by large technology, telecom or financial companies, according to the report, which was published this week.
However, stablecoins face some of the same money-laundering and terrorist-financing risks as other virtual assets, such as increased anonymity and quick exchanges of virtual assets to help disguise the origins of illicit funds, the FATF said.
To mitigate risks, the FATF proposed that all jurisdictions implement its standards for virtual assets. It noted that some jurisdictions, including 25 countries or regions among its members, and virtual asset service providers have made progress in implementing its standards.
The FATF also plans to review the implementation and impact of its standards by June 2021 and provide further guidance on stablecoins and virtual assets.
On Solid Ground: Stablecoins Thriving Amid Financial Uncertainty
The state of stablecoins: Demand for stablecoins continues to grow amid financial uncertainty.
As a new COVID-19 stimulus bill is debated in the United States Senate and Bitcoin (BTC) begins to bounce back from its volatility lows, the demand for stablecoins continues to grow. Powered both by the stability that they provide to tokenholders and the demand created by decentralized finance lending and yield farming, stablecoins — Tether (USDT) in particular — continue to hit record figures consistently.
According to a report by cryptocurrency data and research firm Messari, USDT may soon become the cryptocurrency with the greatest daily transaction volume in terms of U.S. dollars transferred across all Tether-enabled blockchains.
According to Ryan Watkins, research analyst at Messari, that may happen sooner rather than later. He told Cointelegraph: “USDT certainly could flip Bitcoin in transaction volume in August, and if not then sometime soon after. Stablecoins as a whole have already flipped Bitcoin in transaction volume.”
While USDT and a few other dollar-pegged tokens such as Binance USD (BUSD) or USD Coin (USDC) have been leading the way in the growth of stablecoins, even commodity-based stablecoins have been gaining traction lately. Tether’s new gold-backed stablecoin, Tether Gold (XAUT), is reportedly seeing high demand as its underlying commodity recently broke above the $1,900 mark — a number that gold has not seen since September 2011 — even coming close to reaching $2,000 for the first time.
Stablecoin Issuance And Volumes Rise
Although stablecoin volumes have, like most of the cryptocurrency market, remained stagnant during most of the summer, the last few days have seen a considerable uptick in volume for USDT and other dollar-based stablecoins, especially Binance’s BUSD.
Although stablecoin volume has picked up recently, it is still far from the all-time highs achieved in March. However, the collective market capitalization for all fiat-based stablecoins has been growing consistently, increasing by $3.8 billion in the second quarter of 2020 and counting for over $13.4 billion at the time of writing.
USDT alone is responsible for $11 billion out of the aforementioned $13.4 billion, having only just reached the $10 billion milestone on July 22. This means that USDT’s market cap has more than doubled from $5 billion since March. In fact, Tether even temporarily surpassed Ripple’s XRP to become the third-largest cryptocurrency in the market.
Following USDT, Circle’s USD Coin is the second-largest stablecoin, having been the first Tether competitor to surpass the $1 billion market cap figure in early July. On the other hand, Binance USD has been the fastest-growing stablecoin in 2020, according to Messari.
Why Is There Demand?
A demand for stable, safe assets like the U.S. dollar may have been the biggest driver for the success of stablecoins in the first half of 2020, according to Ido Sadeh Man, founder of Saga Monetary Technologies, who told Cointelegraph: “The allure of stablecoins is simple: they appear to promise stability — and given the economic tumult of 2020 so far, it is understandable why they are gaining so much attention.”
As Bitcoin surged over the $11,000 mark throughout July 26 and 27, exchange inflows for USDT reached a 2020 high, which suggests buying pressure for BTC and other cryptocurrencies. This is further supported by the decreasing balance of Bitcoin currently being held by major exchanges. In fact, activity for all three of the largest stablecoins — USDT, Dai and USDC — grew tremendously during this time.
On the other hand, the huge growth in activity and value settled in stablecoins does not come from user remittances or transfers but rather interexchange settlements, as noted by Watkins. He told Cointelegraph: “The majority of stablecoin activity is driven by interexchange settlement. Probably somewhere in the realm of 90+%. Though DeFi activity is certainly picking up.”
Challenges And Dangers
While stablecoins have been growing on all fronts, there are still challenges and dangers to consider. For example, dollar-pegged stablecoins have lost over 28% of their value alongside the dollar itself as the U.S. Federal Reserve continues to print money. Some stablecoin issuers counteract this issue by pegging a stablecoin to multiple currencies rather than just one, as Sadeh Man stated:
“We have seen in recent months that a single currency value can fluctuate wildly with little warning, due to external factors. Users are seeking more stable havens for their assets value — which is why there have been such significant inflows. Those seeking stability need to interrogate the mechanisms which stabilise their chosen coin — otherwise they could be risking asset value if the currency their stablecoin holding is tethered to unexpectedly fluctuates.”
Stablecoins are only as strong as their underlying asset or assets. However, this novel technology still faces many challenges, and the biggest one may soon become regulation, especially as central bank digital currencies start to become a reality. Last year, a panel of senior financial regulators in the U.S. warned about the risk of stablecoins and how their mainstream adoption can negatively impact the economy, and thus, Facebook’s Libra project may never see the light of day.
The problems don’t end there, as technical issues can also present themselves in the future as they have before. For example, the peg of a stablecoin may be broken if there is a security breach, fractional reserve practices, a lack of liquidity or even a lack of trust in the issuing entity. Even large swings in the price of Ether (ETH) can have a devastating effect on the peg of a DeFi-based stablecoin such as MakerDAO’s Dai.
However, there is still much to look forward to. It seems stablecoins have a lot of potential when it comes to providing a possible solution to some of the world’s biggest financial problems such as income inequality and lack of access to banking.
Stablecoins are also an important infrastructure piece of the cryptosphere, particularly the DeFi space. As Marc Zeller, integration lead at Aave — a DeFi lending and credit platform — told Cointelegraph: “Stablecoins are the cornerstone of decentralized finance. As a hedging tool, medium of exchange, and unit of account, their growth has largely enabled the DeFi bloom.”
Unite To Succeed: Swiss Stablecoin Association Hopes To Break The Ice
The new World Stablecoin Association hopes to create a united front for the sector to tackle regulatory concerns and drive collaboration.
The recent formation of the World Stablecoin Association in Switzerland was done with the goal of creating a united front for the sector to tackle regulatory concerns and drive collaboration. Stablecoins are becoming an increasingly important, widely used medium of exchange in the cryptocurrency community, with industry leaders such as Tether (USDT) and USD Coin (USDC) enjoying immense success in 2020.
Tether hit a milestone toward the end of July, surpassing $10 billion in market capitalization as fiat currency continues to be converted into the stablecoin. Meanwhile, USDC celebrated breaking the $1 billion market cap threshold at the beginning of July, just a few months shy of its second birthday.
The success of these projects is a real indicator of the popularity of stablecoins and their utility in the cryptocurrency space, yet up until now, there was no organization to bring these stablecoins together to collaborate. The WSA is still in its infancy, having just been formed, but it is actively in talks with Tether, USDC, Dai and HUSD, hoping to bring these projects on board by the end of 2020.
A number of projects have already reportedly become members of the WSA, such as the Canadian dollar-pegged QCAD as well as decentralized finance protocol Ren, which is backed by Polychain Capital. Additionally, the Brazillian Digital Token (BRZ), Crypto BRL (CBRL), Peg Network, QCash (QC), Stably, USDK and Digitalbits (XDB) are also believed to have joined the initiative.
A United Front
While some of the cryptocurrency ecosystem’s biggest projects come as the result of open-source software development, direct collaboration between industry participants that are offering similar services is not widely seen.
Stablecoins peg to a certain underlying fiat currency or physical asset, and some of these are pegged to the very same asset, which puts them in direct competition. While this competition exists, the creation of the WSA seems to be getting some positive reactions from stablecoin operators and industry experts alike.
Cointelegraph spoke to Emin Gün Sirer — computer scientist, professor at Cornell University and CEO of Ava Labs — to learn the particular challenges facing stablecoins and their operators and if the WSA could potentially provide the support needed to overcome them. He said the creation of an association for stablecoins is a welcome addition to the industry in light of three major challenges:
“On the technical side, we need established best practices for security, auditing, and monitoring for projects to follow. On the regulatory side, they need to convince lawmakers to enact new processes for compliance in the newly emerging DeFi world. And finally, adoption and user education are key to getting stablecoins to reach the next level.”
Gün Sirer believes the amalgamation of these different operators could spearhead the development and proliferation of stablecoins around the world: “It’s fantastic to see the WSA bring together both fiat-pegged and algorithmic stablecoins together under the same structure.” He went on to add: “This united front can help address the technical and regulatory challenges ahead, and thus help expand adoption.”
Cointelegraph also spoke with Roberto Durscki, COO of Stablecorp — the organization behind the launch and maintenance of QCAD.
Durscki highlighted the opportunities for a stablecoin alliance and how it has the potential to benefit the overall crypto ecosystem by sharing compliance insights and establishing a consensus around best practices:
“A token per se doesn’t create a Stablecoin, a lot of work goes on the P&Ps (policies and procedures) as well as overall management of the coin for a reliable and effective financial tool. We believe an alliance/consortium/association of some kind, bringing the best projects globally together, could help set minimum compliance standards as well as help new projects to build those capabilities.”
Another potential upside is the establishment of meaningful partnerships between different stablecoin operators. While the industry has probably been guilty of an individualistic mindset, Durscki sees value in forming teams: “Stablecoins, like any other projects, require solid partnerships to thrive.
Especially on compliance, legal, accounting and tech.” Additionally, given that stablecoins offer an easy medium of exchange between cryptocurrencies, they could also operate well as trading pairs between each other:
“A lot of a stablecoin value is related to its liquidity and ease of trade versus other assets (including other Stablecoins). We believe that an alliance would speed up and facilitate the technical integration among Stablecoins.”
The WSA’s launch comes at a time when stablecoins are enjoying immense success. Tether is close to becoming the cryptocurrency with the highest daily transaction volumes in United States dollars, accounting for over $11 billion of the $13.4 billion market capitalization of stablecoins alone, according to crypto data and research firm Messari.
After Falling 65% This Year In Bitcoin Terms, Do ‘Stablecoins’ Need A Rebranding?
Such a mental exercise is one of the points highlighted in a recent report on “stablecoins” by Matt Walsh and Nic Carter of the cryptocurrency investment firm Castle Island Ventures.
In the taxonomy of digital assets, stablecoins are a category of tokens whose value is linked to dollars or other major currencies or assets. The idea is that their prices are more stable than those of bitcoin and other cryptocurrencies.
But Walsh and Carter refer to dollar-backed stablecoins as “crypto-dollars.” Stability, in other words, is in the eye of the beholder.
“Though initially dubbed ‘stablecoins,’ due to their emergence as a response to volatile ‘native’ cryptocurrencies, they are increasingly being referred to as crypto-dollars,” the report reads.
Such a rebranding could gain traction as dollar-linked stablecoins grow in popularity – even though they’ve been a pretty lousy investment option in recent months compared with bitcoin.
As detailed in First Mover last week, every digital asset in the CoinDesk 20 gained in July except for dollar-linked stablecoins, whose prices were, by definition, unchanged in dollar terms.
That’s partly a reflection of how weak the dollar has been trading in foreign-exchange markets lately, which in turn is a reflection of investors’ pessimistic views on the dollar’s value as the coronavirus-induced recession drags on.
The total outstanding amount of these “crypto-dollars” has more than doubled in the past four months to about $13 billion, according to Coin Metrics, a cryptocurrency data firm.
Crypto traders use the tokens as a form of liquidity, transferring funds easily between digital-asset exchanges.
The tokens are essentially privately issued digital money, and Castle Island points out that they might someday figure in a “global patchwork of crypto-dollar issuers.” Already, a group of 16 of the dollar-linked stablecoins collectively has a broad monetary base greater than that of 72 countries.
There’s a “growing acceptance of crypto-dollars in commerce,” according to the report, as well as a “recognition that these assets are not merely tokens for inter-exchange settlement but have begun to see usage as non-bank dollar substitutes.”
“Despite potential concerns about U.S. monetary policy and debt levels, for billions of people around the world, the U.S. dollar is more stable than their local currency,” according to the piece. They predicted that the market value of stablecoins could eventually outstrip that of bitcoin, currently at $218 billion.
“We believe U.S. dollar stablecoins, or crypto-dollars, may very well end up being the ‘killer app’ for crypto,” the authors wrote. “We may very well end up hearing calls for ‘Stablecoins not bitcoin’ in the same way we heard ‘Blockchain not bitcoin’ a few years ago.”
Such an outlook assumes people continue to want stability in dollar terms. After all, prices for the oldest and largest cryptocurrency are up 65% this year against the dollar.
Which means those crypto-dollars are down 65% this year, in bitcoin terms.
The leading cryptocurrency is currently trading near $11,760, representing a 1.3% decline on the day. Buyers pushed prices to a high of $12,070 on Monday, but the breakout was again short-lived and prices printed a UTC close below $11,800.
Bitcoin’s failure to establish a foothold above the psychological $12K hurdle validates uptrend exhaustion signaled by lower highs on the daily chart MACD histogram, an indicator used to identify trend changes and trend strength. Further, the 10-day moving average is no longer sloping upwards – also a sign of ebbing of bullish momentum.
As such, some chart-driven traders may start to sell, yielding a deeper pullback. Immediate support is located near $11,670 at the ascending trendline on the 4-hour chart. A breach there would expose the higher low of $11,219 created on the 4-hour chart on Aug. 7.
However, if the ascending trendline holds firm, a bounce to $12,000 may be seen.
That said, the greater short-term pressure may be to the downside, as gold has fallen back below $2,000 per ounce. Bitcoin generally rallied in tandem with gold in the second half of July.
The Crypto-Dollar Surge And The American Opportunity
The U.S. has much to gain from being the steward of a politically neutral payments technology, even if it means giving up power over the financial system.
Stablecoins are a hot commodity. Over $16 billion of them circulate in the wild today, up from $4.8 billion to start the year. Mostly these are issued outside of the U.S., and so are largely unaccountable to financial regulators.
If they keep growing, U.S. policymakers, in particular those in the state of New York, will have to stomach the loss of their dominance over dollar clearing.
But because stablecoins represent a powerful neutral financial infrastructure, the U.S. should welcome their ascendance regardless.
It’s no secret that banking is highly politicized, often in informal or hard to apprehend ways. The overt politicization of the N.Y.-based correspondent banking system represents a tax on all users. Embedded in each transaction is a slight risk of censorship.
Dependence on the system means submitting oneself to an American aegis. The harder it is to extricate yourself, the more you are subject to the demands of the administrator.
Banks and payment processors have also become more politicized, as they have begun to “de-risk” (read: de-platform) individuals and industry sectors with whom they disagree politically, or where they consider implied compliance costs too significant to be worth the hassle.
In February, I wrote that U.S. regulators should embrace the potential of stablecoins as continued instruments of dollar dominance. I stressed the potential welfare benefits of allowing savers in countries with inflationary regimes to engage with currency substitution without relying on the bank sector.
Since February, the outstanding supply of stablecoins has grown from around $5.5 billion to $16 billion and their daily settled value has grown from about $1 billion daily to $4 billion daily. This phenomenon is no longer localized to the crypto industry. It has begun to cause geopolitical reverberations.
CoinDesk columnist Nic Carter is partner at Castle Island Ventures, a public blockchain-focused venture fund based in Cambridge, Mass. He is also the cofounder of Coin Metrics, a blockchain analytics startup.
This post is part of CoinDesk’s “Internet 2030” series.
First, stablecoins make for an excellent tool to avoid capital controls in oppressive monetary regimes. Chainalysis has reported that tether (USDT) is extremely popular in China, even recently exceeding bitcoin’s (BTC) usage in the region.
It’s important to understand that the popularity of stablecoins or “crypto-dollars” is not solely due to their digital nature but because of the transactional freedom that they offer to users.
Policymakers should be thanking their lucky stars that a putative successor to the U.S.’ financial infrastructure is a largely American phenomenon.
China’s financial system is highly digitized already. Crypto-dollars like tether offer a fundamentally different value proposition from AliPay or the state digital currency, DCEP, because they are bearer assets not subject to the same level of surveillance or transactional restrictions.
Their digital nature isn’t what sets them apart; it’s the fact that you can permissionlessly accept or send any quantity of crypto-dollars with nothing more than a smartphone and trade it on a vast network of exchanges and brokers worldwide.
Today, crypto-dollarization is in full swing in places like Venezuela. Recently, Venezuelan President-in-exile Juan Guaido has begun promoting the usage of AirTM, a crypto-focused remittance company, to send U.S. dollars (USD) seized from the Maduro regime by the U.S. Treasury to health-care workers in Venezuela.
Startups like Valiu are offering users digital access to the USD thanks to established crypto-financial infrastructure like LocalBitcoins. Crypto-dollars make sense because U.S. banks do not service Venezuelan users, even if regular Venezuelans are not formally sanctioned.
Crypto-dollarization works because stablecoins are, for the most part, unencumbered by the shackles of the U.S. banking system. The largest issuer, Tether, relies on a network of offshore banks, and remains frustratingly outside the purview of the New York regulator, the Department of Financial Services (despite a long campaign to bring Tether to heel).
Stablecoin issuers treat the IOUs as bearer instruments, and generally do not seek to police user behavior when a transaction does not involve the issuer. Users only need a relationship with the issuer if they are redeeming or creating stablecoins with bank dollars.
By granting a measure of transactional privacy and not embedding political conditions into transactions, stablecoins are the closest thing to digital cash we have today. Notably, it is the private sector, not the state, that has delivered on this promise of digitally native cash.
Now, U.S. policymakers reading this might feel a profound sense of unease. New York is the center of the dollar universe. SWIFT, which the U.S. effectively controls, is unambiguously an instrument of power projection abroad.
And the Federal Deposit Insurance Corp. and Department of Justice have a habit of expressing political prescriptions through informal bank guidance and veiled threats. Touch a dollar anywhere – even in a transaction in which neither counterparty is American – and you’re obliged to Uncle Sam.
But these tools are wearing blunt with overuse. The more the U.S. threatens sanctions, the greater the incentive for its peers – allies included – to seek out alternatives. The more risk-averse and puritanical banks become, the stronger the tailwinds for non-bank alternatives.
The more dissidents are de-platformed from U.S. payment processors, the better neutral alternatives start to look.
Perhaps catalyzed by the growth of stablecoins, or more likely by the announcement of Facebook’s libra or China’s DCEP, various branches of the Federal Reserve are now industriously pursuing a “digital dollar.” But would such a project, regardless of its final form, grant transactors the autonomy that they deserve?
Would a digital cash system produced by the Fed consist of an instant-settling, private bearer asset, as is the case with physical cash?
Would an American central bank digital currency be able to credibly guarantee that its rich database wouldn’t be plundered in real time by Homeland Security, Immigration and Customs Enforcement or the Federal Bureau of Investigation, as Larry White has wondered?
Today, the U.S. is still the center of gravity as far as bitcoin and the crypto-dollar ecosystem are concerned. This is a significant advantage that should not be squandered. Policymakers should be thanking their lucky stars that a putative successor to the U.S’ financial infrastructure is a largely American phenomenon.
The U.S. can continue to muddle down an increasingly exclusionary path and punish subscribers to its financial infrastructure by burdening them with political dictates, or it can embrace a neutral alternative.
Self-disruption would be a significant bullet to bite, but it suits the U.S. Values like liberty, privacy, free enterprise and personal autonomy are embedded into our Constitution and social fabric.
One can hardly think of a better nation to underwrite a shift to a truly neutral payments and settlement infrastructure.
While dollar infrastructure is likely to remain dominant far longer than some critics allege, it’s undeniable that banking and messaging have been deputized into carrying out the political objectives of their administrators. As relations with U.S. allies sour and China grows its sphere of influence in Asia, viable alternatives will be created.
And if the DCEP is any guide, these alternatives will not encode strong privacy protections for end users. The U.S. is clearly suited to be the steward of a politically neutral payments technology, if our leaders can rise to the challenge.
If the U.S. chooses to marginalize crypto-dollars and punish their issuers, not only will they suppress a burgeoning American industry, they will also push users into even less accountable alternatives.
While most stablecoins are backed by dollars in bank accounts – and are hence somewhat subject to governance – a subset are issued natively against crypto collateral like ether (ETH).
These projects are more automated and lack the vectors of control and the linkages to the banking system that characterize convertible stablecoins. While still small, crypto-backed stablecoins like dai (current supply $455 million) take a more crypto-anarchist approach, and are harder to surveil or influence.
More draconian regulation of crypto-dollars would not eliminate the category. Instead, it would push users into these slipperier alternatives.
The architects of these public digital dollar solutions should take a leaf from the private sector’s book. Users simply crave the qualities of cash, this time in a digital context.
Far from being a dangerous techno-utopian fantasy, a genuine cash standard on the internet is simply a restoration of what was once ubiquitous and normal: transactional privacy and autonomy.
These qualities are not for criminals but for everyone. And if policymakers dig in their heels, the private sector will only push back harder by providing the service that users demand – but this time outside policymakers’ sphere of influence.
Crypto Long & Short: The OCC’s Stablecoin Statement Is A Seed Of Financial Innovation
An unsurprising statement from a financial regulator is sending some welcome signals that point to a spurt of innovation ahead.
The U.S. Office of the Comptroller of the Currency (OCC) issued a statement earlier this week saying that national banks can provide services to stablecoin issuers in the U.S.
This is not a surprise, as banks have been doing so for some time. But they have been doing so under a cloud of regulatory uncertainty. The statement gives the first sign of official clarity on the idea that stablecoins are legitimate representations of value.
Acceptance And Support
Why is this significant for markets?
To start with, it signals a growing regulatory acceptance of stablecoins. While fiat-backed blockchain-based tokens have been often talked about in the halls of power, especially after Facebook’s stablecoin project Libra was announced last year, they had not been recognized in an official statement as an acceptable result of financial innovation – until now.
And the U.S. is not the only significant economic bloc to signal acceptance: Earlier this week, the European Central Bank (ECB) issued a report that assesses the threats stablecoins could pose. But rather than hint that stablecoins might be in trouble, the report conveys that the ECB is figuring out how to mitigate the potential risks.
The issue was becoming urgent, given the explosive increase in stablecoin demand. The total value of stablecoins has now surpassed $18 billion, up from $10 billion just four months ago. Much of this growth has been driven by international demand for dollars as well as the increasingly sophisticated financial tools being built on top of public blockchain technology. USDC, the leading U.S.-based stablecoin, has seen its market cap almost quadruple so far this year, to over $2 billion.
Reading between the lines, the message goes even further. Acceptance is one thing; support is another. The OCC is signaling to banks that stablecoin activity is legitimate, and that reserve accounts will be offered the same federal protections as any other.
This could incentivize banks to actively seek stablecoin business, and in so doing, broaden both their client base and their stake in crypto markets.
A recent statement from the OCC said that U.S. national banks could now custody crypto assets. Presumably that includes stablecoins, too. So, a bank could attract not just stablecoin issuers, but also their clients. It would then make sense to facilitate the transfers of stablecoins between clients, and (why not) even between banks. New payments networks could emerge, which in turn could give rise to a host of new banking services. For an industry squeezed by low interest rates and looming defaults, this potential growth vector will eventually start to look attractive.
And since one of the main use cases today for U.S.-based stablecoin USDC (the second largest stablecoin by market cap) is extracting yield from decentralized finance (DeFi) platforms, this could be the incentive needed for traditional finance to start to take an open-minded look at the innovations going on in blockchain-based financial applications. New clients could be courted with new types of savings products, which could in turn accelerate the transformation of traditional banking.
Growth And Innovation
It could also embolden new types of stablecoin issuers to come forward with further innovations. To those of us working in the industry, it may seem like stablecoin issuers are everywhere. Looking in from the outside, however, most of them are either small, offshore or both. Other than the members of USDC issuer CENTRE Consortium, founded by Coinbase and Circle in 2018, there are few large U.S.-based corporations commercially active in the space.
Last year, we reported that IBM was building support for a network of stablecoin-issuing banks, and that Wells Fargo had created a corporate stablecoin for internal cross-border transfers.
JPMorgan is apparently still working on JPM Coin, also designed for cross-border payments between institutional clients, announced in 2019. Visa is looking at ways to harness the potential of stablecoins for B2B payments. The list goes on, but no large corporation has yet successfully launched a stablecoin with real-world traction. That is likely to change.
Blockchain-based tokens to represent internal transfers is a relatively straightforward application, and just the tip of what’s possible. An as-yet unexplored option is that of programmable monetary instruments, such as stablecoins that have embedded KYC, or stablecoins that could be distributed amongst certain communities for specific uses limited by code. The OCC statement is likely to give momentum to collaboration between corporations and their banks on creative payments and engagement tools.
The fine line between securities and stablecoins with features is no doubt a factor holding back many private projects. There seems to be regulatory progress there, too. The U.S. Securities and Exchange Commission said this week that they are open to discussions with stablecoin issuers as to whether or not their token would classify as a security – which implies that some would not.
While not exactly clarity, it does open the regulatory door to more conversations about innovation at the highest levels, as well as case-by-case decisions that, while slow, would at least give a more solid foundation for development.
Gaps And Standards
There are barriers, however.
The infrastructure is still young, and although it is growing rapidly in both scope and scalability, the public blockchains on which most current stablecoins run have scalability issues which at times can push up fees to uncomfortable levels. And, given recent progress in payments infrastructure, stablecoin payments may end up being slower than paying by some more traditional methods. Stablecoin settlement is also still an issue.
The U.S. Uniform Commercial Code (UCC) covers settlement finality (a legal construct that defines the point after which a transaction cannot be reversed) for private systems, but does not address the issue of blockchain settlement finality.
With proof-of-work blockchains, settlement is probabilistic, not definite, until a certain number of blocks have passed. And even then, time just makes it increasingly unlikely that a transaction can be reversed. At what stage does a blockchain-based transaction become totally irrevocable? This is understandably an important issue for market participants.
And for many use cases, using stablecoins could add a middleman, rather than streamline operations. This could further impact costs, especially if different fiat currencies are at either end of a transaction.
The potential utility in cross-border transfers highlights the need for an international framework if these instruments are to fulfill their potential to streamline flows of capital. Earlier this month, the Governor of the Bank of England called for a G20 mandate for standard-setting bodies to clarify standards.
In April, the Financial Stability Board (FSB) published the responses to its public consultation on global stablecoin regulation, which make for constructive reading. While not a regulator, the FSB monitors the global financial system and makes recommendations to protect its stability and integrity, and its work could provide a structure for international cooperation.
And regulators will always be concerned about the fragility risks that growing stablecoin popularity could introduce into the global financial system.
A Welcome Start
Regulatory clarity of any sort is an underappreciated trigger for innovation. True, the crypto industry has no shortage of creative code and ambitious applications. It also has no shortage of people willing to put time and money into devising new applications for new types of value. And the whirlwind of activity going on in the decentralized finance space is generating astonishing growth – since the start of 2020, value locked in DeFi contracts has increased from roughly $675 million to over $8 billion.
But that is still a small speck in the financial universe. Adoption and impactful applications will not make a meaningful impact on finance until regulatory clarity encourages serious money to take notice.
I struggled to come up with a metaphor that could represent this type of trigger, one that did not involve everything falling down (which means dominoes are out), things blowing up (the spark in the fireworks shed won’t do) or anything to do with viral contagion (because obviously).
In the end, the best I could come up with was a seed that becomes a tree that is so impressive it encourages planters in other regions to plant their own. This image is lacking in oomph and sparkle, but finance moves slowly.
And even a forest of new trees would not convey the scale of innovation that we could be on the verge of seeing. It is hopefully a reminder, though, that meaningful and long-lasting change starts small.
A comprehensive crypto industry overview
The University of Cambridge’s latest industry survey is out, with no shortage of surprising findings. This is their third edition, and compiles data from 280 entities from 59 countries, across four market segments: exchange, payments, custody and mining.
It’s an insightful overview into how crypto businesses are faring around the world, and highlights some interesting trends.
* Full-time employee growth slowed to 21% in 2019, down from 57% in 2018. The decline was especially notable in smaller firms, which implies that a few large players are dominating the industry.
* On average, 39% of proof-of-work mining is powered by renewable energy, primarily hydroelectric, while 76% of miners say they use some form of renewables in their energy mix. This is up from 28% and 60%, respectively, in 2018.
* Approximately 13% of miners now use financial products such as hashrate or crypto asset derivatives to hedge risks.
* Capital expenditures take up to 56% of U.S.-based miner costs, compared to 31% for Chinese miners, which suggests a competitive edge for Chinese miners that could be explained by the concentration of hardware manufacturers in China.
* 55% of surveyed service providers now support stablecoins, up from 11% in 2018.
* An estimate of the number of crypto asset users has been updated to 101 million identified users, up from 35 million in 2018. This is due to an increase in the number of active accounts, and to more rigorous compliance with KYC procedures on the part of service providers.
* Service providers operationally headquartered in North America and Europe indicate that business and institutional clients make up 30% of their customers. This figure is much lower for Asia-Pacific and Latin American firms, at 16% and 10% respectively.
* Compliance with KYC/AML obligations is heterogeneous across regions. Nearly all customer accounts at European and North American service providers have been KYC’ed, whereas this is the case for only one out of two accounts at service providers based in the Middle East and Africa. The share of crypto asset-only companies that did not conduct any KYC checks at all dropped from 48% to 13% between 2018 and 2020.
* 46% of service providers report not being insured against any risks. 90% keep crypto asset funds in cold storage. 45% use a third-party crypto custodian as part of their cold storage system.
One of my favorite parts of the report was this chart, which color-codes the importance crypto service providers assign to various trends emerging in the industry. Stablecoins win, not surprisingly. Staking and security tokens got less interest than I expected. And the relative lack of interest in non-fungible tokens hints that the recent market buzz around the concept may be short-lived.
Algorithmic Stablecoin Project Neutrino Launches Staking For Its Governance Token
The Waves-backed project will share a portion of protocol fees with NSBT holders.
The Neutrino Protocol, a project building algorithmic cross-platform stablecoins, announced Tuesday the launch of staking rewards for its governance and utility token, the Neutrino System Base Token (NSBT).
Neutrino uses an innovative mix of collateral backing and algorithmic supply changes to create a wide range of fiat-pegged stablecoins. Its flagship stablecoin, USDN, and NSBT are available on Ethereum as ERC-20 tokens.
The USDN generation mechanism relies on WAVES, the native token of the Waves platform. Generating the stablecoin is as simple as using its smart contract to exchange WAVES for USDN. Oracles will read the price of the asset and create an amount of USDN based on WAVES’ current price.
The assets thus form a pool of collateral that backs the USDN stablecoin. The reverse process can be performed at any time, redeeming USDN back for WAVES according to its current market price.
However, this mechanism is only valid if the price of WAVES is growing or remaining stable. If it were to fall, the stablecoin’s reserves would eventually be less than the number of tokens circulating. This is where the mechanism relying on NSBT comes in.
To recapitalize the system, smart contracts will auction off new NSBT in exchange for WAVES in a similar manner to the “flop” auction used by MakerDAO after Black Thursday.
Once the price of WAVES recovers, or the system is otherwise recapitalized, the NSBT will be redeemable for USDN at a rate defined by the stablecoin’s reserves ratio. For example, if there are $130 million WAVES tokens for $100 million USDN, the price of NSBT will be approximately 1.3 USDN.
The formula is exponential, and it is set in such a way that the smart-contract-based price of NSBT will begin rising rapidly once the reserve factor grows above a certain over-collateralization threshold. The smart contract’s mechanism only establishes lower and upper limits to the price through arbitrage mechanisms, while the market price is free to float between those values.
Both the NSBT and USDN tokens can be staked right now. The former entitles holders to 2% of smart contract operation fees, but it can only be staked directly on the Waves platform. The latter draws rewards from the Waves treasury and can be staked on Ethereum as well by simply holding it in a wallet. Staking through exchanges is also possible.
Sasha Ivanov, founder of Waves, said that Ethereum “is just the beginning.” The Neutrino protocol is set to expand to Solana, IOST, Ontology and others, using its oracle-based Gravity bridge protocol. The team is also pushing for proposals to integrate the token into existing DeFi protocols like Compound and Aave.
Women In Tech Say Proposed STABLE Act Harms Those It Claims To Protect
Although the STABLE Act, proposed Dec. 2 by U.S. Reps. Rashida Tlaib (D-Mich.), Jesús “Chuy” García (D-Ill.) and Stephen Lynch (D-Mass.), is being portrayed by its supporters as protecting low-income communities, many women from marginalized communities fear it would actually make their situation much worse.
An OP-ED by Founder of Black People & Cryptocurrency
Several Black women in the tech industry, including Maker Foundation board member Tonya Evans, tweeted a plea to reconsider this bill. Olayinka Odeniran, chairwoman of the Black Women Blockchain Council, told CoinDesk her group of seven board members joined dozens of other professionals in signing a letter to the incoming Biden presidential administration asking for minority industry leaders to help draft such blockchain regulations.
“I come from the financial industry, so I know when any policy is in the early stages of being created they ask for the community’s input. The potential policy they are creating doesn’t have community input,” Odeniran said in an interview. “This will limit the amount of stablecoins out there that people from my community can use to on-board into the space. And it will limit the companies that are interested in using them to serve underprivileged or underbanked minorities.”
Stepping back, the STABLE Act would require stablecoin issuers to secure bank charters and regulatory approval before circulating stablecoins, the tokenized cash either backed by or representing the value of one dollar. In short, projects like the Maker Foundation would need to get an American banking license in order to shepherd ecosystem development of the Ethereum-based MakerDAO, a protocol built to issue a stablecoin called dai.
Dai is particularly popular among Latin American communities for remittances and among students or junior developers who aren’t wealthy enough to be considered accredited investors.
People making more than $200,000 annually, under the STABLE Act, would still generally retain access to a broader spectrum of crypto assets. Licensed entities that prioritize such customers could still issue stablecoins. Coinbase, for example, issued the stablecoin USDC by way of the Centre consortium with Circle Financial – a team that could probably afford to apply for a banking license.
“The claim that this is something to be proud of because it somehow protects minorities and low-income people from being bullied is nothing short of bullshit.”
Odeniran said that, despite legislation like the Equal Credit Opportunity Act, historically banking institutions offer different rates or requirements for people of color. As such, raising the compliance cost of participating in blockchain networks would inevitably mean, she argued, that fewer institutions will serve populations with slimmer profit margins.
Silicon Valley unicorns are already taking the approach of “empowering” Venezuelan families by using cryptocurrency. This hasn’t appeared to ruffle regulatory feathers in California. The STABLE Act may soon undermine the choice Americans have to empower themselves with cryptocurrency, rather than simply exporting this tool for “freedom” to the developing world.
Washington, D.C.-based nonprofit Coin Center issued a statement warning the STABLE Act is so broad it could also make crypto node operators in the United States vulnerable to arrest.
That’s why pseudonymous Cosmos developer Chjango Unchained told CoinDesk in a direct message this bill could outlaw the use cases that help unbanked or underserved fintech users. As a woman of color from a low-income, immigrant household, now a junior professional in Silicon Valley, she tinkers with nodes and uses stablecoins to trade with the same type of systems that wealthier tech investors also use.
“I think the [bill’s] verbiage is paying lip service to those communities, but in reality the second-order consequences of it will play out to disenfranchise exactly those communities they seek to ‘protect,’” Chjango said in a text interview. “Stablecoins now enable users to never have to exit back into fiat, where all of those old guardrails protecting the incumbents are firmly in place. And the kinds of users who benefit from having access to such liquidity are exactly people of color.”
This is especially true if prospective wallet regulations simultaneously hinder those who hold their own crypto, rather than entrusting it to an exchange. On Wednesday, U.S. Reps. Warren Davidson (R-Ohio), Tom Emmer (R-Minn.), Ted Budd (R-N.C.) and Scott Perry (R-Pa.) sent a letter “expressing our concern” about rumors that Treasury Secretary Steven Mnuchin intends to unveil self-hosted wallet regulations in the coming weeks.
Given this context, the STABLE Act strikes at bitcoin’s underlying thesis, where network contributors aren’t inherently financial service providers.
If American lawmakers disagree and enact legislation that could apply to node operators or wallet users, then a wide range of cryptocurrency users suddenly become legal targets.
Crypto “is a means to financial freedom for so many who would otherwise have to submit themselves to a lifetime of indentured servitude to their student loans, all without requiring a credit check,” Chjango said.
It remains to be seen how this bill would impact the variety of crypto users beyond blockchain network operators – from hobbyist node operators to international activists. The bill’s advisory scholar, Willamette University law professor Rohan Grey, tweeted: “You have to accept that running an open blockchain network means you are, at some level, liable for the actions that take place on that network.”
Palestinian-American entrepreneur Mona El Isa, the Goldman Sachs trader turned CEO of Melonport AG, told CoinDesk in a direct message she is worried this bill could “raise barriers” for “low- and moderate-income” households that “will now be shunned from the same system that currently doesn’t bank them anyway.”
Plus, El Isa said Palestinian tech enternpreuers and freelancers with limited banking services sometimes accept cryptocurrency payments from clients abroad because it’s one of the only ways for them to “earn an honest living.”
“The claim that this [STABLE Act] is something to be proud of because it somehow protects minorities and low-income people from being bullied is nothing short of bulls**t,” El Isa said.
Likewise, an American stablecoin user named Inna Dominus described Grey’s tweets about blockchain technology as “toxic.” As an executive in the legal industry who uses stablecoins as an educational tool with her family, Dominus told her daughter this bill is a prime example of why women of color need to keep fighting against prospective laws that would further marginalize minorities with fewer financial options.
Dominus said she believes the way ambiguous bills are carried out by government agencies may systematically put marginalized groups at an even further disadvantage.
“It seems silly that we’re still fighting the perception that crypto is more predatory than, say, large institutional banks,” she said in a text interview. “The difference between crypto and the banks is that banks have much better lobbying. … We need better representation on Capitol Hill or we will continue to see these promulgations, these kinds of misinformed bills.”
US Federal Regulators Set New Expectations For Stablecoin Issuers
The President’s Working Group has not said anything revolutionary, but does establish some new clarity.
A group of leading U.S. financial regulators has released a new statement on stablecoins.
One of the headlining topics of crypto regulation news this year, stablecoins were the main topic of a Dec. 23 statement the President’s Working Group on Financial Markets, or PWG. The PWG includes representation from the Treasury, the Federal Reserve, the Securities and Exchange Commission, and the Commodity Futures Trading Commission.
The group’s stated opinions were hardly revolutionary, mostly saying that stablecoin issuers would need to abide by all the typical rules of the road in terms of financial law. The regulators say that stablecoins need to have systems in place to abide by all applicable anti-money laundering requirements before coming to market.
Morever, the regulators did not say that stablecoins are necessarily currencies or commodities, which are subject to less aggressive regulation than securities or derivatives. They instead left the question open:
“Depending on its design and other factors, a stablecoin may constitute a security, commodity, or derivative subject to the U.S. federal securities, commodity, and/or derivatives laws.”
The announcement quotes Treasury Deputy Secretary Justin Muzinich as saying, “The statement reflects a commitment to both promote the important benefits of innovation and to achieve critical objectives related to national security and financial stability.”
OCC Greenlights National Banks To Run Nodes And Stablecoin Networks
The latest from the Treasury’s most crypto-forward office says that national banks don’t have to fear stablecoin nodes.
Monday evening, the Treasury’s Office of the Comptroller of the Currency told national banks that they are allowed to run independent nodes for distributed ledger networks.
Referring to of independent node verification networks, the OCC’s interpretive letter says that banks “may use new technologies, including INVNs and related stablecoins, to perform bank-permissible functions, such as payment activities.”
Coming amid a great deal of uncertainty as to the future of stablecoins, the OCC’s announcement is big news. The office, nonetheless, cautions that there are cyber risks inherent to using such technology:
“Banks must also be aware of potential risks when conducting INVN-related activities, including operational risks, compliance risk, and fraud. New technologies require enough technological expertise to ensure banks can manage these risks in a safe and sound manner.”
Brian Brooks, who formerly led Coinbase’s legal team, has been the Acting Comptroller of the Currency since May. During his tenure, the office has put out a host of guidance authorizing banks to be more active in crypto and, more recently, barring them from cutting off services to legal industries.
Major lobbyist group the Blockchain Association noted that “The letter states that blockchains have the same status as other global financial networks, such as SWIFT, ACH, and FedWire.” Such flagships mechanisms of international payments have had to up their games in response to competition from blockchain-backed payments in recent years.
Major lobbyist group the Blockchain Association noted of today’s announcement that “The letter states that blockchains have the same status as other global financial networks, such as SWIFT, ACH, and FedWire.” Such flagships mechanisms of international payments have had to up their games in response to competition from blockchain-backed payments in recent years.
The new guidance follows up on a separate group of regulators laying out new guidance for stablecoin operators immediately before Christmas.
The subject of stablecoin legal status in the U.S. has taken on an outsized role over the past month, especially after Congresswoman Rashida Tlaib introduced a bill that seemed to outlaw any operation of a stablecoin network, including private persons running, for example, Ethereum nodes that process DAI transactions.
Crypto Fans See Regulatory Update As A Step Closer To Mainstream
The cryptocurrency sector may be inching closer to mainstream finance after fresh guidance from a U.S. banking regulator on using certain types of less volatile digital coins for payments.
Federally chartered banks can use so-called stablecoins for payment activities and participate in the underlying blockchain that verifies and records transactions, according to a statement from the Office of the Comptroller of the Currency on Monday. Analysts said the move may encourage banks to develop stablecoins for faster payments.
Stablecoins are designed to avoid wild swings by being pegged to another asset, such as the U.S. dollar or gold. In contrast, Bitcoin is famously volatile, surging to a record above $35,000 on Wednesday just two days after registering its biggest one-day decline since March.
“Banks will likely see a commercial opportunity to launch their own stablecoins” and that could spur issuance, which climbed to $31 billion last year from $5 billion, said Seamus Donoghue, vice president for sales and business development at digital infrastructure provider Metaco.
The Office of the Comptroller of the Currency statement follows a Dec. 23 warning from the Treasury Department and other agencies that stablecoin issuers need to tighten protections against money laundering. A week earlier, Treasury proposed new requirements that would force banks and other intermediaries to maintain records and submit reports to verify customer identities for certain cryptocurrency transactions.
Banks potentially entering the blockchain space won’t be a competitive threat to the valuations of existing cryptocurrencies, David Grider, a strategist at Fundstrat Global Advisors, wrote in a note Tuesday.
Grider sees the development as long-term positive for the crypto industry, though with winners and losers. For instance, large firms like JPMorgan Chase & Co. and Bank of America Corp. could benefit from the more widespread adoption of bank-issued stablecoins, he said.
Tether is the dominant stablecoin used by cryptocurrency exchanges worldwide, with about a 75% market share. Other popular tokens include USD Coin, which is run by a consortium that includes Coinbase Inc. and Circle Internet Financial Ltd., and Paxos Standard, which has been approved by the New York State Department of Financial Services. Gemini dollar is offered by the exchange run by the Winklevoss brothers.
The OCC said blockchain-based stablecoins “may enhance the efficiency, effectiveness, and stability of payments activities.”
The Bloomberg Galaxy Crypto index is up about 30% this week, and some commentators have attributed the rally in part to the regulatory update.
OCC Says Banks Can Use Stablecoins In Payments
The banking regulator’s guidance comes as the use of stablecoins has boomed in recent years, observers say.
Banks are allowed to participate in public decentralized networks and use stablecoins in payment settlements, according to new guidance from a federal banking regulator.
The Office of the Comptroller of the Currency in a guidance letter this week said national banks and federal savings associations may use new technologies, including independent node verification networks—also known as blockchain networks—and related stablecoins, to perform bank-permissible functions.
The letter, published Monday, is the latest from the Treasury Department unit to spell out how traditional financial institutions can do business involving digital currencies. Before the guidance, some banks were unsure about whether they could use the underlying blockchain as payment networks.
A stablecoin is a type of digital currency that aims to maintain a stable value and is backed by an underlying asset or a benchmark, such as the value of a fiat currency, or a basket of assets that could include investment securities and commodities. The OCC in its guidance said stablecoins can be used as a mechanism to facilitate payment activities, such as the payment of remittances.
Independent node verification networks, a type of decentralized technology, validate and record financial transactions, including stablecoin transactions. A participant in these networks, known as a node, validates transactions, stores transaction histories and broadcasts data to other participants.
A national bank or federal savings association, while complying with related laws and regulations, may serve as a node on an independent node verification network to validate, store and record payment transactions, the OCC said. A bank may also use those networks and related stablecoins to carry out other permissible payment activities.
The OCC in its guidance said there is increasing demand in the market for faster and more efficient payments through the use of decentralized technologies, such as independent node verification networks. And using stablecoins in payment settlements may offer both the efficiency and speed of digital currencies and the stability of existing currencies, the OCC said.
“Our letter removes any legal uncertainty about the authority of banks to connect to blockchains as validator nodes and thereby transact stablecoin payments on behalf of customers who are increasingly demanding the speed, efficiency, interoperability, and low cost associated with these products,” Brian Brooks, the OCC’s acting comptroller, said in the statement.
The OCC in recent months has been issuing more guidance aimed at easing banks’ concerns about the new financial technology.
Monday’s guidance letter comes as banks become increasingly interested in tapping into stablecoin markets, as the use of stablecoins has boomed over the last two years, according to Jeffrey Alberts, a partner at law firm Pryor Cashman LLP in New York. Cryptocurrency companies, on the other hand, are also interested in having sophisticated banks as partners to take advantage of the banks’ well-developed compliance programs.
It can be challenging for cryptocurrency companies to build compliance programs from scratch, he said. “This is an exciting opportunity for banks to move into an area that is becoming increasingly profitable and do cutting-edge work,” said Mr. Alberts, who co-chairs his firm’s financial institutions group.
“It would also free up cryptocurrency companies” to focus on what they’re good at, he said.
JPMorgan Chase Execs Weigh In On Stablecoin Regulation, Crypto Competition
While the OCC’s new stablecoin guidance doesn’t have an impact on JPM Coin, it could lead to crypto payments if there’s demand.
During JP Morgan Chase’s Q4 2020 earnings call, CEO Jamie Dimon and CFO Jennifer Piepszak weighed in on the OCC’s recent approval of banks using stablecoins for payments, as well as whether or not the approval will have any impact on the development of JPM Coin.
During the question-and-answers portion of the call, Portales Partners analyst Charles Peabody asked about the approval from the OCC for banks to use public blockchain networks for payments.
“That guidance enables an offering of stable going on a public blockchain. So that doesn’t impact JPM coin. JPM coin, you should think about as the tokenization of our customer deposits,” responded JPM CFO Jennifer Piepszak, according to a transcript of the call.
However, she did not rule out the possibility of a JPM-backed stablecoin if customers showed interest.
“So, it’s obviously very early. We will assess use cases and — and customers demand. But — but it’s still too early to see where this goes for us.”
JPM CEO Jamie Dimon was also quick to jump in and mention that the bank is “using blockchain for sharing data with banks already and so we are at the forefront of that which is good.”
Debuted in October of 2020, JPM Coin is largely used on the backend of JPM’s payments systems, helping to settle nearly $6 trillion in payments on a daily basis. On the call, Piepszak also described the JPM Coin project as “tokenizing deposits to make payments easier for client.”
Ultimately, Dimon seemed to imply to crypto payments settlement won’t greatly change how JPM operates.
“There is this talk about several banks having digital currencies and stuff like that, right?” Dimon concluded. “[…] So I — I do expect that stuff is coming and it may not change our world that much”
Dimon may be underestimating the impact crypto will have on the payments landscape, however.
Paypal, one of the Fintech giants that Dimon mentioned by name as a payments competitor, confirmed that crypto payments will be available starting in 2021. The CEO — a former noted skeptic of cryptocurrencies — made it clear that payments will become an increasingly crowded and cutthroat field over the next decade:
“I expect it to be very, very tough competition in the next 10 years. I expect to win. So help me God.”
Reserve Rights (RSR) Gains 300% As Stablecoins Gain Regulatory Approval
Global stablecoin adoption and uncontrolled hyperinflation in Venezuela and Argentina have helped push Reserve Rights to a new all-time high.
Nonfungible tokens (NFTs) and high-yielding decentralized finance (DeFi) platforms have been the focus of attention in the cryptocurrency sector for the past few months. This intense focus on NFTs, DeFi and Bitcoin’s (BTC) price action means that some investors have glossed over the fact that it was a series of positive developments in stablecoins that helped kick off the 2021 bull market.
One project that has quietly amassed significant gains this year is Reserve Rights, a dual-token stablecoin platform where all the tokens are backed by a basket of smart contract-managed cryptocurrencies.
Data from Cointelegraph Markets and TradingView shows that the platform’s Reserve Rights (RSR) token has increased more than 320% since Jan. 1, going from $0.0196 to a new all-time high of $0.829 on March 8 as the project prepares to expand its services to new regions.
Three reasons for the strong growth RSR has seen in 2021 are the global adoption of stablecoins as a viable payment medium, worsening global financial conditions leading to hyperinflation in the countries where Reserve focuses its operations, and optimism surrounding Reserve’s mainnet launch and several major upcoming developments.
Stablecoins Get The Stamp Of Approval
On January 4 the United States Treasury’s Office of the Comptroller of the Currency announced that banks would be allowed to run independent nodes for distributed ledger networks and transact in stablecoins.
Since the approval, stablecoin projects like Reserve, MakerDAO, Terra and Curve DAO have all experienced an influx of trading volume as regulatory concerns decrease.
Hyperinflation Creates A Real-World Use Case
A second major driver in the recent growth of RSR is the worsening financial conditions in countries that are dealing with hyperinflation. Typically, capital controls are instituted in places dealing with uncontrolled hyperinflation but this does not deter citizens from attempting to store their savings in more stable assets.
One of the first countries where Reserve focused its early growth was Venezuela, which has seen its local Bolivar currency rapidly lose its purchasing power in recent years.
According to the team, users in Venezuela can now utilize the Reserve app as a way to transfer their wealth to a more stable currency such as the U.S. dollar and transact with it as needed.
With the Reserve app, you can deposit your Bolivars and in two minutes, they become US dollars.
You can pay with them easily and freely.
You can move them to a US bank account.
You can save them, without devaluation. (Well in a relative sense. Brrrrr and so on, but still.)
— Reserve (@reserveprotocol) February 27, 2021
Since announcing that the Reserve app would open to every Venezuelan on the waitlist, RSR has steadily increased, and the Reserve user base has grown.
Argentina, Colombia and Panama are also enduring economic toil and hyperinflation, meaning there is no shortage of users who would benefit from having access to the platform.
Rumors Of Enterprise-Level Adoption Boost RSR Price
There are several high-profile developments that have yet to materialize, but they appear to have still had a positive impact on RSR price.
Multiple connections between PayPal and members of the Reserve team have long been the source of rumors about a future integration with the payments giant. Plans for a PayPal integration were recently acknowledged by the Reserve team, but the exact details have yet to be made public.
Investors also appear to be excited about the upcoming Reserve protocol mainnet launch, which co-founder Nevin Freeman said is planned for an unspecified date in 2021.
According to data from Cointelegraph Markets Pro, market conditions for RSR have been favorable for some time.
The VORTECS™ score, exclusive to Cointelegraph, is an algorithmic comparison of historic and current market conditions derived from a combination of data points including market sentiment, trading volume, recent price movements and Twitter activity.
The global economic outlook has brightened since the development of multiple COVID-19 vaccines, but there are still numerous challenges to overcome, and hyperinflation and recessions are just a few. Analysts have predicted that stablecoins will continue to gain traction now that they are being integrated into traditional finance and viewed a less of a threat by central banks.
This means that the Reserve protocol is well positioned for future growth, as it offers its growing user base one of the main use cases that Bitcoin was originally designed for: banking the unbanked.
Stablecoin Reserves On Crypto Exchanges Hit New Historic High Of $10B
Cryptocurrency exchanges continue accumulating massive amounts of stablecoins like Tether and USDC.
Stablecoins like Tether (USDT) and USD Coin (USDC) have hit another milestone in terms of accumulation by exchanges.
According to market data provider CryptoQuant, stablecoin holdings on global crypto exchanges soared to a new all-time high on March 28, exceeding $10 billion.
Cryptocurrency exchanges are now holding nearly 16% of the total market value of all stablecoins, with stablecoin market capitalization amounting to $63 billion at the time of writing, according to data from CoinGecko. The total trading volume of all stablecoins is estimated at about $88 billion.
According to CryptoQuant data, volumes of stablecoin holdings on exchanges have been repeatedly seeing all-time highs this year, surging more than 100% in two months. As previously reported, stablecoin inflows are often seen as a short-term indicator of bullish action for Bitcoin (BTC), suggesting that sidelined capital is moving back into BTC.
Coupled with growing stablecoin accumulations, some other metrics like CryptoQuant’s All Exchange Stablecoin Ratio could potentially point toward another upward move in crypto markets. Technical analyst Crypto Seer noted on March 27 that the metric had reached its lowest level since November 2020.
“Each time this ratio has gone so low is marked by periods of significant strength for $BTC. The significant reduction in on exchange supply for BTC can be noticed here,” he said. The metric indicates BTC reserves divided by all stablecoin reserves held on exchanges, pointing to potential selling pressure.
The latest stablecoin market milestone comes as payment giant Visa is officially piloting its first settlement transaction in USD Coin on the Ethereum blockchain. USD Coin is the second-largest stablecoin pegged to the U.S. dollar, following Tether.
“I smell crypto mass adoption here,” CryptoQuant CEO Ki Young Ju said about Visa’s move into USDC. Ju told Cointelegraph that the new spike in stablecoin holdings on exchanges could be a result of more United States investors entering the market:
“Stablecoin holdings across all exchanges could indicate potential buying power. Since last year, stablecoin market was mostly dominated by Tether, but now the market is evenly shared with other stablecoins like USDC, BUSD, HUSD, and etc. This stablecoin holdings surge came from the rise of USDC, which might indicate more US investors coming to this industry.”
According to CryptoQuant, USDC holdings on crypto exchanges now amount to over $2.2 billion, while its market cap is around $11 billion.
Tether Stablecoin Is Fully Backed (1 To 1) , Says New Assurance Report
Tether’s reserves for its USDT stablecoin exceed the amount required to redeem the digital asset tokens, according to auditing firm Moore Cayman.
Tether Holdings Limited, a company behind the world’s largest stablecoin Tether (USDT), has released an assurance opinion to confirm that Tether tokens are fully backed by its reserves.
In a statement shared on Twitter Tuesday, Tether provided the company’s Consolidated Reserves Report, or CRR, accompanied by an assurance report from accounting network Moore Cayman.
Signed on March 26, the accountant’s report intends to prove the accuracy of Tether’s CRR compiled on Feb. 28. “In our opinion, the CRR as prepared by the management of Tether Holdings Limited Group as of February 2021 at 11:59 PM UTC is presented in accordance with criteria set out therein and it, in all material respects, fairly stated,” the assurance opinion reads.
The report goes on to state that Tether’s reserves for USDT stablecoin exceed the amount required to redeem the digital asset tokens as consolidated total liabilities amount to $35.2 billion, while consolidated total assets amount to “at least” $35.3 billion.
Moore Cayman noted that its assurance opinion is limited to USDT as information covering Tether’s gold-backed XAUT stablecoin “has not been subject to the scope of our assurance engagement.”
Moore Cayman is a provider of audit services to firms and funds in various jurisdictions, including offshore jurisdictions like the Cayman Islands and British Virgin Islands, as well as Delaware, Hong Kong, the United Kingdom and others.
“Tether has always been fully backed, and the assurance opinion we made available today confirms it once again. As a leader in the growing cryptocurrency industry, we remain committed to being among the most transparent stablecoins,” Tether Holdings wrote.
“We do intend to release attestations periodically going forward,” Stuart Hoegner, general counsel for Tether and cryptocurrency exchange Bitfinex, told Cointelegraph. He added that the CCR was executed on March 26, so it was not available until very late last week.
USDT’s 1:1 peg with the U.S. dollar has long been the subject of some skepticism, with many questioning the validity of its backing.
In February, Tether and its sister firm Bitfinex settled with the New York Attorney General’s Office over claims the firm misrepresented the degree to which USDT was backed by fiat collateral. As part of the settlement, New York regulators forced the firms to pay $18.5 million for damages as well as submit to periodic reporting of their reserves.
Tether Mints More Coins To Break $60 Billion Market Cap
Massive volatility on crypto markets has been always associated with an uptick on stablecoin markets, a Tether exec noted.
Tether (USDT), the world’s largest stablecoin by market capitalization, continues to grow despite record-breaking cryptocurrency outflows triggered by Elon Musk’s Bitcoin (BTC) criticism.
On Monday, Tether’s market cap hit $60 billion for the first time in history, marking another milestone of the stablecoin’s growth. According to data from Tether Transparency, USDT market value amounts to $60.4 billion at the time of writing, up over 580% from one year ago.
Tether’s new market cap record follows a series of newly minted USDT tokens at Tether Treasury. According to data from blockchain analytics service Whale Alert, at least 6 billion new Tether USDT tokens have been minted at the treasury over the past 30 days, with the latest batch of 1 billion USDT minted on May 24. According to an announcement by Tether, institutional and corporate demand is the main driver of Tether’s continued growth.
USDT repeatedly broke new market cap milestones over the past two months, adding $10 billion each month.
Tether broke into the top three cryptocurrencies by market cap alongside Bitcoin (BTC) and Ether (ETH) and has been gaining ground as the third biggest cryptocurrency by market cap over the past few days, flipping Binance Coin (BNB) on May 23.
Tether’s continued growth follows massive crypto volatility as the market shed $1 trillion from its mid-May high above $2.5 trillion. Bitcoin, which became a $1 trillion asset earlier this year, lost over $400 billion in the latest market crash, with its market cap sitting above $720 billion at the time of writing.
Tether CTO Paolo Ardoino emphasized that periods of enormous crypto volatility have been often associated with stablecoin growth:
“During these extreme episodes, we’ve historically seen an uptick in stablecoin activity, made evident by Tether’s recent US$60 billion milestone as demand continues to grow. Events like these even support the ecosystem’s strength and help everyone refocus back to building rather than the distraction of token price gains.”
Founded in 2014, Tether USDT is a major stablecoin pegged at a 1:1 exchange ratio with the United States dollar. As the world’s largest stablecoin, Tether currently represents 60% of the $100 billion combined stablecoin capitalization, according to data from CoinGecko. USDT’s biggest rival, USD Coin (USDC), is ranked the eighth largest cryptocurrency by market value, with a market cap of $20 billion.
Bitcoin’s Reliance On Stablecoins Harks Back To The Wild West Of Finance
To understand the weakness of stablecoins such as Tether, it is worth a quick history lesson from pre-Civil War American finance.
Stablecoins are one of the weirdest things in the whole bizarro world of cryptocurrencies, because they operate on principles directly opposed to the rest of the crypto system.
Crypto true believers argue that bitcoin and its ilk will supplant “fiat” currencies issued by governments, while the whole point of the innovative blockchain that underlies them is to overcome what pseudonymous inventor Satoshi Nakamoto called “the inherent weaknesses of the trust based model.”
Yet stablecoins, and especially the largest, Tether, are thriving. Tether’s $60 billion of issuance leaves it jockeying for third place in crypto market value behind bitcoin and ethereum. There are scores of others, and Facebook’s Libra, renamed Diem last year, plans to join in with stablecoins covering several currencies.
Stablecoins are a type of cryptocurrency tied one-for-one to dollars or other traditional currencies and whose value relies on trusting the issuer.
Stablecoins have also become central to the financial infrastructure of crypto. According to data provider Crypto Compare there’s more trading between Tether and bitcoin than between bitcoin and all fiat currencies put together. For crypto traders, at least, stablecoins are a vital tool, because of the speed with which they can be used to move money from one crypto exchange to another, and because they provide a handy way to park cash temporarily in what is basically dollars.
This creates a major vulnerability for crypto. Instead of building a new financial system immune to the problems of the old one, it is reinventing problems long-since mitigated by regulators in traditional finance.
To understand this weakness, a quick history lesson. Stablecoins are the living embodiment of free banking, the system of lightly-regulated and often fraudulent issuers of dollar bank notes that dominated U.S. finance until the government stepped in after the Civil War. Paper money was backed by the assets of these banks.
But trust in those assets determined whether and how big a discount to apply to any given dollar bill. Alongside the regulated banks were thousands of issuers of small-value IOUs, such as from a Michigan barber, that were used as money in frontier towns short of cash.
There’s a good reason these stablecoins of yore were eventually junked. Users of money—that is, pretty much everyone—had to keep up-to-date on the condition, and perceived condition, of dozens of bank note issuers to avoid being duped on a transaction. The costs of this alone were incalculable, quite aside from the widespread failures and fraud.
The twin dangers to the scores of stablecoins that have been created are the same as the pre-Civil War scrip: the assets turn out to be worth less than thought, or people come to believe that the assets are worth less than thought and there’s a run.
The biggest stablecoins—from Tether, Circle and Paxos—publish reports from accountants attesting that their assets match the amount issued, in an attempt to ensure trust. So far, all three have succeeded, with their stablecoins proving remarkably stable around $1.
A glance at the free banking era should remind traders of the risks. Back in the 1830s, banks would fool auditors by shipping the same chest of coins from one to the next to be counted multiple times, or by topping up a barrel of nails with a layer of silver, according to Joshua Greenberg’s enjoyable study of the era, “Bank Notes and Shinplasters.”
The parallel is clear from the details of Tether’s $18.5 million settlement with the New York Attorney General in February. It said Tether was lying about having full backing for its issues, and when Tether tried to head off rumors about its financial situation by employing an accountant to attest to the assets, cash was put into its new account only on the day of the assessment.
Tether also lent $475 million to work with Bitfinex to help it through a cash crunch, this time the day after publishing the balance of a new bank account in the Bahamas. This is the modern version of mobile chests of silver.
Stuart Hoegner, Tether general counsel, said the firm is “taking steps to obtain audits for several financial years“ and will publish them. “To be clear, these kinds of transfers are not happening,“ he said by email when asked about assets being moved just before or after an assessment.
Tether doesn’t do business in the U.S., with a few exceptions, and agreed in its February settlement not to take on customers in New York. Circle has a “bitlicense” issued by New York state, while Paxos is regulated as a trust in the city, in an effort to boost confidence. This being crypto, there is of course a full crypto stablecoin too, called Dai, which gives each user a “vault“ to store collateral; it will be liquidated by “keepers” if its value falls too low to support the Dai issued against it.
My worry is that it isn’t enough to be regulated, transparent and solvent, as the run on money-market funds in 2008 and again last year showed. Ultimately nothing beats access to Federal Reserve loans when large numbers of depositors are demanding their money back.
Unlike with banks and funds, there’s no chance of the Fed helping out stablecoins in a crisis. That means the assets they hold are vital, along with their terms. Paxos’s accountants’ attestation shows it holds cash and Treasurys in accounts with unnamed U.S. banks, while Circle says it holds “cash, cash equivalents and short-duration investment-grade assets.”
As part of its legal settlement Tether disclosed more detail of its assets, showing a big exposure to commercial paper, a form of short-term lending to companies. Mr. Hoegner said the company uses in-house traders to invest in commercial paper, “always ensuring that we have an adequate amount of liquidity to meet any eventual redemptions.“
JPMorgan interest-rates strategist Josh Younger points out that Tether’s scale ranks it alongside the biggest money-market funds and companies as a major owner of commercial paper.
In one way Tether has more protection against a run than an ordinary bank if something goes wrong: Its terms allow it to suspend payments or repay with a chunk of its assets instead of dollars. That’s unlikely to be reassuring to users, however.
It surprises me that Tether is so popular given the revelations from the New York case, the ease with which it can suspend payments and the concern among regulators, including the Fed, about stablecoins. But there is a key difference to the earlier era that helps stablecoins avoid the discounts that plagued the bank notes of the Wild West.
Back then the effort of traveling to a bank’s branch to swap its notes for solid silver dollars meant it was hard to arbitrage away discounts, especially for notes from faraway banks. In the digital world it isn’t much of a hassle to cash in a stablecoin, so any discount quickly vanishes.
Sichuan Energy Regulator To Meet to Discuss Bitcoin Mining
Some mines in Sichuan are operating as usual despite the recent crackdown, Global Times reported.
The Sichuan Energy Regulatory Office said Thursday it will meet June 2 to discuss crypto mining activities amid China’s nationwide crackdown.
* The energy regulator of the south-western province is required to meet by the country’s National Energy Administration, according to Global Times, a newspaper under the Chinese Communist Party’s flagship publication, People’s Daily.
* Despite a national crackdown on bitcoin (BTC, -0.02%) mining, some mines in Sichuan are operating as usual, Global Times said, citing unidentified industry insiders.
* Sichuan has been a popular region for bitcoin mining due to its cheap electricity from hydropower during the rainy season.
* Chinese regulators recently stressed that the country would be taking a stricter approach to bitcoin mining, with the People’s Bank of China prohibiting financial institutions from providing services to crypto companies.
Can A Cryptocurrency Break The Buck?
Disruptions in a stablecoin’s value could wreak havoc on the broader crypto market unless regulators step in.
On Sept. 16, 2008, the day after Lehman Brothers filed for bankruptcy, the Reserve Primary Fund “broke the buck”: Its net asset value fell below $1 per share. The fund — often called the first money-market fund — held $785 million of Lehman commercial paper that was suddenly worthless.
Although the paper represented only 1.2% of the fund’s total assets of $64.8 billion, demands for withdrawals escalated, and the fund lost two-thirds of its assets within 24 hours. This triggered a general run on money-market funds that stopped only when the U.S. Treasury issued an extraordinary guarantee of essentially all money-market fund liabilities. The episode underscored how important that $1 net asset value is to investors.
Certain cryptocurrencies known as stablecoins are today’s economic equivalent of money-market funds, and in some cases their practices should have us worried that they could break the buck, creating significant damage in the broader crypto market.
One such stablecoin is Tether. With a market capitalization close to $60 billion, it is almost as big as the Reserve Fund was in 2008. Each Tether token is pegged to be equivalent to $1. But, as with the Reserve Primary Fund, the true value of those tokens depends on the market value of Tether’s reserves — the portfolio of investments made with the fiat currency it receives.
Tether recently disclosed that as of March 31, only 8% of its assets were in cash, Treasury bills and “reverse repo notes.” Almost 50% was in commercial paper, but no detail was provided about its quality. “Fiduciary deposits” represented 18%. Even more troubling: 10% of total assets were in “corporate bonds, funds & precious metals,” almost 13% were in “secured loans (none to affiliated entities),” and the remainder in “other,” which includes digital tokens.
Tether separately provided a report from the accounting firm Moore Cayman stating that Tether’s assets exceed “the amount required to redeem” outstanding tokens. But that report provided no description of assets. It appeared to be based solely on management’s accounting, noting that Tether’s policy is to use “historic cost,” and that “the realizable value of these assets … could be materially different.”
These facts should put holders of Tether — and other stablecoins — on notice that they may have trouble getting back $1 for each token. Tether doesn’t claim that its tokens are backed by fiat currency. It simply says its tokens “are 100% backed by Tether’s reserves,” which are defined so broadly that any asset could qualify.
Tether also says it “reserves the right to delay any redemption or withdrawal if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves” and that it “reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves.”
A money-market fund would never be allowed to follow such policies. The Securities and Exchange Commission permits money-market funds to use a $1 NAV under stable pricing conventions — valuing assets at amortized cost rather than at market price, and using “penny rounding” pricing — only on the condition that they limit their risk.
Their investments must have minimal credit risk and short maturities, such as with short-term government securities and high-quality commercial paper, and they must limit the amount invested in any one issuer. The fund’s board must also believe that a $1 NAV reflects the market value of its assets.
But stablecoins like Tether face no such constraints. There is no U.S. legal framework for regulating them. There are no requirements on how reserves must be invested, nor any requirements for audits or reporting.
If some of Tether’s investments were to become worthless or decline in value, it would suffer the equivalent fate of breaking the buck. And if, for any reason, a wave of Tether holders suddenly tried to convert their tokens to cash, we do not know whether Tether could liquidate sufficient investments quickly to satisfy the demand.
The consequences of such an inability to meet a sudden wave of withdrawals could be significant in the larger crypto ecosystem. Tether is the most widely traded cryptocurrency; its recent volume has been more than twice that of Bitcoin.
Coindesk recently described Tether as “a key piece of plumbing for the roughly $2 trillion global crypto market” because traders “use it to quickly transfer dollar value between exchanges to capture arbitrage opportunities when a bank wire is unavailable or too slow.”
A JPMorgan research report earlier this year said that 50% to 60% of all Bitcoin trades are for Tether, and that trading is dominated by proprietary trading firms using high-frequency algorithmic strategies.
If those algorithms were turned off — as has happened in Treasuries and other asset classes when volatility increases — there could be a significant drop in liquidity. “A sudden loss of confidence in [Tether] would likely generate a severe liquidity shock to Bitcoin markets,” it noted.
It’s easy to imagine further collateral consequences, particularly because the recent rise in crypto prices has likely been fueled in significant part by debt. When liquidity suddenly declines, and prices fall, those with leveraged positions get squeezed.
Approximately 65% of Tether tokens are held through the Chinese exchange Huobi, according to the crypto analysis firm Long Hash. It could be that Chinese investors convert renminbi into Tether in order to trade other cryptocurrencies while avoiding legal or regulatory constraints.
According to Coinmarketcap, ownership is also heavily concentrated. Although there are almost 3.5 million addresses that hold Tether tokens, the top 10 addresses hold 24% and the top 100 hold 41% of all tokens. That could increase the risk of a run.
Just two years ago, the risks of stablecoins were brought to the public’s attention by Facebook Inc.’s proposal for Libra. It wanted to create a “simple global currency” or stablecoin that would be pegged to a basket of fiat currencies.
That provoked widespread opposition from central bankers and politicians, many fearing it would undermine sovereign currencies. Facebook then had to promise in congressional hearings that it would not launch the idea unless regulators approved.
In the months that followed, the Financial Stability Board proposed some principles for regulating stablecoins, which the Donald Trump administration largely endorsed in a statement last December.
These included restrictions on reserves, limits on risk and transparency requirements. Libra, now called Diem, has been redesigned to address many of these concerns. But regulators have not approved it nor, more important, has the U.S. implemented the board’s principles generally.
Last fall, the Office of the Comptroller of the Currency issued guidance that said national banks could hold stablecoin reserves if they verified daily that the reserves were at least equal to the outstanding tokens. But stablecoin issuers do not have to follow the OCC guidance. Tether, for example, keeps its reserves in a small bank in the Bahamas.
We need to strengthen the regulation of crypto-assets generally and in particular stablecoins. A bill has been introduced in Congress that would require that stablecoins be issued by a bank and would impose certain standards, but whether it moves forward is anyone’s guess.
So perhaps Gary Gensler, the new chairman of the SEC, should explore regulating stablecoins in a similar fashion to money-market funds: The issuance of a stablecoin should be conditioned on following risk-limiting practices designed to ensure that the tokens are in fact worth that price. These should limit investments of reserves to those of minimal credit risk and short maturity. There should be liquidity requirements as well.
The SEC is about to revisit the adequacy of its regulations on money-market funds because the reforms it imposed following the 2008 financial crisis were not sufficient.
When financial markets became highly stressed in March 2020, a run on money-market funds was prevented only by the extraordinary interventions of the Federal Reserve. Let’s hope regulators look more closely at stablecoins before we experience the crypto version of breaking the buck.
Crypto Lode of $100 Billion Stirs U.S. Worry Over Hidden Danger
Regulators are worried about hidden risks to investors and even the financial system stemming from a fast-growing corner of the crypto market meant to be immune from volatility.
Their focus is on so-called stablecoins, a form of cryptocurrency that has a fixed price, typically one dollar, and is backed by real-money reserves.
At the end of May, the total market capitalization of stablecoins, which include ones offered by crypto firms Tether and Centre, broke $100 billion.
But in recent weeks, lawmakers and officials from the Federal Reserve and the administration have expressed alarm both in public and private that some consumers won’t actually be protected should one of the firms not have the backing they purport to have. They also say the growing size of stablecoins has created a situation where huge amounts of U.S. dollar-equivalent coins are being exchanged without touching the U.S. banking system, potentially blinding regulators to illicit finance.
“They’re dangerous to both their users and, as they grow, to the broader financial system,” said Lev Menand, an academic fellow at Columbia Law School, in testimony to a Senate Banking subcommittee last week.
Administration officials have expressed concern to representatives of stablecoin issuers in recent weeks that consumers don’t understand that money held in a stablecoin isn’t protected by the Federal Deposit Insurance Corp. and that, in some cases, they could potentially lose money on a stablecoin, according to a person familiar with the matter who requested anonymity to describe confidential discussions.
The person said officials are also worried that criminals could use stablecoins to transfer money without having to touch a bank, meaning that they could avoid protections meant to catch money laundering and other illicit activity.
Massachusetts Democratic Senator Elizabeth Warren compared stablecoins to “wildcat notes” issued by poorly capitalized banks in the 19th century that later stuck many of their holders with large losses, speaking at a Senate Banking subcommittee hearing last week. Warren said that if the Federal Reserve were to issue its own digital currency, consumers could get the benefits of a stablecoin without that kind of risk.
The U.S. and other nations are already considering launching their own digital currencies. Those coins, known as central bank digital currencies, would be direct competitors to stablecoins. Later this year, the Federal Reserve Bank of Boston plans to publish research and open-source code showing technology that could underpin a digital dollar.
Fed Chair Jerome Powell has said lawmakers will likely need to weigh in for the project to advance and that the process could take years.
Last month, in a statement on the Fed’s progress in researching a CBDC, Powell said that stablecoins could pose risks to the financial system. “As stablecoins’ use increases, so must our attention to the appropriate regulatory and oversight framework,” Powell said.
Days after Powell’s statement, Fed Governor Lael Brainard in a speech gave her own warning, saying that widening use of stablecoins could fragment the financial system, potentially raising costs for U.S. households and businesses.
Brainard and other Fed officials have warned that if privately-issued stablecoins become widely used, but consumers then lose confidence in them, it could result in the kind of “run on the bank” panic that threatens financial stability.
As cryptocurrency trading has exploded, so has the use of stablecoins. Right now, investors primarily use stablecoins as a place to park money on cryptocurrency exchanges without having to transfer cash back to their bank accounts.
The largest by far, with a market capitalization of $62.6 billion, is Tether, which is incorporated in Hong Kong. U.S. Dollar Coin, or USDC, has a market value of $23.8 billion and was created by the Centre Consortium, a partnership between crypto payments firm Circle Internet Financial Inc. and U.S. crypto exchange Coinbase Global Inc.
Early stablecoin controversies circled around Tether International Ltd., which originally said its coins were completely backed by cash. In February, New York’s attorney general said the company for years didn’t actually have the cash it said it did and banned Tether from trading with New York residents.
Now the company says Tether’s coin is backed not just by cash, but by assets including commercial paper, corporate bonds and precious metals. The Centre Consortium says each U.S. Dollar Coin is backed by a dollar held in a bank account.
“Tether embraces transparency and regulation,” said Tether General Counsel Stuart Hoegner, in a statement, noting that the company is registered as a money-services business with the Treasury Department.
Hoegner said Tether doesn’t currently accept U.S. customers and is pursuing audits for past years of Tether’s reserves. “We continue to look for avenues of regulation globally and are pursuing regimes in several countries,” he said.
Other than continuing work on a potential central bank digital currency and increasing what stablecoin firms have to disclose to consumers, it’s unclear what regulators can do to slow stablecoins’ rapid growth. Timothy Massad, former chairman of the Commodity Futures Trading Commission, in a May op-ed said the Securities and Exchange Commission could regulate stablecoins in a similar way to money-market funds, which aren’t FDIC-insured and faced stress during the 2008 financial crisis.
One bill introduced in Congress last year would require stablecoin issuers to have a banking charter and get approval from the Fed, among other agencies, though the bill is unlikely to become law.
The most immediate way that some stablecoins might come under attack is from enforcers, such as what happened with the New York attorney general, who could pursue issuers for lying to consumers, said Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center. Lipsky said stablecoin issuers could eventually work in tandem with international governments’ projects to issue their own digital currencies but that the U.S. and others will have to develop regulations to ensure consumers aren’t hurt.
“The way it’s marketed is that you’re getting a dollar, but stablecoins are not always that stable,” Lipsky said.
Federal Reserve Official: Stablecoin Growth Is ‘Exponential,’ Deserves ‘Attention’
Boston Federal Reserve President Eric Rosengren notes that Tether could be a “disruptor” to short term credit markets.
While a presentation yesterday from Boston Federal Reserve President Eric Rosengren has some members of cryptoTwitter spooked at the idea of regulation and oversight, the central bank might simply be pondering the future.
In a presentation titled “Financial Stability,” Rosengren identified the stablecoin Tether by name as a part of three different “Financial Stability Challenges.” The challenges included risks to the housing market, the need for emergency lending facilities in times of crises, and “periodic disruptions to short-term credit markets,” where Tether was noted as one possible disruptor.
A follow-up slide noted that stablecoins are rapidly growing in marketcap, and now are roughly 20% the size of the total AUM for prime money market mutual funds:
“The reason we should be a bit concerned about stablecoin is that its growing very rapidly so there’s exponential growth in stablecoin,” Rosengren said in an interview with Yahoo Finance. “[…] I do think we need to think more broadly about what could disrupt short term credit markets over time, and certainly stablecoins are one element.”
While Avanti Financial group CEO Caitlin Long rang the alarm bells that this could be a harbinger of the Federal Reserve laying the groundwork for a regulatory framework for stablecoins, Rosengren ultimately seemed to be taking a more tempered view.
3/ And here’s part 2.
Again, every single USD ultimately clears thru the Fed, which means the Fed has jurisdiction over USD #stablecoins. It matters that the Fed is saying this. Caveat emptor, folks. pic.twitter.com/iWkO7AoUpn
— Caitlin Long (@CaitlinLong_) June 25, 2021
Rosengren noted that the rise of stablecoins aren’t a threat to credit markets on their own, but instead need to be evaluated in terms of the risks they might pose if they continue to grow as a segment of credit markets, and to what degree the Fed could backstop stablecoin-dominated markets:
“I do worry that the stablecoin market that is currently, pretty much unregulated as it grows and becomes a more important sector of our economy, that we need to take seriously what happens when people run from these type of instruments very quickly. And just like the money market funds caused a bad disruption in credit markets, I think a future financial stability problem could be occurring if we don’t start thinking carefully about what happens to things like stablecoins next time we have a bad market difficulty.”
Rosengren also noted that “We actually had a stablecoin that ran into financial difficulties last week,” but declined to name which. Additionally, despite being asked twice by anchor Brian Cheung, Rosengren declined to say whether the Fed would step in to “backstop” Tether or other stablecoins if they ever posed a risk to broader credit markets.
He noted, however, that Tether’s backing and the backing of other stablecoins “basically looks like a portfolio of a prime money market fund but maybe riskier,” and as such liquidity injected into money markets in times of crisis would effectively backstop Tether as well.
Tether disclosed for the first time in March their full reserve balance sheet, and in February settled with the NYAG a suit that said they improperly reported the degree to which the stablecoin was backed by fiat.
Iron Finance Bank Run Stings Investors — A Lesson For All Stablecoins?
The Iron Finance stablecoin fiasco caused cries for regulation and shed light on the importance of complete collateralization.
The cryptoverse has been overrun with negative events lately. One of the most recent ones was the Iron Finance bank run that occurred on June 16. Iron Finance is a multi-chain, partially collateralized stablecoin protocol with the main goal of providing a dollar-pegged stablecoin to be used for DeFi applications. It was the first large-scale bank run in the cryptocurrency market.
Iron Finance’s stablecoin, IRON, is a partially collateralized token soft pegged to the United States dollar and is available both on the Polygon network and the Binance Smart Chain (BSC). The collateralization of the coin is supported by two different tokens on each of these networks.
On the Polygon network, it’s the USD Coin (USDC) and the TITAN token, while on the BSC, it’s collateralized by Binance USD (BUSD) and the STEEL token. The Polygon network and Iron Finance are both protocols supported by billionaire investor Mark Cuban.
TITAN is the internal collateral token for the stablecoin, IRON, and it was at the forefront of this bank run along with IRON. TITAN is distributed to liquidity providers (LPs) for staking in various liquidity pools. LPs earn profits on transactions and enabling liquidity so that other investors can purchase the TITAN token.
As Cuban revealed in his blog on yield farming, liquidity providing and valuing crypto projects, he was one of these LPs for the protocol. He staked his TITAN tokens on the QuickSwap exchange, providing the TITAN/DAI trading pair on the platform. This entails that Cuban pockets 100% of the transaction profits when investors buy TITAN with Dai.
Soft Pegging And Partial Collateralization Led To The Bank Run
The bank run, which caused losses worth nearly $2 billion to investors including Cuban, happened due to the price of the TITAN token. It jumped from trading at around the $10 mark on June 9 to hit an all-time high of $64.19 on June 16.
This high prompted some whales to take the opportunity to sell their tokens, which ultimately led to a panic sell initiating a domino effect as the partial collateralization of the coin came further into the limelight.
The market was then flooded with TITAN tokens, which led to the price of the token dropping down to nearly $0 resulting in a total loss of $2 billion. Since the IRON stablecoin is collateralized with TITAN on the Polygon network, its soft peg to the U.S. dollar was also impacted.
The value of the token fell nearly 30% almost immediately to trade in the $0.7 range. Scott Melker, a crypto trader and analyst, told Cointelegraph:
“Iron Finance was climbing the popularity ranks among yield farmers. LunarCRUSH had the token ranked No. 9 in popularity and other social listening platforms had it in the top 10. A few major sellers’ actions revealed that Iron Finance was only partly collateralized. A massive bank run collapsed the system, effectively killing the entire network.”
Algorithmic stablecoins like IRON are often very difficult to design and sustain, both economically and technically. Michael Gasiorek, head of growth at TrustToken — the creators of TrueUSD, a USD-pegged stablecoin — told Cointelegraph why despite some concern, this wasn’t a rug pull:
“Iron Finance wasn’t a ‘rug pull,’ per se — the losses weren’t due to obvious malice or theft, but simply ineffective tokenomics and smart contract design that were predictable by those who had the technical skill and took the time to study the project design.”
Although Iron Finance had announced that the redemption of USDC for IRON is now resumed on the protocol again, the price of IRON hasn’t rebounded yet to its original $1 value, thus entailing that any redemptions made would be at a loss to the investors and liquidity providers alike.
The company released a post mortem report analyzing the bank run. In the report, it was mentioned that an IRON stablecoin v2 will be launched at a later date.
Cuban Calls For Regulation, But Does It Stifle Innovation?
Since Cuban was the most high-profile investor affected by this bank run and was the sole provider of liquidity for the TITAN/DAI trading pair, his opinion has been much sought after in the financial markets.
In the aftermath of the public fiasco, Cuban has called for regulation to “define what a stable coin is and what collateralization is acceptable.” However, Gasiorek has a contrary opinion on this while stressing the importance of thorough detailed research, he opined:
“Regulation is an important component of a mature investment sector, but [it] can stifle innovation in young and growing markets, like crypto. If you want to prevent losses, deeply understand what you’re investing in, remain especially skeptical when earning returns in the 1,000s of percent, and accept the enormous risk associated with such a premium. And maybe don’t yell for regulators if the risk catches up with you.”
Gregory Klumov, CEO and founder of Stasis — the company behind the largest euro stablecoin — added, “Any coercive regulation is likely to reduce the rate of innovation and attractiveness to a global clientele. Self-regulation and gradual development are more attracted by the decentralized nature of this area.”
Since stablecoins are often used by crypto investors and liquidity providers alike while transiting between positions in some cryptocurrencies and avoiding the liquidity of others, they are widely used in the cryptoverse. In fact, the market capitalization of all the major stablecoins has grown four times this year from nearly $25 billion to over $100 billion as it stands today.
Pointing to the enormous potential of decentralized finance (DeFi) to increase financial inclusion for the unbanked, Paolo Ardonio, chief technology officer of Tether — the company behind the USDT stablecoin — added in a conversation with Cointelegraph: “All stablecoins are not created equal. In some projects, there is a risk that everything goes to zero.”
Could self-regulation be the way forward?
This is not the first time a stablecoin protocol has come under the microscope. Last year, Tether was the center of attention when a lawsuit was filed against the company and Bitfinex by the New York Attorney General for alleged illegal activities and market manipulation based on reserves.
After a long litigation process that lasted until February this year, the Office of the New York Attorney General settled with Tether, which paid an $18.5-million fine and agreed to submit reports of its reserves.
Despite this, USDT has nearly tripled its market capitalization this year from $21 billion to around $63 billion at the time of writing. Melker further stated how Tether served as an example of a crypto company having to fend off fear, uncertainty and doubt (FUD) created in the market as an aftermath of the settlement: “Regulatory agencies with bad intentions are searching for any dirt they can find in the crypto space, and Tether is a great place for them to start due to its popularity and controversial history.”
Such stablecoin incidents could often be an indication of a greater need for a central bank digital currency (CBDC) from an economy like the United States. However, a representative of the Bank of England, the central bank of the United Kingdom, has opined against the hype of stablecoins bringing in a “brave new world,” saying that regulators should not treat these coins differently only because they are packaged in “shiny technology.”
However, Gasiorek further opined on the risks of stablecoins being applicable to CBDCs as well: “No technology is free from abuse, and even CBDCs are unlikely to singlehandedly solve fraud or financing of suspected groups. We believe CBDCs have a role to play alongside privately developed digital assets.”
As the race for the first global CBDC intensifies and the prominence of stablecoins keeps rising in the crypto market, regulators could have a crucial role to play in the path ahead due to the enormous impact of CBDCs on the stablecoin market. Melker further spoke on the nature of this interaction between the two:
“CBDCs are inevitable because complete control of the money supply is a central banker’s dream — not because of a failure of stablecoins. The world is moving digital and money is not immune. This will drive more adoption of Bitcoin and other cryptocurrencies as people realize that they are giving up their privacy and freedom with a digital dollar.”
Foreign CBDCs And Stablecoins Unlikely To Threaten US Dollar, Says Fed Vice Chair
Though Randal Quarles said there was a “legitimate and strong regulatory interest in how stablecoins are constructed and managed,” a U.S. dollar-pegged coin could help provide support for its fiat counterpart.
Randal Quarles, vice chair for supervision of the Federal Reserve Board of Governors, said he believed neither dollar-pegged stablecoins nor digital currencies issued by foreign central banks are likely major causes for concern for the U.S. dollar.
In a prepared statement for the Annual Utah Bankers Association Convention Monday, Quarles said that foreign currencies — whether fiat or digital — would be unlikely to challenge the U.S. dollar’s role in the global economy. He cited the size of the U.S. economy, trade relationships with other nations, and “credible U.S. monetary policy” as reasons he believed even a central bank digital currency, or CBDC, issued abroad would pose little risk.
“It’s inevitable that, as the global economy and financial system continue to evolve, some foreign currencies (including some foreign CBDCs) will be used more in international transactions than they currently are,” said Quarles. “It seems unlikely, however, that the dollar’s status as a global reserve currency, or the dollar’s role as the dominant currency in international financial transactions, will be threatened by a foreign CBDC.”
Quarles’ comments on stablecoins pegged to the U.S. dollar were also seemingly lacking urgency. Though the Fed vice chair said there was a “legitimate and strong regulatory interest in how stablecoins are constructed and managed,” a U.S. dollar stablecoin could support its fiat counterpart by making cross-border payments faster and cheaper.
According to Quarles, the concerns around stablecoins — one, namely, that holders exchange a large number of coins all at once — are “eminently addressable.” Even Bitcoin (BTC), to which he referred as “a risky and speculative investment rather than a revolutionary means of payment,” isunlikely to affect the role of the U.S. dollar given the crypto asset has failed to become a widely accepted means of payment.
However, rather than pushing for a CBDC issued by the Federal Reserve, Quarles implied that a federally issued digital currency would discourage innovation from the private sector as well as potentially constrict the availability of credit and many services of commercial banks.
Though he did not rule out the U.S. government eventually releasing a CBDC, he added any rollout needed to be prepared to prevent illicit activity and justify the potential cost of expanding the Federal Reserve.
“The potential benefits of a Federal Reserve CBDC are unclear […] developing a CBDC could, I believe, pose considerable risks.”
In May, Federal Reserve chair Jerome Powell said the government body would be issuing a discussion paper sometime this summer to explore the implementation of a CBDC. Powell has spoken many times about the possible ramifications of the U.S. government issuing a CBDC, saying that he believed it is more important “to get it right than it is to be first.”
Crypto.com Taps Circle For Global (USDC) Dollar Deposits
Crypto.com and Circle’s partnership enabled U.S. dollar deposits and receiving USDC for users in more than 30 countries.
Digital asset exchange platform Crypto.com has opened a new U.S. dollar fiat on-ramp thanks to a new partnership with global payment provider Circle, according to a Monday announcement.
The partnership between Crypto.com and Circle enables users in over 30 countries to deposit dollars from their bank account and receive USD Coin (USDC), a popular dollar-pegged stablecoin at a one-to-one ratio.
Crypto.com’s trading platform has over 50 pairs with USDC, which means that user will be able to buy Bitcoin (BTC), Ether (ETH) and other cryptocurrencies with their stablecoins. Dollar withdrawals will be enabled in the near future, the announcement reads.
Crypto exchanges use fiat-to-crypto payment gateways, also known as on-ramps, to enable users to add funds from their bank accounts using fiat money like U.S. dollars and euros. Users can then use those funds to buy crypto on the platform.
Users need to transfer their dollars with a unique code provided by Circle when making deposits, the announcement details. “Circle will take care of the processing, storage, and USD-to-USDC conversion. Users will then receive their funds in their Crypto Wallet within three business days.”
Noting that transferring fiat money into crypto exchanges has been an arduous process, Crypto.com co-founder and CEO Kris Marszalek said that the partnership with Circle aims to provide smoother money transfer solutions to the platforms’ users.
“This partnership will fuel crypto adoption globally and is another example of how innovators continue to break down barriers between traditional finance and the future of payments,” Circle co-founder and CEO Jeremy Allaire added.
Circle recently started a new initiative called The Circle USDC Institutional Trading Program, which allows high-volume trading firms, crypto exchanges and market makers to access Circle APIs for automated infrastructure to issue and redeem USDC.
Last year, Visa picked Circle to make USDC transactions compatible with certain credit cards and facilitate USDC transactions between cross-border Visa-friendly companies.
Coinbase Debuts Savings Product With 4% APY On USDC Deposits
The crypto exchange is touting far higher yields than what traditional savings accounts can offer.
Coinbase is rolling out a crypto savings account that lets you earn 4% annual percentage yield (APY) by lending out your USDC.
The account isn’t FDIC- or SIPC-insured and functions much like other products at crypto lenders and other exchanges that regularly offer yields around 8%. The reason why Coinbase is offering a comparatively lower yield is because it doesn’t lend to “unidentified third parties,” said Thorsten Jaeckel, senior product manager at Coinbase.
Coinbase, which administers the USDC stablecoin in partnership with Circle through the CENTRE Consortium, appears to be aiming squarely for banks with its new product, touting rates “more than 50x the national average of a traditional savings account.”
The account is geared towards retail users and the yield is created by Coinbase lending out the USDC to “verified borrowers,” Jaeckel told CoinDesk via email. A Circle spokesman said the project runs on the firm’s Yield and DeFi API products, which were first announced last week.
It’s the second USDC savings product advertising 4% APY in as many days. On Monday, Compound Labs, the maker of the major Ethereum money market of the same name, announced the creation of Compound Treasury. That USDC-powered vehicle is aimed at fintechs and neobanks.
Pre-enrollment for the consumer-oriented Coinbase product is now open for eligible customers in the U.S.; users in Hawaii and New York are not eligible.
The USDC product arrives less than a year after Coinbase rolled out its bitcoin lending product, which has been equally conservative. Coinbase capped credit lines at $20,000 per customer and offered an interest rate of 8% for BTC-backed loans with terms that are a year or shorter.
USDC Stablecoin Could Soon Expand To 10 More Blockchains
The stablecoin with a market cap of $25 billion is currently on four networks.
USDC, the stablecoin now native to four blockchains, could soon be on eight to 10 more networks, CoinDesk has learned.
It’d be the broadest expansion of the $25 billion stablecoin to date, potentially surpassing the eight blockchains that support Tether’s USDT, the market leader with a $63 billion market cap.
“We anticipate that in the coming months USDC will become available on Avalanche, Celo, Flow, Hedera, Kava, Nervos, Polkadot, Stacks, Tezos, and Tron,” according to a draft announcement from USDC administrator CENTRE obtained by CoinDesk.
The expansion comes as stablecoins draw increasing scrutiny from regulators, with Eric Rosengren, president of the Federal Reserve Bank of Boston, specifically mentioning USDT and even the relatively obscure TITAN in a recent talk about emerging systemic risks. While Fed Vice Chair Randal Quarles followed with more positive remarks about stablecoins, it is clear the sector is squarely on Washington’s radar.
CENTRE, which is a consortium run by crypto exchange Coinbase and payments firm Circle, said expanding to other chains helps “drive individual and enterprise adoption of open blockchain technologies.”
“We anticipate that USDC on these blockchain platforms and multichain protocols will further accelerate the use of the world’s fastest growing digital dollar currency,” CENTRE said in the draft announcement.
USDC was launched on Ethereum in 2018 and expanded to Algorand, Stellar and Solana in the second half of 2020.
The potential expansion to other blockchains follows a pair of announcements showing momentum behind USDC as an interest-generating savings vehicle. Circle announced its Circle Yield and DeFi API products late last week.
In its draft announcement, CENTRE said updates on the timing of the further integrations would be issued “over the balance of the year.”
Stablecoins Under Scrutiny: USDT Stands By ‘Commercial Paper’ Tether
Are stablecoins actually stable? Tether’s basket of reserve assets raises eyebrows as a new round of debate regarding backing begins.
The stablecoin market has been growing exponentially, and last week, Eric Rosengren — president of the Federal Reserve Bank of Boston — appeared to raise a cautionary flag.
“There are many reasons to think that stablecoins — at least, many of the stablecoins — are not actually particularly stable,” he said in remarks before the Official Monetary and Financial Institutions Forum, voicing concerns that “a future [financial] crisis could easily be triggered as these become a more important sector of the financial market, unless we start regulating them.”
Moreover, in an accompanying slide presentation, the bank CEO referenced Tether (USDT), the dominant stablecoin issuer, noting that its basket of reserve assets looks very much like a “very risky prime fund” — the sort that got into trouble in the last two recessions.
Was Rosengren right to call out Tether by name for its reserve assets, which include commercial paper, corporate bonds, secured loans and precious metals? Could the parabolic growth of stablecoins truly destabilize short-term credit markets, and would the stablecoin sector be better served by more rigorous reserving and auditing?
Also, given that Tether by far remains the dominant player in the global stablecoin market, what would happen if it falters — could it bring down the larger crypto market along with it? As the chart below used in Rosengren’s presentation shows, stablecoin market capitalization relative to prime money market mutual funds under management now exceeds 20%.
Francine McKenna, adjunct professor at American University’s Kogod School of Business, understands Rosengren’s concern. She told Cointelegraph that these new stablecoin funds are, in a sense, “interlopers” in the traditional short-term credit markets and that the Boston Fed president and his peers could be realizing that “suddenly we don’t have our fingers on all the levers.”
Stablecoins Run The Crypto Market?
Stablecoins are affecting short-term credit prices now, but these instruments could just as quickly exit the market. In mid-June, a “run” on the Iron Finance protocol, for instance, caused the price of its IRON stablecoin to move off peg and crushed its native token, TITAN, by almost 100%, impacting investor Mark Cuban among others.
Rohan Grey, assistant professor at Willamette University College of Law, told Cointelegraph that if Tether collapses, it could have dire effects on the cryptoverse:
“Tether is still one of the most widely traded asset pairs for almost every other crypto, and provides a huge amount of liquidity to the sector. So yes, a crash in Tether would have significant knock-on effects for the rest of the ecosystem.”
Circle and a few other stablecoins have begun to take market share from Tether, “So it’s definitely possible that some other stablecoin will step into the breach, but even without Tether, the rest of the crypto industry remains built on a foundation of stablecoins,” he added.
Controversy has dogged USDT through much of its short history, and in February, Tether and its Bitfinex affiliate agreed to pay the state of New York $18.5 million for misrepresenting the degree to which USDT was backed by fiat collateral.
“Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie,” said New York State Attorney General Letitia James when announcing the settlement, which also requires Tether and Bitfinex to submit mandatory quarterly reports on USDT reserves — the first of which was summarized in Rosengren’s slide deck.
Not all were reassured by the March USDT report, however. The fact that commercial paper accounted for half (49.6%) of assets was a particular eyebrow-raiser. “The fact that Tether is holding so much corporate paper and corporate bonds is a huge issue,” Grey told Cointelegraph, adding: “No one knows what it is, and it’s completely at odds with their claim for years that they were only invested in cash or cash-like assets.”
A “cash equivalent” has to be something especially “liquid with no market uncertainty,” McKenna explained to Cointelegraph: “Commercial paper is not generic. There are all sorts of commercial paper.” She said that it’s not like the old days when people said that General Electric’s commercial paper was “as good as gold.” Today, “You have to see who the issuer is.”
“USDT has been a big question mark since its inception,” Sidharth Sogani, founder and CEO of research firm Crebaco, told Cointelegraph. If Tether is investing assets in something other than U.S. dollars, then what happens if those assets — e.g., precious metals or corporate bonds — fall in price? “Will USDT lose its value?” Also, how are earnings being distributed?
Tether’s users presumably own the bonds and commodities backing the stablecoin, “So the interest earned is the users’ right,” said Sogani.
Not everyone has a problem with Tether pegging its token to a basket that includes commercial paper, however. “To my mind there is nothing inherently wrong with a stablecoin — USDT or not — holding or being backed by commercial paper, as opposed to being 100% backed by a specific fiat currency,” Sean Stein Smith, assistant professor in the Department of Economics and Business at Lehman College, told Cointelegraph.
That said, Stein Smith acknowledged potential “complications” that could arise — a “run” on the stablecoin could destabilize a specific tranche of the commercial paper market, for example. Or conversely, if the commercial paper market “seized up,” it could disrupt redemptions of that particular stablecoin.
Would a regular audit of Tether’s reserves by a Big Four accounting firm improve its standing regarding the “backing” question? “Regular auditing would absolutely help,” said Stein Smith, “both in raising the confidence in the backing of USDT, and creating crypto-specific standards that could be adopted by other stablecoin issuers going forward.”
But others aren’t so sure. USD Coin (USDC), the second leading stablecoin, has Grant Thornton LLP confirm that it has sufficient U.S. dollar reserves every month, for instance.
This is often cited as a better approach, but even this has serious limitations, in McKenna’s view. All that is really happening, McKenna explained, is a monthly verification of the issuer’s bank balance. Two minutes after the auditor examines the bank statement, the stablecoin issuer could simply transfer funds elsewhere.
What’s the answer then? According to Mckenna, it’s escrow accounts — i.e., “segregated client funds like broker/dealers are required to have.” In any event, “There are lots of ways to tie up money so it can’t be touched.”
Elsewhere, another sticking point for people is the fact that according to Tether itself, only 2.9% of USDT’s asset backing is in cash, which has led some to say that Tether is acting like a bank — but without being subject to a bank’s heavy regulation.
“It is pretty clear looking at the makeup of the reserves — a tiny proportion of the reserves are cash on account at banks — that Tether is operating like a bank but with none of the normal disclosure,” Martin Walker, director of banking and finance at the Center for Evidence-Based Management, told the Financial Times.
Meanwhile, all the publicity about reserves probably isn’t helping the stablecoin attract new users. According to CoinMarketCap, USDT’s market capitalization has barely budged over the past month. With U.S. dollar-backed stablecoins, market capitalization is a good proxy for total supply because each coin is very close to $1.00.
Meanwhile, USD Coin and Binance USD (BUSD), Tether’s closest competitors, have both increased their market cap substantially during this period — 10% and 12%, respectively, since the start of June.
Cointelegraph invited Tether/Bitfinex to comment on the idea that it seems to be losing ground to its competitors but did not receive a response.
What If USDT Faltered?
There is no sign of any imminent USDT collapse, but given Tether’s continuing market dominance, such an event is often a topic of conversation — as a matter of speculation. Sogani told Cointelegraph:
“The BTC/crypto pairs would be sustained, but still there would be a bloodbath. I believe the market would lose between 10 to 15% — USDT circulating supply is $64 billion right now — in market cap and a sudden correction of up to 35% could be seen if USDT collapses as it would trigger a panic.”
Stein Smith, by contrast, doesn’t agree that stablecoins generally, or USDT specifically, represent much of a threat to financial stability or the crypto ecosystem. “If stablecoins truly did pose a global systemic risk, why are so many central banks experimenting and deploying central bank digital currencies — which are at a basic level government issued-stablecoins,” he said, adding:
“If Tether collapsed there would certainly be some volatility and headlines foretelling the ‘end of crypto,’ but it would not crash the entire sector.”
STABLE Act Needed?
Elsewhere, stablecoin regulation could be coming, at least if certain initiatives prove successful. “It is important that when a fiat-currency-pegged stablecoin is issued that it is regulated,” said Sogani, “or else it is like creating value out of thin air to keep buying more crypto, especially Bitcoin. Since stablecoins are centralized in most cases, strict regulations must be in place because of lack of transparency.”
The stablecoin market is fragmented globally, too, as different organizations have their own stablecoins, and many stablecoins are available on multiple chains. USDT, for example, is available as an ERC-20 token on Ethereum, a TRC-20 token on Tron and a BEP-20 token on Binance Smart Chain and can also be used via the Omni Layer on Bitcoin (BTC), which makes auditing more difficult.
“Stablecoin is essentially unregulated free banking that issues deposits. However, free banking never worked in the past, even in cases where the government required backing,” Yale University finance professor Gary Gorton recently presented along with his opinion that “There needs to be credible backing for Stablecoin as they are now runnable without any entity overseeing them.”
“The sector could profit from more regulation,” Willamette University’s Grey told Cointelegraph. Grey helped draft the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, which was introduced in the United States House of Representatives in December 2020.
The STABLE Act would, among other things, require U.S. stablecoin issuers to obtain bank charters and prior approval from the Federal Reserve, the Federal Deposit Insurance Corporation and the appropriate banking agency in their jurisdiction.
All in all, stablecoins have exploded recently, and as a result, they are attracting more attention from financial regulators. Tether sits at the top of the stablecoin pyramid, but questions remain about whether all fiat-based stablecoins are really pegged one to one, said McKenna. “If I need cash to honor redemptions or pay taxes am I going to get dollar for dollar?”
After all, when money market funds “broke the buck” during the 2008 financial crisis — i.e., when their net asset value fell below $1 — it was because those funds had invested in derivatives, commercial paper and other suddenly illiquid assets. McKenna concluded: “Yes, there are enormous reasons for the Fed and its presidents to be concerned.”
Stablecoin Growth Could Affect Credit Markets, Rating Agency Warns
Fitch notes potential asset contagion risks posed by stablecoins could lead to tighter regulations for the industry.
The growth of stablecoins that are not fully backed by safe assets could trigger a destabilization in short-term credit markets, rating agency Fitch has warned.
In a commentary note, the agency explained that coins that are fully backed by safe assets pose a lesser risk for the financial markets.
The agency gives USD Coin (USDC), which is backed by United States dollars on a one-to-one basis held in custody accounts, as an example for fully backed stablecoins but warned that the authorities “may still be concerned if the footprint is potentially global or systemic.”
On the other hand, Tether held 26.2% of its reserves in cash, fiduciary deposits, reverse repo notes and government securities, according to the biggest stablecoin issuer’s March 2021 reserve disclosure.
Fitch highlighted that Tether’s commercial paper (CP) holdings, which account for $20.3 billion — or nearly 50% of its reserve — “may be larger than those of most prime money market funds (MMF) in the United States and EMEA.”
“A sudden mass redemption of USDT could affect the stability of short-term credit markets if it occurred during a period of wider selling pressure in the CP market, particularly if associated with wider redemptions of other stablecoins that hold reserves in similar assets.”
The Facebook-backed stablecoin Diem is another example Fitch uses to explain the attention of regulators. Diem proposed to hold 80% of its reserves in government securities while holding 20% in cash with overnight sweeps into MMFs that invest in short-term government securities.
Fitch noted that projects with the potential to rapidly become systemic, such as Diem, could lead to tighter regulations for stablecoins.
“Potential asset contagion risks linked to the liquidation of stablecoin reserve holdings could increase pressure for tighter regulation of the nascent sector,” the note reads.
Fitch noted United States regulators’ warning that entities with similar asset allocations to Tether might not remain stable if the short-term credit spreads widen significantly. “This contrasts with the way stablecoins are marketed to the public,” Fitch analysts added.
Last month, Boston Federal Reserve President Eric Rosengren expressed concerns regarding the exponential growth in stablecoins. “I do think we need to think more broadly about what could disrupt short-term credit markets over time, and certainly stablecoins are one element,” he said.
How To Keep Crypto From Crashing The Financial System
What used to be a sideshow is becoming a systemic risk.
Once upon a time, the realm of cryptocurrencies was a curious sideshow, a place where criminals did business and enthusiasts dabbled at their own peril. Not anymore.
It’s rapidly evolving into a veritable Westworld of finance, where glitchy simulacra of investment funds, banks and derivatives allow visitors to take on immense risks — risks that could ultimately spill over into traditional markets and the broader economy.
Regulators have been struggling to get a grip on all this. It’s increasingly important that they succeed, and soon.
Whether crypto will prove to be, on balance, a good thing is still unclear. As money, it has so far failed: The volatility, transaction costs and carbon footprint of Bitcoin, for example, have made it largely useless for purposes other than speculation and ransomware (and even there it has flaws).
That said, the underlying blockchain technology — which allows people anywhere to transact and create indelible records without relying on a trusted intermediary — may yet have uses beyond selling “official” copies of video clips and commemorating the torching of valuable artwork. In due course, it might help sovereign states improve their official currencies.
Lately, though, the denizens of crypto have been replicating the work of traditional financial institutions, without any of the regulatory guardrails designed to keep them in check. Left unattended, this is not likely to end well.
Exhibit 1 is stablecoins, representations of fiat currencies that operate on the blockchain. They mimic bank deposits by purporting to be worth, say, exactly one U.S. dollar per coin. But unlike banks, the organizations that manage them have no deposit insurance, no recourse to emergency loans from the Federal Reserve, and no limits on where to invest the reserves of fiat money that allegedly back them.
Tether, the outfit behind one of the most popular stablecoins, has already been caught lending its dollar reserves to its affiliated crypto exchange, and still claims to hold potentially volatile assets such as precious metals and other digital tokens.
History has repeatedly demonstrated how dangerous such a naked combination of deposit-like liabilities and risky investments can be. Even the rumor of losses can trigger a rush to redeem before the money is gone, with systemic consequences.
Suppose, for example, stablecoins became large buyers of commercial paper, short-term debt that companies issue for purposes such as buying supplies and paying employees. (Tether says it already holds tens of billions of dollars of such paper.)
A sudden wave of redemptions could starve the market of cash, rendering companies unable to make payroll — similar to what happened in 2008, when the bankruptcy of Lehman Brothers triggered a run on money-market funds that devastated the commercial paper market (a vulnerability that itself has yet to be fully addressed).
Exhibit 2 is the burgeoning world of decentralized finance, or DeFi. Working on the Ethereum blockchain, using “smart contracts” capable of automating transactions, often-amorphous teams of developers have set into motion a panoply of applications. These include exchanges, bank-like platforms and derivatives dealers where people can lend, borrow and make highly leveraged bets.
Many of the services have decentralized governance systems that leave decision-making to a constantly changing community of users. Scams abound. Hackers frequently find ways to drain funds, as famously happened with the original autonomous blockchain organization, the DAO. Think of it as full-service shadow banking with nobody in charge.
So far, the sums involved are relatively small — the equivalent of tens of billions of dollars, compared with the hundreds of trillions coursing through global capital markets. But this could change quickly, with far-reaching repercussions — particularly given the amount of leverage involved.
Imagine a group of hedge funds making a large bet on cryptocurrency. In DeFi, an algorithm would typically determine how much of their own money, or “margin,” they would have to commit to get a given amount of exposure. This might be 20%, enough to cover a $20 billion loss on a $100 billion investment. In the highly volatile realm of crypto, though, setting margins is a tricky business.
An error, a hack or a sharp market move could cause the algorithm to recalculate, suddenly requiring the hedge funds to deliver billions more by selling assets in other markets — precisely the kind of contagion that tends to trigger broader meltdowns. And that’s just one of many possible scenarios.
What’s A Regulator To Do?
One promising solution for stablecoins: Require them to deposit their reserves only in traditional banks, which would in turn park the cash at the Federal Reserve. This would make them equivalent to federally insured deposits, leaving them to compete on the quality of the payment services they provide, as opposed to profiting from unduly risky investments.
Properly regulated, stablecoins could have beneficial uses, such as making it easier and cheaper for migrant workers to send money to their families back home. The payment “rails” they help develop might even someday serve as infrastructure for digital cash issued directly by sovereign central banks.
DeFi will be more complicated. One challenge will be defining what a platform actually does — is it like a bank, an exchange, a securities dealer, something else? Another will be figuring out whom to hold accountable in a decentralized organization — the developers, the users? Multiple agencies will have to cooperate, and new legislation will probably be needed to give them the necessary powers.
The overarching goal should be to ensure similar services are competing on the merits, rather than on the degree of regulation they face or their tolerance for crime. In cases where that’s not possible, some may have to be outlawed.
To their credit, global regulators are aware of the issues and are starting to engage. They’ve thought deeply about the options for addressing stablecoins. They’ve met with DeFi participants to better understand the risks. They’ve set forth concrete proposals to keep traditional banks safe. But they need to act quickly. This could get very big, and very dangerous, very fast.
Circle CEO Says USDC To Take High Road, But It’s A Long Road
Jeremy Allaire made the promise at a time when investors have been demanding more transparency around USDC.
With his company on the cusp of going public, Jeremy Allaire – CEO of Circle, operator of USDC, the world’s second-biggest stablecoin – has vowed to make his company “the most public and transparent operator of full-reserve stablecoins in the market.”
He has a ways to go.
Circle announced Thursday that it is listing on the New York Stock Exchange via an acquisition by Concord, a special-purpose acquisition company, or SPAC, led in part by former Barclays CEO Bob Diamond. The deal values the crypto financial services firm at $4.5 billion.
After the announcement, Allaire wrote in a tweet that the transformation from a private to a public company “creates an opportunity for Circle to also provide significantly more transparency about the business we are building around USDC, and about the reserves that back USDC.”
Allaire made the promise at a time when a growing number of commentators have called for greater insight into the assets backing stablecoins like Tether’s USDT, the largest in the cryptocurrency category with about $63 billion of assets. No. 2 USDC has grown to about $25 billion outstanding from less than $1 billion a year ago.
Regulators and industry analysts have warned that a loss of confidence in stablecoins could destabilize cryptocurrency markets and potentially even spread to Wall Street.
The issue could take on even more significance if Circle’s projections for its own growth prove accurate: In a presentation Thursday, Circle executives estimated that USDC in circulation could more than double to $83 billion next year and reach almost $200 billion by 2023.
The presentation mentions the word “reserves” only once – to point out that USDC earns “interest income on reserves.”
Circle did include the following line in fine print in a list of “risk factors” on page 45 of the 46-page presentation: “We have obligations to safeguard the assets of our customers, and any failure to do so could negatively impact our business and result in liabilities, regulatory enforcement and reputational harm.”
The company has been issuing monthly “attestation” reports on its assets since 2018. According to those reports, it had been holding all of its customer funds in federally insured U.S. banks until the end of February 2020. In its subsequent attestation report for the month ended March 31, 2020, Circle added the category “approved investments,” without specifying what those were.
Despite mounting inquiries from investors and the media, Circle has not disclosed breakdowns of the “approved investments” or the amount held in them.
During an interview with CoinDesk TV on June 30, Allaire didn’t directly answer questions on what the investments were, though he said there’s a “very narrow set of permissible financial instruments that are able to be held” according to the law.
“If you look at it, it’s obviously cash. It’s, you know, government treasuries, those types of short-term instruments,” Allaire said. “We don’t break out the actual individual line items in USDC reserves, but what we do is actually publish exactly what we are required to do and we make it very clear that we are holding ourselves to an even higher standard.”
The pseudonymous blogger known as Bitfinex’d, a long-standing critic of tether and stablecoins generally, published a post on Medium on Wednesday chronicling the changes in how Circle has characterized its reserve assets.
“You can’t claim to be transparent if you’re unwilling to be transparent about your reserves,” the post read. “It’s not illegal to show people what you’re holding. You’re holding other people’s money, and other people’s livelihoods and families are dependent on you, and they deserve to know what the hell they’re holding.”
As CoinDesk columnist JP Koning pointed out, Circle is licensed as a money transmitter with 44 state-issued licenses, and regulations on the investment scope for such entities vary from state to state.
Texas imposed tighter restrictions for those entities to invest only in safe assets, while states such as New York and Connecticut allowed money transmitters to invest in commercial paper and preferred shares of publicly listed companies.
As the stablecoin market grows, it has drawn increasing concerns from regulators and experts for the potential impact on digital assets as well as on traditional markets like stocks and bonds. Stablecoins play a key role in the plumbing of the $1.4 trillion global cryptocurrency market. Traders use them to quickly move dollar value between exchanges in order to take advantage of arbitrage opportunities.
Some traders, analysts and economists have speculated that financial losses at Tether or other stablecoin issuers, or even a crisis of confidence, might trigger a sell-off that could put downward pressure on prices for other cryptocurrencies, including bitcoin.
“Stablecoins will never be as stable as dollars, physical or digital – and may even require a bailout when panic over broken promises spreads,” wrote Marcelo M. Prates, a CoinDesk columnist, central bank lawyer and researcher.
Raft Of Warnings
Fan Yifei, a deputy governor of China’s central bank, has voiced concern that stablecoins could pose a risk to the stability of the global financial system.
Eric Rosengren, president of the Federal Reserve Bank of Boston, made similar remarks last month.
“I do worry that the stablecoin market that is currently, pretty much unregulated as it grows and becomes a more important sector of our economy, that we need to take seriously what happens when people run from these type of instruments very quickly,” Rosengren said.
Fitch, the bond-ratings firm, warned last week that the rapid growth of stablecoins could have implications for the functioning of short-term credit markets.
In May, the Federal Reserve published a survey of market contacts finding that brokerage firms, investors, political advisers and academics increasingly see cryptocurrencies and stablecoins as a threat to the stability of the financial system. Global regulators have been studying the potential risks from stablecoins since at least 2019. European Central Bank President Christine Lagarde echoed the concerns last year.
USDC Assets To Be Disclosed In SEC Filings, Circle CEO Says
“Our intention is to include greater reserves transparency” as the stablecoin operator goes public via a SPAC deal, Jeremy Allaire told CoinDesk TV Friday.
Circle CEO Jeremy Allaire reiterated his pledge to pull back the curtain a little more on the USDC (-0.05%) stablecoin a day after he announced plans to take his company public.
“Stablecoins are a more powerful innovation than the closed-loop, wallet garden proprietary types of payment systems of the past,” Allaire said Friday on CoinDesk TV’s “First Mover.” “They deserve a greater degree of transparency.”
In recent weeks, a growing number of observers have scrutinized the stablecoin sector over the lack of transparency and are calling for greater insight on the assets backing the digital tokens.
While most of the criticism has focused on Tether’s USDT (-0.05%), the largest stablecoin by market capitalization, its closest rival USDC, which Circle operates, has also been called out for the lack of detail in its monthly “attestations.”
Circle announced Thursday that it is going public via a merger with Concord Acquisition Corp., a special purpose acquisition company (SPAC), in a deal that values the payments infrastructure provider at $4.5 billion. The company projected a USDC circulation of $190 billion by 2023, seven times more than it is now.
When asked Friday why Circle hasn’t provided more information about USDC’s reserves, Allaire said the company has been involved in a complex process for months preparing the Concord transaction.
The parties are required by the U.S. Securities and Exchange Commission (SEC) to file a Form S-4 detailing the proposed merger, he noted, suggesting that more pertinent information would come soon.
“Our intention is to include greater reserves transparency there,” Allaire said.
SEC filings are “the appropriate venue and medium to publish and share that kind of information,” he said.
Allaire also spoke about the possibility of stablecoins challenging the decades-old SWIFT messaging system as a medium of international transactions.
“Dollar digital currencies can transact globally without touching SWIFT and other currencies like bitcoin (BTC, +3.03%) can transact globally without touching SWIFT,” he said, noting that electronic currency is an invention that goes beyond stablecoins and central bank digital currencies (CBDCs).
“Internet-native money is here, it is growing rapidly and will continue to grow and that’s something that the world has to adjust to,” he said.
Powell Says Stable Coins Need Regulation to Protect U.S. Public
Federal Reserve Chair Jerome Powell said there are potential risks from stable coins and that they require regulation to ensure their safety.
Powell told the House Financial Services Committee on Wednesday that stable coins are a lot like money market funds or bank deposits “but without the regulation.”
“We have a tradition in this country where the public’s money is held in what is supposed to be a very safe asset. We have a pretty strong regulatory framework around bank deposits, for example, or money market funds. That doesn’t exist really for stable coins,” he said during semi-annual testimony on the U.S. economy.
Fed officials including Boston Fed President Eric Rosengren have highlighted potential growing risks from stable coins including Tether. During a recent presentation, Rosengren pointed out a slide showing Tether’s underlying assets that included commercial paper, secured loans, corporate bonds and precious metals; effectively “this is a very risk prime fund,” Rosengren said.
Powell echoed the need for oversight.
“If they are going to be a significant part of the payments universe — which we don’t think crypto assets will be but stable coins might be — then we need an appropriate regulatory framework, which frankly we don’t have,” he said.
How The Civil War Shapes The Future of Stablecoins
The Civil War replaced a decentralized monetary system with a centralized one, setting precedents for the regulation of stablecoins today.
In 1861, civil war broke out in the United States. Over the next four years of conflict, the politics of the U.S. were remade and so were its monetary affairs. A new monetary system was born during the war years that exists with us today and is shaping our stablecoin future.
The Decentralized Currency System
Before the Civil War, there was a decentralized currency system with a myriad of coins and banknotes. All banknotes were privately issued through independent banks. (There was no U.S. government paper money.) If a bank wanted to issue currency it had to deposit bonds with its state’s banking authority. Usually, a bank could issue anywhere from 90% to 100% of the value of the bonds deposited.
However, in some states you could basically deposit worthless bonds as collateral. And some banks just ignored the rules. The result was thousands of different banknotes, all with different values. Making matters worse were wildcat banks. A wildcat bank was a fly-by-night operation that appeared in a region and spent its banknotes far and wide. Then it would just pull up stakes and disappear, leaving worthless banknotes behind.
During the Civil War, Congress and the Abraham Lincoln administration overturned the decentralized system, establishing a government monopoly on money. It did this in a number of ways, but the most relevant to the future of stablecoins were through the redefinition of money and the establishment of the National Banking System.
Birth Of The Money Monopoly
Before the Civil War, money could be “current” or “lawful.” Current money was public or private money that was widely used.
Lawful money was official money. Once the Civil War began, Congress began to equate current money with lawful money.
For example, an 1862 law stated that no one could issue any instrument “for a less sum than one dollar, intended to circulate as money … or used in lieu of lawful money.” Meanwhile, in 1864, Congress declared that no one “shall utter or pass … any coins … intended for the use and purpose of current money.” Soon, current money was the same as lawful money. In other words, the only money that could circulate freely and be used in payments was official U.S. money. (A stablecoin used for everyday retail transactions would be considered current money and be in violation.)
Combined with this redefinition of money was the restraint of private banknotes. As we have seen, during the early nineteenth century private banks issued thousands of banknotes. To end this chaotic situation and establish a U.S. currency union, the National Banking System was created in 1863 under the direction of the Office of the Comptroller of the Currency (OCC). These new national banks would be able to issue their own notes called National Bank Notes.
In effect, the OCC re-established the private currency system on a government-controlled collection of national banks that met strict deposit (100% reserves against issuance) and auditing criteria and issued government approved banknotes. Congress completed the end of private banknotes by taxing them out of existence. Eventually, the banknotes of the national banks were replaced by those of the Federal Reserve.
The Civil War And Stablecoins
How does the monetary legacy of the Civil War impact stablecoins today? Let us look at some recent developments.
Remember wildcat banks and the fear of a bank issuing a worthless currency, taking its profits and disappearing? The Stablecoin Classification and Regulation Act, often referred to as the Stable Act, was addressing this very fear, but for stablecoins.
The bill, introduced into the U.S. House of Representatives in November 2020, called for any institution issuing a stablecoin to be a member of the Federal Reserve System and to hold 100% reserves against any coin issuance. Such federal regulation, it was hoped, would prevent any “wildcatting.” Here, instead of wildcat banks, we have wildcat stablecoin issuers.
But the Stable Act rests on a contradiction. It basically defines stablecoins as private current money and authorizes their issuance. As we have seen, current money is legally the same as lawful, official U.S. money. These authorized stablecoins thus challenge the U.S. monetary monopoly established during the Civil War, clearly violating the laws of 1862 (unless there are no fractional stablecoins) and 1864 mentioned above.
So, are stablecoins illegal? Stablecoins run into legal trouble when they seek to be in direct competition with the U.S. dollar in retail payments. A stablecoin that tries to replace the dollar as a means of payment in everyday transactions will be identified as current money and thus in violation of the 1864 law forbidding private coins (unless you argue that a stablecoin is not actually a coin or token).
Stablecoins more closely resemble a monetary instrument known as scrip. Scrip is non-dollar-denominated private money that only operates in an enclosed or geographically limited system, and that cannot be directly substituted for U.S. dollars. Hence, scrip is not a challenge to the U.S. government’s monopoly on money. The only legal private money in the U.S. today falls into this category. So as long as stablecoins operate in closed, private networks, there should not be a legal problem.
This was the path the OCC took in its interpretive letter in January 2021. Here, the OCC defined stablecoins as a payment mechanism and not current money: “Stablecoins serve as a means of representing fiat currency on an INVN [independent node verification network]. In this way, the stablecoin provides a means for fiat currency to have access to the payment rails of an INVN.” This is a fancy way of saying that stablecoins are scrip.
But let’s look at another interpretive letter. On Sept. 21, 2020, the OCC issued a statement that allowed national banks to hold stablecoin reserves for stablecoin issuers. This rule allows national banks to facilitate stablecoin issuance when they hold the 100% backing reserves. One can now envision a nationwide network of stablecoin issuers resting on the National Banking System. Civil War-era National Bank Notes could be replaced with stablecoins.
The Civil War replaced a decentralized monetary system with a centralized one, and in the process established new monetary definitions and structures that exist to this day. This Civil War legacy is shaping the development of stablecoins and cryptocurrency in general.
This Is A Reading From A Financial History Expert, Franklin Noll Owner Of Noll Historical Consulting
Located just outside Washington, DC, Noll Historical Consulting was established in 1999 by Franklin Noll, PhD. Noll Historical Consulting’s clientele quickly expanded to include US Government and international agencies with a focus on the history of finance and money, especially the technology of money—how money is created, used, and evolves over time. Noll Historical Consulting’s functionality also grew to include archival and collections management.
Over the past 20+ years, Noll Historical Consulting has worked with the US Treasury, the Bureau of Engraving and Printing, the Bureau of the Fiscal Service, the Office of the Comptroller of the Currency, the Federal Reserve, the International Monetary Fund, and other agencies, helping them to use history to meet their immediate needs and to plan for the future.
These tasks have included support for US Treasury policymaking, Bureau of Engraving and Printing product development, including banknote design, and investigations into the future of cryptocurrencies, especially central bank digital currencies and hybrid banknotes. Noll Historical Consulting has also provided extensive public relations support to various agencies, ranging from press relations to social media.
With a deep and wide knowledge of financial and monetary development and technology, extensive experience in the care of definitive financial instruments (including currency), and ready access to the nation’s major archives, Noll Historical Consulting is unmatched in its field.
Franklin Noll began his professional life as a businessman. Coming from a small farming town in the Pennsylvania Dutch country, he studied business and computer science at Lehigh University. He then worked in the plastics industry before returning to school to study history. Earning a PhD in history at the University of Maryland, he taught history at the university level for several years, winning the Rundell Award for Teaching and being named a University of Maryland Distinguished Teacher. Noll then left academia to begin his own company.
Noll is a recognized authority on the history of money, Treasury securities, Civil War finance, and the US public debt. He has extensively written and spoken upon these topics, including making film and radio appearances and writing blogs for the US Treasury and Bloomberg News. Noll has embraced the new world of cryptocurrencies and DeFi, examining how a knowledge of monetary history can aid in their development. He is an expert columnist for CoinDesk, Cointelegraph, Be In Crypto, New Money Review, and other crypto news agencies and was elected a member of the Association of Cryptocurrency Journalists and Researchers.
Noll is currently serving his third term as the President of the Treasury Historical Association and is featured in the production of an upcoming documentary film on the history of the Treasury Building being created by the Treasury Historical Association.
Andrei Lipkin is a resident of Minsk, Belarus. After successfully completing his studies at the Belarusian State University of Informatics and Radioelectronics, he moved into banknote and security document design at the State Special Printing House of Belarus. While rising to lead the Marketing Division, Lipkin introduced numerous innovations into the documents issued by the various Ministries of the Republic of Belarus and developed innovative, state-of-the-art security features and designs. He also oversaw their production from prepress linework to final press runs while working to ensure customer satisfaction. After over 20 years in government employment, Lipkin left to work on his own.
Acting as a consultant to central banks, cryptocurrency companies, and security printers, he developed proven methods to adapt familiar financial documents to the digital realm. He also established universally-applicable technological processes for printing these hybrid documents that combine innovative financial blockchain technologies with definitive financial instruments. Such secure financial instruments can be used with cryptocurrencies, central bank digital currencies (CBDCs), and other digital payment systems.
A paper by Franklin Noll, president of Noll Historical Consulting and an expert on American monetary history, and Andrei Lipkin, a Belarussian consultant on bank notes and cryptocurrency, who originated the term “cryptobanknotes” in 2017, takes a close look at bank notes and how they relate to cryptocurrencies.
Their conclusion is that the forms of currency are not mutually exclusive. “Smart Banknotes and Cryptobanknotes: Hybrid Banknotes for Central Bank Digital Currencies and Cryptocurrency Payments” is a paper that will be presented at the Seventh Joint Bank of Canada and Payments Canada Symposium on Sept. 16.
The premise is that cash as we know it will not be around forever, but neither will it go away quickly. Bank notes will be around for the foreseeable future, and what is needed is a transitional device to ease the transition from 19th century cash to the digital currency of the future.
Two basic forms are envisioned, a smart bank note and a cryptobanknote. Smart notes are further explained here. (I will address cryptonotes next week).
The paper defines a smart bank note as being like a traditional bank note in that it bears intaglio and offset printing on paper or polymer, and like a traditional bank note it can work offline, hand to hand without a network or electricity. The difference from traditional bank notes is that there is the option of using it to transmit its value over an electronic network, letting it act as an electronic payment vehicle.
The smart note would communicate with a network via an embedded radio-frequency identification microchip. When desired, the note’s value can be transferred off the note, for example, by smart phone or point of sale device. Using the same devices, the value of the smart bank note can also be transferred back from a network onto an “empty” or valueless smart banknote. The status of the smart bank note, whether it contains its face value or is empty, is indicated by a tactile and visible icon made of electronic ink.
This icon could involve an existing design feature or a new one integrated into an existing design. An example authors Noll and Lipkin give is a $10 U.S. smart bank note. The chip, or status icon could be the current Statue of Liberty torch on the bill’s face.
If the user wants to make an electronic transaction — say, to their bank account, a relative, or at a place that does not accept cash, the note is touched to a phone and the value is transferred over the network.
Since the note is now “empty” of value, the Statue of Liberty torch icon disappears, showing visually and by touch that the smart banknote no longer has value.
To put the value back onto the note, the user can turn it in to a bank or merchant that will recharge it and put it back into circulation. Or, the user can personally do the same thing. Either way, the Statue of Liberty torch would reappear, showing that the note has regained its value, and it can continue circulating hand-to-hand.
On this episode of “The Breakdown,” NLW analyzes a stablecoin-focused speech from Randal Quarles, vice chair of the Federal Reserve, starting with a primer on developing trends related to the topic, including:
CBDC discussion, investigation and development across global powers The ability of stablecoins to make a U.S. CBDC redundant The conversation around central bank digital currencies (CBDCs) is growing louder. In China, the digital yuan continues to roll out through lottery tests and, more recently, for use in the Beijing subway. Today, the European Central Bank announced a new two-year “investigation” period during which the ECB will prepare for a larger digital euro design phase with user consultation, regulatory discussions and market analysis.
Still, NLW argues that we can’t view the rise of public CBDC discussions in the absence of the growing adoption of private stablecoins. While these private, fiat-pegged stablecoins seem increasingly in the regulatory crosshairs, Federal Reserve Vice Chair Randal Quarles recently argued the U.S. central bank and policy makers shouldn’t fear them – and that, indeed, when regulated properly, stablecoins might make the need for a CBDC redundant.
Fed And Yale Researchers Lay Out 2 Regulatory Frameworks For Stablecoins
Yale Professor Gary B. Gorton and Jeffery Zhang of the Board of Governors of the Federal Reserve System have co-authored a 49-page paper called, “Taming Wildcat Stablecoins.”
The Federal Reserve’s ongoing research into central bank digital currencies, or CBDCs, has broadened to include stablecoins and whether they can be effectively regulated.
In their paper, which was published in SSRN’s eLibrary on July 17, Gorton and Zhang argue that “privately produced monies” such as stablecoins are “not an effective medium of exchange because they are not always accepted at par and are subject to runs.” The authors then go on to propose solutions to address what they consider to be “systemic risks created by stablecoins.”
After taking a deep dive into the history of private money, beginning with the Free Banking Era in the United States, a period from 1837 to 1864, the researchers concluded that policymakers have two choices with respect to regulating stablecoins: make stablecoins equivalent to public money or introduce a CBDC, which entails taxing private stablecoins out of existence.
With respect to the first choice, the government could require that stablecoins be issued through FDIC-insured banks or stipulate that all stablecoins be fully collateralized by Treasuries at the Federal Reserve.
The paper made its way through Twitter on Sunday, with Avanti founder Caitlin Long making an interesting connection between the publication date and an upcoming stablecoin working group led by Treasury Secretary Janet Yellen.
Beginning July 19, Yellen will convene the President’s Working Group on Financial Markets to Discuss Stablecoins. The group brings together various regulators to assess the potential benefits and risks of stablecoins.
The discussion around stablecoins has ramped up recently, with Fed Chair Jerome Powell calling for stricter regulations of assets like Tether (USDT). In testimony before the House of Representatives on July 14, Powell said cryptocurrencies are unlikely to join the payment universe anytime soon due to their extreme price volatility.
To date, Fed researchers have been more open to the idea of a CBDC, though unlike their counterparts in Asia and Europe, the United States has no immediate plans for a so-called digital dollar. Despite its hostile attitude towards Bitcoin (BTC), China has emerged as one of the front-runners to issue a centrally-controlled digital currency.
US Financial Agencies Will Meet To Discuss The Future Impact Of Stablecoins
They intend to discuss the regulation of stablecoins, as well as the technology’s potential benefits and risks.
U.S. Secretary of the Treasury Janet L. Yellen announced plans to convene the President’s Working Group on Financial Markets, or PWG, as well as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to discuss possible interagency work with regard to stablecoins. The meeting is set to take place on Monday July 19.
Secretary Yellen Said:
“Bringing together regulators will enable us to assess the potential benefits of stablecoins while mitigating risks they could pose to users, markets, or the financial system. In light of the rapid growth in digital assets, it is important for the agencies to collaborate on the regulation of this sector and the development of any recommendations for new authorities.”
In December 2020 the PWG stated that it would begin examining current regulations of stablecoins in order to identify and address the technology’s related risks.
The announcement of this meeting comes two days after the Chairman of the Federal Reserve Jerome Powell addressed the need for stricter regulations for stablecoins in front of the House of Representatives. Powell stated that if stablecoins are to be a part of the payments universe, regulation is needed.
Yesterday a bipartisan bill was introduced into the House to provide a clear definition of assets, like digital tokens, and other emerging technology under current securities law. The Securities Clarity Act would apply equally to all assets, tangible or digital, and states an investment contract asset is separate and distinct from the offering it may have been a part of.
Treasury Secretary Yellen Urges Lawmakers To Quickly Introduce Stablecoin Guidelines
The President’s Working Group on Financial Markets expects to deliver regulatory recommendations for stablecoins in the coming months.
United States Treasury Secretary Janet Yellen has told financial regulators that the government must act quickly to establish a regulatory framework for stablecoins.
The comments came at Monday’s meeting of the President’s Working Group on Financial Markets. The group discussed the rapid growth of stablecoins, revealing plans to issue regulatory recommendations in the coming months, according to Reuters.
The group also deliberated on stablecoins as a means of payment, possible risks to end-users, and their broader impact on the U.S. financial system and national security.
In February, Yellen warned that the misuse of crypto assets has been a growing problem alongside cyber-attacks triggered by the global pandemic. At the time, she acknowledged the promise of these new technologies but also warned about her vision of the reality, stating “cryptocurrencies have been used to launder the profits of online drug traffickers; they’ve been a tool to finance terrorism.”
Co-founder and CEO of Circle, Jeremy Allaire, labeled the meeting as “very significant”, commenting that stablecoins are here to stay and likely to become key components of the global economic and financial system:
“It’s extraordinary and positive that US financial policy leadership are taking this on right now. It’s a sign of how far we’ve come and how fast this is all happening.”
1/14 VERY significant meeting today with Presidential Working Group meeting to discuss appropriate policy and supervision of private stablecoins. Lots to say about this, @SecYellen, @federalreserve , and @USOCC teams.
— Jeremy Allaire (@jerallaire) July 19, 2021
Stablecoin growth has been monumental this year as demand for decentralized finance has surged. Circle’s USDC has been the best performer so far this year with a 577% increase in circulating supply to record levels of 26.4 billion according to CoinGecko.
Speaking on stablecoins last week, Federal Reserve Chair Jerome Powell similarly emphasized the need to establish a robust regulatory framework for stable tokens.
“If they’re going to be a significant part of the payments universe, then we need an appropriate regulatory framework which, frankly, we don’t have,” he said.
As reported by Cointelegraph earlier this month, the world’s most popular stablecoin, Tether, remains under scrutiny. On June 25, President of the Federal Reserve Bank of Boston, Eric Rosengren, raised a cautionary flag regarding Tether’s basket of reserve assets.
When the total stablecoin supply topped $100 billion in May, it triggered alarm among financial regulators concerned about the sector’s lack of oversight, including the opacity surrounding how stable token issuers manage their reserves.
Auditors Reveal USDC Backing As Jim Cramer Sounds Alarm Over Tether’s Mad Money
Grant Horton has conducted an audit on USDC’s reserves and Jim Cramer has questioned what’s going on with Tether’s commercial paper reserves.
Auditors working for Circle have disclosed the reserves backing the firm’s USDC stablecoin, while Mad Money’s Jim Cramer has questioned Tether’s lack of transparency with its USDT reserves.
Multi-national tax advisory firm Grant Horton conducted the audit, and a reserve attestation report was published on July 20 which showed that 61% of USDC’s reserves were held in cash and cash equivalents equating to $13.4 billion, as of May 28.
Circle’s total commercial paper accounts for 9% of its reserves, and the figures provide a stark contrast to Tether’s reserves, in which undisclosed commercial paper accounted for 49.5% of its total reserves — something that Cramer has been “sounding the alarm” about recently.
The Circle report defines cash as deposits at banks and Government Obligation Money Market Funds, while cash equivalents are defined as securities with an original maturity less than or equal to 90 days.
On May 28 there was 22,176,182,251 total USDC in circulation, with the total fair value of Circle’s U.S. dollar-denominated assets held in segregated accounts fully backing the supply of USDC according to the report.
Circle noted that it voluntarily disclosed its reserves as part of its transparency goals, with the firm revealing plans to go public via a special purpose acquisition company (SPAC) earlier this month.
‘Yankee CDs’ and US Treasures represented the next biggest share of assets backing the reserves at 13% and 12% each, with a combined total value of $5.6 billion.
Yankee CDs are defined as “USD denominated Certificates of Deposit issued in the US by branch(es) of Foreign Banking Organizations,” with a maximum maturity of 13 months, while the U.S treasuries have a maximum maturity of three years.
The total commercial paper allocations represent 9% worth $2 billion, corporate bonds account for 5% worth $1.1 billion, and municipal bonds and U.S. agencies comprise 0.2% worth $100 million.
Circle’s USDC reserve breakdown was published amid increased scrutiny on the stablecoin sector from the U.S. government, with United States Treasury Secretary Janet Yellen meeting with other financial regulators this week to discuss a regulatory framework for stablecoins.
Finally, as we march towards becoming a listed company, we will be filing quarterly audited financials and management disclosures that will be required as an SEC regulated public company, and will include USDC reserve composition disclosures similar to our attestations.
— Jeremy Allaire (@jerallaire) July 20, 2021
Circle CEO Jeremy Allaire emphasized in a July 20 blog post that the firm is committed to providing transparency of its operations and working within the traditional financial system:
“Core economic activities underpinning USDC are built inside the perimeter of the U.S. financial system, and not outside of it.”
Jim Cramer Thinks Tether Is Mad Money
Speaking during a July 20 interview with The Street, Jim Cramer, the host of CNBC’s Mad Money questioned Tether’s lack of transparency and is asking why the firm hasn’t disclosed what the large percentage of commercial paper backing USDT is.
Tether released a brief reserve breakdown on May 13 and did not mention any independent review conducted on behalf of the firm.
Tether’s reserve breakdown showed that as of March 31, three-quarters of its reserves were held in cash, cash equivalents, other short-term deposits, and commercial paper. Amongst that category, commercial paper accounted for 65.39%, with cash alone accounting for just 3.87%.
Circle Reveals Assets Backing USDC Stablecoin
Crypto’s No. 2 stablecoin is backed mostly – 61% – by cash and cash equivalents. Here’s what comprises the rest.
The majority of Circle’s USDC (-0.03%) stablecoin is backed by U.S. dollars, the company revealed on Tuesday.
Circle, a global payments company, was one of USDC’s creators. It published a breakdown of its assets backing the stablecoin for the first time in its latest attestation report, which was dated July 16. According to the report, about 61% of its tokens are backed by “cash and cash equivalents,” meaning cash and money market funds.
Yankee Certificates of Deposit – meaning CDs issued by foreign (non-U.S.) banks – comprise a further 13%, U.S. Treasuries account for 12%, commercial paper accounts for 9%, and the remaining tokens are backed by municipal and corporate bonds.
The company has issued about $22.2 billion worth of USDC, according to the attestation.
It’s unclear what, specifically, Circle has invested in to back USDC. The company intends to go public later this year in a merger with a special purpose acquisition company that would value Circle at $4.5 billion.
According to footnotes in Tuesday’s attestation, the commercial paper has a “minimum S&P rating of S/T A1,” meaning S&P Global Ratings regards the issuer’s ability to meet its financial obligations as being strong.
Circle joins Tether in publishing a rough breakdown of its asset reserves, at least partially answering questions about whether its stablecoin is fully backed. Like Circle, Tether also uses commercial paper to back its USDT token, though commercial paper accounts for far more of Tether’s reserves than Circle’s does.
Tether Promises An Audit In ‘Months’ As Paxos Claims USDT Is Not A Real Stablecoin
Tether’s general counsel said a full audit is coming in months.
There will be an official audit of the world’s most popular stablecoin Tether within months according to the project’s general counsel.
An audit for the world’s third-largest digital asset has been awaited for several years and increased regulatory pressure appears to have accelerated the process.
In a rare mainstream media interview on CNBC, Tether CTO Paolo Ardoino and general counsel Stu Hoegner were asked some pressing questions on the subject of USDT’s backing and transparency.
Hoegner Responded To The Question By Saying:
“We are working towards getting financial audits, which no one else in the stablecoin sector has done yet.”
Hoegner added that the firm hopes to be the first to do so and that audits will be coming in “months, not years”. He stated that Tether is backed one-to-one with its reserves but admitted that those reserves were not all US dollars. According to Hoegner, Tether’s reserves are heavily dollar-weighted but also include cash equivalents, bonds, secured loans, crypto assets, and other investments.
The current market capitalization of USDT is 62 billion according to Tether’s transparency report. It has grown by 195% since the beginning of the year but has lagged behind rivals USDC and BUSD in terms of growth.
Circle released its own reserves disclosure report on July 21, revealing that 61% of USDC’s reserves were held in cash and cash equivalents with the rest in commercial paper accounts, treasuries, and bonds.
Paxos Takes A Swipe
In a related development, rival stablecoin company Paxos took a swipe at both Tether and Circle in a July 21 blog post claiming that they are “not comprehensively overseen by any financial regulators.”
“Neither USDC nor Tether is a regulated digital asset, for the simple reason that neither token has a regulator. In fact, neither USDC nor Tether tokens are ‘stablecoins’ in anything other than name.”
Paxos revealed that 96% of its own stablecoin reserves are cash or cash equivalents.
Tether revealed a breakdown of its USDT backing for the first time in May, following increased scrutiny from U.S. lawmakers. The firm has been submitting periodic reports regarding its reserves since reaching a settlement with the New York Attorney General’s Office in February.
US Patent Granted To Stablecoin Concept Backed By Government Debt
Unlike fiat currency-pegged stablecoins, Yuga Coin intends to be solely pegged to government debt such as bonds and treasury notes.
Two co-founders of the Puerto Rico-based digital FV Bank say they have become the first in history to be awarded a U.S. patent for a stablecoin design based solely on government debt.
The patent application, filed last year on the back of a pre-existing patent by Nitin Agarwal and Miles Paschini, describes their instrument as a “tokenized crypto asset backed by sovereign debt.”
Its working name is Yuga Coin, which in Sanskrit means the “joining of two things,” or in this case, “generations,” Agarwal told CoinDesk in an interview on Tuesday.
“We aim to create multiple stablecoins that are government-friendly, Know-Your-Customer (KYC), anti-money laundering and Financial Action Task Force (FATF) compliant based on different currencies,” said Agarwal.
Each coin will be redeemable 1:1 against a corresponding national currency where they will be backed by national treasury instruments (including bonds and treasury notes) of the corresponding country.
Those stablecoins, intended to be created under the same Sanskrit banner and denominated in U.S. dollars or euros at first, are to be traded in a controlled network adjusted to rate the risk of trading with particular counterparties.
The argument goes that these would be more stable than other cryptos pegged to a fiat currency because they are not reliant on a single banking entity holding the collateral. “The stability of the tokenized crypto asset is more akin to the stability of the government debt,” the patent reads.
While the market is currently flooded with various versions of stablecoins pegged to either commodities or fiat currency (think USDT and USDC , the competition for such an instrument pegged to government debt is scarce.
“Avanti Bank (Caitlin Long) does speak about stablecoins backed by banks which hold all funds in government securities and no fractional reserves,” said Agarwal. “However, in order to make this multinational and multicurrency, the bottleneck of a bank has to be removed, which is the approach we are taking.”
A push to become more compliant in the eyes of regulators is currently at the fore of most crypto entrepreneurs’ minds in their pursuit of legitimacy. The FATF recently updated its guidance requiring virtual assets and their providers to comply with the same rules as traditional financial institutions.
Pandering to that notion, Yuga Coin also seeks to incorporate regulatory-approved identity verification standards and an incorporated risk score similar to that of a FICO credit score in traditional finance.
Agarwal said Yuga Coins would be verified by a regulated and trusted entity that is later recorded on-chain. Once a person has a verified identity in their wallet, the end-user is then in control of who can view their identity verification.
“We conceptualized this about three years back when the stablecoins market cap was less than $10 billion,” said Agarwal. “Today we see more people realizing this is the right way to run a stablecoin.”
The Case For Stablecoins Being The New Shadow Banks
What keeps breaking the buck, is engaged in financial transformation, and keeps on growing?
The stablecoin market.
The value of the top four stablecoins has surpassed $100 billion in the space of four years, and the coins — which trade on a blockchain but attempt to maintain a one-for-one peg with fiat currencies — now form an integral part of the crypto ecosystem, often acting as the collateral behind DeFi and enabling transfers between crypto exchanges.
But as the market grows, it’s also coming under increased scrutiny in part because it’s still unclear how stablecoin issuers are maintaining their pegs. Most of the criticism has so far been directed at Tether, which claims that its tokens are 100% backed by reserves, though it has released few details of what those are exactly.
If Tether’s account of its reserves is accurate, then it’s now a massive player in the commercial paper market which has historically been dominated by large investors such as regulated money market funds (MMFs).
This is the reason why JPMorgan Chase & Co. strategist Josh Younger describes stablecoins as being “the primary interaction point between the crypto-native and traditional financial systems through their reserve funds.” The suggestion is that if stablecoins were to experience disruption, it could reverberate into financial markets through the commercial paper channel, again depending on what issuers hold:
“While there is not much direct linkage between events in cryptocurrency markets and the traditional financial system, reserves backing stablecoins may have some overlap. As noted previously, disclosures from Tether indicate significant holdings of commercial paper (i.e., 50% of their reserves portfolio or roughly $30bn), presumably denominated in USD.
Assuming no significant changes to these allocations, the rapid growth of USDT would suggest that they could become one of the largest holders of USCP – if indeed that’s what is included in the disclosed holdings. Furthermore, while other stablecoin issuers have not made the same detailed disclosures, assuming their reserves are similarly allocated, the overall exposure of stablecoins to USCP could be comparable to that of U.S. prime MMFs.
But by no means are stablecoin issuers a dominant player in the USCP market (Exhibit 7). Indeed, while prime funds are easy to identify as active market participants, stablecoin related activity is difficult to spot.
It is worth noting that beyond the high-level disclosure of their reserves portfolio, very little is known about the nature of USDT’s CP position, including issuer names or domiciles, tenors, credit rating or if the position is managed in-house or by a third party manager. These details might matter to secondary markets if reserves need to be converted into cash.
While USCP can and does trade in secondary markets, primary market flows dominate, and traditional investors are biased to hold these short-term obligations to maturity. Secondary markets in USCP and CD can prove fickle in the face of large liquidity events, similar to those faced by US prime MMFs in March 2020.
At that time dealers faced heavy demand to provide liquidity across multiple asset classes (including money markets) with limited balance sheets. Ultimately, the intervention of Federal Reserve via targeted programs was needed to normalize markets.
The definition of shadow banks is notoriously fuzzy, but it typically includes non-regulated entities engaged in maturity or liquidity transformation — that is securing short-term funds to invest in longer-term assets, or converting illiquid assets into more easily spendable money. On that basis, stablecoins could well be taking questionable reserve assets and converting them into stable digital cash.
This isn’t a problem as long as the stablecoin market avoids huge bouts of redemptions. So far that has been the case, even in the sharp crypto sell-off in May. That’s somewhat surprising given that — by Younger’s calculations — the top four coins have ‘broken the buck’ (i.e. dipped below their peg) with some regularity; having spent the past 30% to 40% of the past three months trading below par.
But an unexpected disruption risks causing problems for exchanges and issuers which provide the coins. That in turn could feed into the traditional financial system through the key funding market which is commercial paper, and again raises questions of financial stability given that stablecoin issuers are unregulated. That’s one reason why officials at the Federal Reserve have been talking about stablecoins, with Bank of Boston President Eric Rosengren recently keying in on their resemblance to traditional “but maybe riskier” prime money market funds.
Back To Younger:
Banks are generally subject to a higher level of scrutiny and disclosure owing to the fact that their liabilities are used as a medium of exchange as well as a store of value. In other words, their activity leads to the creation and destruction of the credit money that dominates the overall money supply (~80% globally, even after a substantial expansion of central bank balance sheets …).
That makes banks de facto systemically important—hence the introduction of federal deposit insurance in 1934. This leaves stablecoins in something of a conceptual middle ground between deposits and money market fund shares: utilized for some selective forms of payment (for now, at least) but mostly a more liquid claim on a pool of securities (ideally short term and high quality).
Without federal insurance, that means there is an argument for their reserve holdings to be subject to more stringent requirements than 2a-7 funds. But regardless of where regulators ultimately fall in their treatment of this new asset class, presumably they will impose liquidity and asset quality requirements as well as a combination of regular, standardized and more extensive disclosure.
Though their decentralized nature does not necessarily allow for these to be imposed directly, in principle they can be implemented through the domestic commercial banking system, which is currently acting either custodian or correspondent to these issuers.
One to watch.
Tether Executives Facing Criminal Bank Fraud Charges
The U.S. Department of Justice is investigating Tether for a possible offense conducted years ago, Bloomberg reported Monday.
Executives from Tether are potentially facing a criminal probe into bank fraud, Bloomberg reported Monday.
* The U.S. Department of Justice is investigating Tether for a possible offense conducted years ago, the outlet reported citing people with knowledge of the matter.
* The price of bitcoin dipped on the news, falling about $1,000 shortly after the report came out.
* Tether, which administers USDT, the crypto market’s largest stablecoin, has long been dogged by accusations of murky banking relationships.
* Tether and its sister exchange Bitfinex settled an investigation by the New York Attorney General’s Office (NYAG) into whether the stablecoin issuer was covering up the loss of nearly $1 billion in customer funds earlier this year.
* In the settlement agreement, the NYAG said Tether used various banks, but was suspended from some, including Wells Fargo, for unspecified reasons.
* Bloomberg previously reported in 2018 that the DOJ was investigating whether Tether and Bitfinex were pumping bitcoin’s price.
* Tether did not immediately answer CoinDesk’s request for comment, but in a blog post after this article was published, seemingly implied the Bloomberg story was wrong without quite saying so.
* “Tether routinely has open dialogue with law enforcement agencies, including the U.S. Department of Justice, as part of our commitment to cooperation, transparency, and accountability,” the statement said.
Regulators Scrutinizing Tether’s Commercial Paper Reserves: Comptroller of The Currency
Tether is still under regulatory pressure, with eyes now cast toward its commercial paper reserves. The firm behind the world’s leading stablecoin, Tether, is facing more regulatory pressure this week with United States financial watchdogs scrutinizing the composition of its reserves.
According to a Tuesday Bloomberg report, the Acting Comptroller of the Currency, Michael Hsu, said regulators are looking into Tether’s stockpile of commercial paper to see whether each Tether (USDT) token really is backed by the equivalent of one U.S. dollar.
A team of regulators led by Treasury Secretary Janet Yellen has held a high-level, closed-door talk on the risks posed by stablecoins and particularly Tether. Citing “people familiar with the matter,” the report stated the President’s Working Group on Financial Markets was concerned about Tether’s claims that it holds massive amounts of commercial paper. This investment type relates to debts that companies issue to meet their short-term funding needs.
The group compared the situation to an unregulated money market mutual fund that could be susceptible to an exodus of investors. The current circulating supply of USDT is 62 billion, according to its transparency report.
In mid-May, Tether revealed a loose breakdown of its reserves, stating that it had invested in instruments beyond cash and cash equivalents, including Bitcoin (BTC), bonds, secured loans and a large proportion of commercial paper. In an interview with CNBC on July 21, Tether general counsel Stuart Hoegner promised that a full financial audit of its reserves would be coming within months, not years.
On July 19, Yellen urged agency lawmakers to “act quickly” to ensure stablecoins face appropriate rules and a regulatory framework for them is formulated.
On Tuesday, crypto cynic Senator Elizabeth Warren sent a letter to Yellen asking for greater regulation of the crypto industry. At a hearing of the Senate Banking Committee, Warren again expressed her opposition to crypto:
“Instead of leaving our financial system at the whims of giant banks, crypto puts the system at the whims of some shadowy, faceless group of super-coders and miners, which doesn’t sound better to me.”
A partner at Anderson Kill Law, Preston Byrne commented that “the far more frightening reality here is that the financial system is in the hands of Elizabeth Warren.”
New Bill Proposes US Treasury To Have Full Authority Over Fiat Stablecoins
The bill also calls for the U.S. Federal Reserve to be vested with the clear authority to issue a digital dollar.
A new bill introduced by United States Representative Don Beyer of Virginia has proposed a far-reaching regulatory and legal framework for digital assets across the board.
Entitled “The Digital Asset Market Structure and Investor Protection Act of 2021,” the bill touches on virtually all the important gray areas that continue to exist regarding cryptocurrencies in the U.S. context.
One of its primary goals is to establish statutory definitions for digital assets and digital asset securities, bringing the former under the purview of the Commodity Futures Trading Commission (CFTC) and the latter under that of the Securities and Exchange Commission (SEC).
Both the CFTC and SEC would be tasked with providing legal clarity regarding the regulatory status of the top 90% of crypto assets by market cap and trading volume.
Moreover, the bill seeks to formalize regulatory requirements for all digital assets and digital asset securities under the Bank Secrecy Act, classifying both as “monetary instruments” in order to strengthen transparency, reporting and Anti-Money Laundering enforcement.
When it comes to central bank digital currencies, the bill seeks to pave the way for the Federal Reserve to issue a digital dollar by explicitly designating it as the only institution with authority to do so. Notably, it calls for the U.S. Treasury Secretary to have the power to either permit or prohibit U.S. dollar and other fiat-based stablecoins.
Details of the proposed investor protection measures include requiring the Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA) and Securities Investor Protection Corporation (SIPC) to issue explicit clarifications as to the “non-coverage” of the digital asset sector so that investors are clearly aware their assets are not insured in a similar manner to traditional bank deposits or securities.
To prevent fraud, the bill proposes that any digital assets that are not recorded on a public distributed ledger within 24 hours should be reported to a CFTC-registered digital asset trade repository. The text of the bill defines the latter as follows:
“The term ‘digital asset trade repository’ means any person that collects and maintains information or records with respect to transactions or positions in, or the terms and conditions of, contracts of sale of digital assets […] entered into by third parties (both on-chain public distributed ledger transactions as well as off-chain transactions) for the purpose of providing a centralized recordkeeping facility for any digital asset.”
However, the term does not mean the private or public ledger itself nor its operator, unless it or they seek to aggregate or include off-chain transactions as well.
As reported, Treasury Secretary Janet Yellen has recently told financial regulators that the government needs to act quickly to establish a regulatory framework for stablecoins, noting that they pose possible risks to end-users and could have a wider impact on the country’s financial system and national security.
Framework To Regulate Crypto, Stablecoins Introduced In US Congress
Rep. Don Beyer (D-Va.) said the existing digital asset market structure and regulatory framework are too “ambiguous and dangerous for investors and consumers.”
Legislation to provide a “comprehensive legal framework” to regulate the digital asset market and possibly grant the federal government the ability to ban some stablecoins was introduced in the House of Representatives Wednesday.
According to sponsor Rep. Don Beyer (D-Va.), chairman of the U.S. Congress Joint Economic Committee, the existing digital asset market structure and regulatory framework are too “ambiguous and dangerous for investors and consumers.”
Among Its Many Provisions The Measure Would:
* Create statutory definitions for digital assets and digital asset securities and provide the Securities and Exchange Commission (SEC) with authority over digital asset securities and the Commodity Futures Trading Commission (CFTC) with authority over digital assets
* Require digital asset transactions that are not recorded on the publicly distributed ledger to be reported to a registered Digital Asset Trade Repository within 24 hours to minimize the potential for fraud and promote transparency
* Explicitly add digital assets and digital asset securities to the statutory definition of “monetary instruments,” under the Bank Secrecy Act (BSA), formalizing the regulatory requirements for digital assets and digital asset securities to comply with anti-money laundering, recordkeeping, and reporting requirements
* Provide the Federal Reserve with explicit authority to issue a digital version of the U.S. dollar, clarify that digital assets, digital asset securities and fiat-based stablecoins are not U.S. legal tender, and provide the U.S. Treasury Secretary with authority to permit or prohibit US dollar and other fiat-based stablecoins
* Direct the Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), and Securities Investor Protection Corporation (SIPC) to issue consumer advisories on “non coverage” of digital assets or digital asset securities to ensure that consumers are aware that they are not insured or protected in the same way as bank deposits or securities
According to Beyer, there are an estimated 11,000-plus separate digital asset tokens in existence, with a market cap of over $1.5 trillion, and that 20 million to 46 million Americans currently own bitcoin and other digital assets.
What’s Going On With Tether?
Since the end of May, tether’s growth has gone completely flat.
This week, the crypto market again shrugged off bad press for one of its most critical service providers. The issuers of the stablecoin tether are reportedly in the sights of the U.S. Department of Justice for misleading banks about the nature of their business.
That’s not really news, and the market’s non-reaction to it was predictable. What’s interesting is something that’s been going on since the end of May: Tether’s growth has gone completely flat.
The chart here shows the supply of tether and USD coin, the second-largest stablecoin by supply. Since the end of May, tether’s supply has been stuck at $64.3 billion. The two-month doldrums is remarkable for a currency that had tripled between Jan. 1 and May 31.
Tether has long been dogged by allegations that it’s not backed by real dollars — that its issuers are pumping up the price of cryptocurrencies using units of tether issued out of thin air. Obviously, traders either don’t believe that, or don’t care: Tether has largely kept its peg to the dollar, even if its financials may be dodgy.
Trading crypto implies a certain degree of comfort with risk. I guess nobody goes to the cashier’s window at the Bellagio and demands to see their audited balance statements, either.
Still, the question of tether’s solvency is one of systemic importance. Tether and other stablecoins act as money-market funds in crypto markets. Tether is used mostly in offshore venues like Binance. The difference between these offshore exchanges and a casino is that price discovery happens on these venues.
Tether could be part of a market-crash scenario, in which a sudden flood of discounted tether crashes the price of bitcoin or other liquid crypto assets. It’s unlikely to have the kind of systemic impact that fell out from the run on Lehman Bros.’ money-market fund, the Reserve Primary Fund, in 2008. That event precipitated a run on all money-market funds.
Tether is different from stablecoins like USDC that are more directly overseen by U.S. regulators, and it goes beyond how one money-market fund differs from another. Even as its growth has slowed, and then stagnated, growth in USDC has continued, as the chart below shows.
That’s not due to some kind of flight from tether into the relative safety of a more regulated stablecoin, as tether’s maintenance of its $64.3 billion supply shows. It’s more likely the influx of new investors who can’t, or won’t, deal in tether or trade on offshore exchanges. This would include professionals and institutions, especially those that have fiduciary responsibility for investor funds.
That underscores the difference between tether and USDC: These aren’t two flavors of the same thing. One is overseen by U.S. regulators, the other isn’t (apart from abiding by a settlement with the New York Attorney General’s Office). As such, they are different kinds of products, used by different users in different places. It wouldn’t be smart to assume that a crisis of confidence among offshore traders using tether would spread to other stablecoins. In that light, tether may not be systemically important in the same way the Lehman Bros. money market fund was. But the risk of a tether crash is a systemic risk that underlies any investment in crypto assets.
Stablecoin Market To Have Hit $1T By 2025, Unstoppable Domains CEO Predicts
As an early crypto bull, Unstoppable Domains CEO Matthew Gould believes that Bitcoin won’t retest its all-time high of $64,000 for at least one year.
The private stablecoin market will surge parabolically in the next four years despite the existing regulatory uncertainty, Unstoppable Domains CEO Matthew Gould believes.
In a Thursday interview with Business Insider, Gould predicted that the stablecoin market would hit $1 trillion by 2025 to see roughly a tenfold increase from around $115 billion at the time of writing.
“We may even do it quicker than that,” the CEO noted, adding that the global stablecoin adoption will be partly driven by the growing acceptance of decentralized finance applications. “The more people with stablecoins in the pocket, the more people who can participate in decentralized finance,” Gould said.
Despite being optimistic about the future of stablecoins, Gould still emphasized that a rapid surge of this digital asset type is associated with certain financial risks, including concerns over stablecoins’ volatility and their one-to-one backing with pegged assets like the United States dollar.
“Whenever you have that kind of growth, you’re gonna have risk. You shouldn’t be able to call yourself a $1 coin if you don’t actually have $1 in the bank,” he noted.
However, Gould is still confident that the greater regulatory clarity and the growing competition in the stablecoin market will gradually eliminate these risks. “Groups like Circle with their USDC have taken the most conservative and safest approach in building out their stable coins. And they’ve been really actively engaged in the US to ensure that they’re compliant,” the CEO added.
Apart from forecasting a major stablecoin market surge, Gould is also optimistic about the crypto market in general, expecting the industry to continue consolidating in the long run. However, the CEO doesn’t expect Bitcoin (BTC) to near its all-time highs for at least one year after reaching $64,000 in April, stating:
“I think we’re going to continue to be range-bound for the rest of this year. This is based on past experience, typically when the market crashes 50% or more, it takes a year or two of consolidation.”
Gould’s remarks come amid global financial regulators increasing attention to stablecoins like Tether (USDT) and USD Coin (USDC) amid more concerns over the rapid stablecoin growth as the market surged from less than $1 billion in 2019 to over $100 billion. In mid-July, U.S. Treasury Secretary Janet Yellen called on financial authorities to quickly establish a proper regulatory framework for stablecoins. Previously, the Japanese Ministry of Finance disclosed plans to develop stricter global rules for digital currencies, particularly fiat-pegged stablecoins.
2022 Trial Date Set For Tether’s Accused ‘Shadow Banker,’ Reggie Fowler
Former NFL team owner and alleged “shadow bank” operator Reggie Fowler is not engaged in any plea negotiations and the trial against him is set to begin early next year.
A 2022 trial date has been set for former NFL team owner and alleged “shadow banker” Reggie Fowler.
Fowler is the accused operator of the shadow bank to the crypto sector, Crypto Capital, which was at the center of controversy in the court case against iFinex Inc — the parent company of crypto exchange Bitfinex and stablecoin issuer Tether.
According to Wednesday court documents, United States District Judge Andrew Carter of the Southern District of New York has set a jury selection and trial date for Feb. 14, 2022, which is subject to change in light of future pandemic-related restrictions.
U.S. prosecutors allege that Fowler provided unlicensed money-transmitting services to several crypto firms, along with bank fraud and laundering funds on behalf of Columbian drug cartels.
A case against Bitfinex and Tether, in which iFinex was accused of commingling funds between the two firms to cover up an $850-million loss suffered by Bitfinex in its dealings with Crypto Capital, was settled in February of this year. The firms were ordered to pay $18.5 million worth of civil penalties and to shut down trading operations in New York.
However, the case against Fowler is still ongoing after he rejected a guilty plea deal that would have left the former NFL investor on the hook for $371 million. The figure was reportedly based on the proceeds he generated from his alleged crimes.
U.S. federal attorney Audrey Strauss outlined in the documents that the “parties are not currently engaged in plea negotiations and do not anticipate resuming negotiations,” which means there is unlikely to be a settlement like in the instance of iFinex.
Tether Sheds Light, But Not Enough, On Its $63 Billion Reserves
The stablecoin has secured itself a critical place in the crypto ecosystem, but its holdings fall short compared with those of prime money-market funds.
One of the things most cryptocurrency enthusiasts really don’t want is more exposure to the U.S. government. It turns out—via the biggest so-called stablecoin, tether—that is exactly what they got. Holdings of Treasury bills backing tether surged, according to the first accountant-verified breakdown of its issuer’s $63 billion of assets.
Tether is designed to trade one-for-one with the dollar and has become immensely popular as a way for traders quickly to shift money between crypto exchanges or park cash without going through the hassle of transferring it to a bank account.
But its peg to the dollar is dependent on the value and availability of its investments, and here the new disclosure brings both good and bad news. The good news is that with more detailed disclosure and the stamp of approval from an accountant, it is less likely that Tether, the company that issues the coin, and linked crypto brokerage Bitfinex are repeating the illegal practices that led to an $18.5 million settlement with the New York Attorney General earlier this year.
The bad news is that the disclosure is still far less than is provided by regulated money-market funds. The accountant’s assurance is limited to one day, and it is based in the Cayman Islands—albeit part of Moore Global, a second-tier international firm. And the portfolio still includes plenty of assets that would be hard to sell to support the value of the coin in an emergency.
Tether has secured itself a critical place in the crypto ecosystem, with three times as much trading between bitcoin and tether as between bitcoin and dollars. Tether is bigger than the next two largest stablecoins put together. Yet doubt has swirled around its legitimacy after revelations of banking troubles and misuse of its assets, culminating in the New York legal action which led to it being banned from operating in the state and agreeing to publish information about its holdings.
Regulators and central banks are now worrying that stablecoins are getting so big they could pose a threat to financial stability if forced to dump assets in a hurry.
The pressure has prompted a flurry of disclosures by stablecoins after years of refusing to provide details of assets. Tether’s detailed breakdown shows it bought more than $14 billion of T-bills during April, May and June. U.S. government paper is now almost a quarter of the investments backing the currency, although it also cut its cash by about $2.5 billion.
T-bills would be useful if tether hit problems: They would be easy to sell either to finance refunds if the cryptocurrency suffered a run of withdrawals, or to provide cash to shore up the price by buying tethers in the market if they fell to a discount to the dollar.
More troubling, Tether holds $2 billion in “other investments” including other cryptocurrencies, with no indication of how easy they would be to sell. It also has $2.5 billion in secured loans, which are often impossible to sell before maturity.
A Tether spokesperson didn’t immediately respond to requests for comment.
Almost half the assets are in commercial paper, a form of short-term loan used by banks and large companies. The bulk of that is rated investment grade. But its holdings have an average rating of A-2, lower than the norm for a prime money-market fund.
They have an average maturity of 150 days, much longer than is usual among such funds.
Few major banks, the biggest commercial-paper issuers, are rated as low as A-2, but the rating does include American Express, while Detroit-based Ally Financial is A-3, according to rating agency S&P Global.
Tether’s assets are riskier than those of its smaller rivals, Circle and Paxos, which issue USDC, BUSD and PAX. Paxos says it holds almost all its money in cash or equivalent, with 4% in T-bills, about as secure a portfolio as is possible. Circle is riskier, with 61% in cash and equivalent, but its commercial paper holdings are all at least A-1 rated, and it holds no secured loans, cryptocurrencies or the “other” of tether.
The flip side of taking more risk in the portfolio is that tether should be making a fatter return. I estimate its commercial paper holdings alone should bring in an annual income of around $90 million, based on the rating and maturity. The less liquid holdings, assuming they earn more to reflect the higher risk, ought to push up income to at least $200 million a year, and potentially far more. All of that income goes to the company, not to holders of tether.
Circle, which is in the process of listing via a SPAC, expects to make $40 million of income this year from the roughly $28 billion of assets currently backing its USDC coin, plus further growth.
The danger of taking more risk is that a sudden fall in the markets Tether invests in could wipe out the slim cushion of 0.25% of extra assets Tether holds above its liabilities. If that happened, its assets would be worth less than $1 per tether, which could destroy confidence and prompt a rush to withdraw, as happened to money-market funds that “broke the buck” during the 2008 financial crisis.
So far, tether has proved invulnerable to panic, and its rapid growth continued after the New York penalties. The coin had only a brief, though severe, drop even amid the broad market chaos of March 2020.
There are also obstacles to a run on the fund. Redeeming tethers for dollars requires a minimum transaction of $100,000. Even if there was a run, tether’s terms allow it to suspend any account holder for no reason and to repay with its assets, instead of in dollars.
Customers wouldn’t be happy with such moves, but tether has come through many problems that ought to have destroyed faith in it already.
The latest disclosure is an improvement, and hopefully Tether will eventually provide full details and the audit it has long said it is working toward. The problem is that Tether is trusted more than it should be, and while I can’t predict what will shake that trust, that makes it inherently fragile.
Coinbase Vowed It’s Stablecoin Called USD All-Cash Backing Isn’t Fully Backed
For months, a visitor to the website of Coinbase Global Inc., the largest U.S. cryptocurrency exchange, would see that the company offered a stablecoin called USD Coin with a simple premise: For every dollar offered to investors, there was $1 “in a bank account” to back it.
That promise was important for the stablecoin, which unlike Bitcoin has a set price and can be redeemed by users for regular currency. It helped USD Coin grow to be the world’s second-largest stablecoin, with $28 billion in assets.
But when Circle Internet Financial Inc., Coinbase’s partner in offering the coin, disclosed USD Coin’s assets for the first time last month, it turns out the promise wasn’t true.
According to a disclosure in July, the assets actually include commercial paper, corporate bonds and other assets that could experience losses and are less liquid if customers ever tried to redeem the stablecoin en masse.
That is likely to catch the eyes of U.S. regulators and enforcers who have recently homed in on stablecoins as a potential risk to the economy, experts say.
“You can’t market a product with falsities,” said Columbia Law School lecturer Lev Menand, adding that the failure to disclose the truth could be considered a consumer protection violation. “There’s a material difference and a huge amount of evidence that something backed by dollars held in a bank account is different than something backed by things like U.S. Treasuries or corporate paper.”
That’s something that the Federal Trade Commission could investigate under its mandate to enforce against “unfair or deceptive acts or practices.”
Stablecoins have come under increasing scrutiny from the government in the past few months as U.S. investors pour money into the market. As of last week, such coins held $117 billion. Already, the largest stablecoin, Tether, settled with the New York attorney general after she said Tether lied about the reserves backing its coin.
A Circle executive said in a statement that his company’s own disclosures and marketing materials provide accurate information. Centre, a consortium founded by Circle and Coinbase to govern USD Coin’s protocols, didn’t respond to requests for comment.
A Coinbase spokesman pointed to a blog post from earlier this month that said USD Coin’s reserves comply with regulatory requirements. On the day Bloomberg News contacted the company, some of the language describing USD Coin’s assets on its website changed.
“Each USDC is backed by one dollar or asset with equivalent fair value, which is held in accounts with U.S.-regulated financial institutions,” the spokesman, Andrew Schmitt, added in a statement Tuesday. “Users can always redeem 1 USD Coin for US$1.00. We have added additional detail to our website for customers to understand more about USDC reserves.”
From December 2018, the earliest saved page available from the Internet Archive, to Monday when Bloomberg called, Coinbase on its website described USD Coin as backed by dollars “held in a bank account.” A more in-depth help page about the coin said it was “100% collateralized by a corresponding USD held in bank accounts of the issuer.”
The Centre consortium publishes reports from an auditor that attest to the level of reserves. As late as March 2020, those reports said the coin’s reserves were held at federally insured U.S. depository institutions. But starting in April 2020, the attestations said the reserves could also be held in “approved investments,” without describing what those are.
Centre revealed in July of this year that 61% of the reserves were in risk-free assets like cash and its equivalents, but that some of the reserves were in assets that contain some risk of default, such as corporate debt and certificates of deposit with foreign banks. An additional 12% of the funds were in U.S. Treasury bonds, which aren’t considered a default risk but also aren’t as liquid as cash.
Stablecoin issuers “say trust us and that’s all well and good until there’s a problem,” said Adam Levitin, a professor specializing in financial regulation at Georgetown Law. “They can’t turn to the Fed for liquidity, there’s no deposit insurance — it’s an investment gamble.”
Cryptocurrency investors typically use stablecoins as a place to park cash when they want less exposure to more volatile currencies such as Bitcoin or to move money in and out of the crypto market more quickly than they can with banks.
Stablecoins also allow users to easily move money between different crypto exchanges almost instantaneously, a process that can take days if done through a bank. Key to stablecoins’ promise is that investors at any time can redeem $1 of a stablecoin for $1 in real money that can be deposited at a bank.
In a blog post explaining the more detailed disclosure, Circle Chief Executive Officer Jeremy Allaire said the company wanted to “continue leading the sector with greater transparency” as stablecoins become more important to the broader financial system and Circle moves toward becoming a public company.
Circle announced on Monday that it intended to apply to become a full-service U.S. federally chartered crypto bank, a move that could give regulators more insight into its practices.
Policy makers are expressing mounting concern that consumers don’t know what risks they’re taking when they purchase a stablecoin. That concern is fueled by a lack of disclosure among some coins about what, exactly, is contained in their reserves.
In July, Treasury Secretary Janet Yellen convened U.S. officials to discuss whether the snowballing stablecoin market could be a risk to financial stability. Soon after, Securities and Exchange Commission Chairman Gary Gensler suggested some stablecoins should probably be regulated as securities and subject to more investor protection.
An investigation by New York Attorney General Letitia James found that Tether, the largest stablecoin, hadn’t always backed up its coins. Tether settled the case earlier this year and now says it doesn’t operate in the U.S.
USD Coin, which was founded in September 2018, took advantage of doubts about Tether’s backing to enter the fast-growing market. From the beginning the companies and Centre said USD Coin would be transparent about its assets and comply with U.S. regulations.
Gensler and other regulators have said the reserves backing stablecoins look more similar to those of money-market mutual funds than cash deposits. Such funds also try to maintain a value of $1 and can invest in Treasury bills as well as in corporate debt or other securities that have some chance of default.
The funds charge a management fee and pay a yield to investors. Although they’re generally considered safe, such funds have “broken the buck” in the past, meaning their value fell below $1. That happened in 2008 when the Reserve Primary Fund couldn’t withstand rapid withdrawals by its investors after the failure of Lehman Brothers Holdings Inc.
Some policy makers have said stablecoins could face a similar risk if investors panicked.
The move into noncash assets has allowed Circle to build up its profits ahead of its planned market listing this year. Unlike money market funds, USD Coin doesn’t pay its holders a yield. Instead, Circle keeps whatever profits it earns for its own shareholders. In an investor presentation, Circle described returns earned on investing its reserves as one of the “fundamentals of our financial model.”
In a filing with the SEC last week, Circle said the company earned about $3.2 million in the first quarter on interest income from USD Coin’s reserves, which at the end of March stood at about $11 billion. That’s more than the company could have made investing solely in cash equivalents.
The filing, made in connection with Circle’s bid to become a public company, said a portion of that income was shared with Coinbase per a contractual agreement. The company in the same period made about $14.1 million in revenue from other business lines, like managing business accounts and payments systems.
Circle has yet to disclose exactly what investments comprise USD Coin’s reserves.
“It’s like Schrodinger’s stable coin,” said Rohan Grey, a professor at Willamette University, referring to the famous thought experiment used to explain quantum theory. “You don’t know if the cat is dead or alive until you open the box,” said Grey, who has been a critic of stablecoins and advised lawmakers on legislation to increase their regulation.
Tether Claims To Have Increased Total Assets By $21B In New Accounting Review
Tether Holdings has been disclosing its reserves and liabilities as part of a settlement with the New York Attorney General’s office in February 2021.
Tether Holdings Limited, the company behind the USDT stablecoin, released an independent accountant report on Monday claiming that its tokens are fully backed by its reserves.
Moore Cayman, an accounting network based in the Cayman Islands, reviewed Tether’s latest Consolidated Reserves Report, or CRR, and determined that the company met its reserve obligations for the period that ended on June 30, 2021.
According to the report, Tether’s consolidated total assets amounted to at least $62,773,190,075 for the reporting period. The company’s consolidated total liabilities were $62,628,932,116, of which $62,610,829,196 were related to USDT.
Moore Cayman’s Opinion On The Matter Is Stated As Follows:
“In our opinion, the CRR as prepared by the management of Tether Holdings Limited group as of 30 June 2021 at 11:59 PM UTC, is presented in accordance with the criteria set out therein and is, in all material respects, fairly stated.”
As Cointelegraph reported, Tether’s consolidated assets were said to be worth $41,017,565,708 as of April 29, 2021.
The June report further revealed that cash and cash equivalents amounted to $53.3 billion of Tether’s total assets. This included $30.8 billion in commercial paper and certificates of deposit, $6.2 billion in cash and bank deposits, $1 billion in reverse repo notes and $15.2 billion in Treasury bills.
Secured loans not related to any of Tether’s affiliates amounted to $2.5 billion. The company also held over $4.8 billion in corporate bonds, funds and precious metals. A little over $2 billion were held in “other investments” including digital tokens.
Tether revealed its asset breakdown for the first time in May of this year. As of March 31, 2021, commercial paper accounted for 65.39% of its “cash, cash equivalents, other short-term deposits and commercial paper” category. For the June reporting period, that figure had fallen to 57.72%.
The market capitalization of USDT currently stands at $62.6 billion, according to industry data. USDT remains by far the world’s largest stablecoin, though its share of the overall market has declined as major competitors like USDC continue to grow in popularity.
Tether minted its 50 billionth coin in April as Bitcoin (BTC) and other cryptocurrencies reached new all-time highs. The second leg of the bull market, which appears to be underway this month, could ignite bigger demand for dollar-pegged stablecoins in the near future.
Coinbase, Circle Say USDC Reserves To Be In Cash, Treasuries
A consortium including Coinbase Global Inc. said all the reserves of the second-largest cryptocurrency stable coin will shift into cash and short-term U.S. Treasuries, forgoing riskier investments.
The reallocation of the assets backing USDC, a $27 billion stablecoin, marks a swift change from July when consortium member Circle Internet Financial Inc. said that the reserves included corporate bonds and commercial paper.
Until August, Coinbase’s website falsely described USD Coin as backed completely by dollars “in a bank account.” The company changed the description after being contacted by Bloomberg News earlier this month.
In a series of tweets, Coinbase President Emilie Choi said that the company’s description of USDC’s reserves “could have been clearer,” and that it “should have moved faster to update statements like that on our website” after Circle disclosed the reserves included assets other than cash. The money had first moved into a diversified portfolio in May 2021, Choi said.
Choi said USD Coin’s reserves will be comprised entirely of cash and short-term Treasuries starting in September.
According to Circle, USD Coin’s reserves have not been all-cash for more than a year. The reserves were only in cash until March 2020, when the company added short-term U.S. Treasuries to accommodate the coin’s rapid growth, according to a Circle spokesperson, who said the coin’s disclosures also changed to reflect that. The coin’s reserves moved to a broader portfolio of investments in May 2021, the spokesperson said. By the end of September, the spokesperson said the reserves will be completely in cash and Treasuries with a term of less than 90 days.
Circle and Coinbase have said that users can always exchange one dollar of USD Coin for an actual dollar that can be deposited in a bank account.
Centre, the consortium that includes Coinbase and Circle, revealed in July that 61% of the reserves were in risk-free assets like cash and its equivalents, but that some of the reserves were in assets that contain some risk of default, such as corporate debt and certificates of deposit with foreign banks. An additional 12% of the funds were in Treasury bonds, which aren’t considered a default risk but also aren’t as liquid as cash.
Aaron Brown, a crypto investor who writes for Bloomberg Opinion, says it gives the consortium less ability to diversify, which could be important down the line.
“The old investment rules for USD Coin were perfectly sound,” said Brown. “Circle is making a splashy announcement to address a problem that doesn’t exist, in hopes of making itself seem more prudent than rivals.”
Tether, the largest stablecoin and one widely used to trade Bitcoin, has also in the past said each token is backed by one U.S. dollar, either through actual money or holdings that include commercial paper, corporate bonds and precious metals. That has triggered concerns that if lots of traders sold stable coins all at once, there could be a run on assets backstopping the tokens.
That’s caught the eye of regulators in Washington, who have grown wary of the rapidly growing world of stablecoins — whose market capitalization currently stands above $119 billion — and some of the hidden risks that might be present.
Bloomberg News reported this summer that lawmakers and officials from the Federal Reserve as well as the Biden administration have expressed alarm that some consumers might not be protected should one of the firms not have the backing they purport to have. They also say the growing size of the market has created a situation where huge amounts of U.S. dollar-equivalent coins are being exchanged without touching the U.S. banking system, something that is potentially blinding regulators to illicit finance.
Among stablecoins, USD Coin’s market value trails only Tether’s $64 billion. Circle said last month it was set to go public in a merger with special purpose acquisition company — the deal valued the company at $4.5 billion.
The USDC developer revealed last month that only 61% of tokens were backed by “cash and cash equivalents.”
Stablecoin USDC (-0.04%) will be 100% backed by cash and short-term U.S. Treasurys by September, developer Circle announced.
* Circle revealed last month that only 61% of tokens were backed by “cash and cash equivalents,” referring to cash and money-market funds.
* The September attestation published by Circle will show that all USDC reserves are held in cash and short-term U.S. government Treasurys, the company announced Sunday.
* Circle revealed plans in July to go public via special purpose acquisition corporation (SPAC) Concord Acquisition Corp. in a deal that would value Circle at $4.5 billion.
* Earlier this month, Circle announced its desire to become “a full-reserve national commercial bank” operating under the supervision of the U.S. Federal Reserve, U.S. Treasury Dept., Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC).
Tether Asks Court To Block NYAG From Releasing Documents To CoinDesk
Our Freedom of Information Law (FOIL) request asked for the release of any documents attesting to Tether’s reserve composition.
The parent company of stablecoin issuer Tether and crypto exchange Bitfinex has petitioned the New York Supreme Court to block CoinDesk and other organizations from receiving documents detailing the composition of Tether’s reserves over the past few years.
The petition was filed on Tuesday by Tether and Bitfinex’s attorney, Charles Michael of Steptoe & Johnson, against the State of New York, Attorney General Letitia James and Freedom of Information Law Appeals Officer Kathryn Sheingold, in response to a Freedom of Information Law (FOIL) request filed by CoinDesk.
To help bolster its claim that releasing such information would hurt its business, attached to the petition were several dozen articles as exhibits, including a few from CoinDesk itself.
“Competition is fierce, with upstart exchanges constantly entering the market and challenging the incumbent,” the petition said. “Bitfinex and Tether differentiate themselves from their competitors using at least three secret and competitively sensitive types of data that are at issue in this proceeding: (1) financial strategies, (2) compliance measures and documentation and (3) customer data.”
Thus, letting the New York Attorney General release such information “would tilt the competing playing field against Tether. CoinDesk, the online publication seeking the records in this case, has itself summarized what competing stablecoins have disclosed, and none are at the level of detail in the requested documents.”
Also noted in the petition is the difficulty cryptocurrency businesses such as Tether and Bitfinex have had in finding banks that would work with them, and the ways Tether and Bitfinex have tried to overcome such roadblocks. “Bitfinex and Tether have spent years cultivating non-public relationships with financial institutions around the globe that are capable of processing a high volume of high value transactions efficiently,” according to the filing.
Tether settled an investigation by the NYAG into its finances for an $18.5 million fine earlier this year.
The full FOIL request by CoinDesk asked for the release of any documents attesting to Tether’s reserve composition, similar to what the company published earlier this year.
It said, in part, that CoinDesk was:
Filing a FOIL request for a copy of the asset reserve composition details backing the stablecoin tether ($USDT) for Tether Operations Limited. These details should have been provided to the OAG as part of the investigation into iFinex which was settled earlier this year. I’m specifically only looking for information about what is backing Tether’s reserves, including the document Tether claims to have sent OAG in May 2021.
I do not currently need any other documents about the investigation or about the OAG’s ongoing monitoring of Tether’s reserves over the next two years.
Attorneys for Tether asked the NYAG’s FOIL officer not to release these documents, and the FOIL officer initially agreed to this request, denying the application. CoinDesk appealed the decision, and Sheingold, the appeals officer, reversed the FOIL officer’s decision. Tether had until Wednesday, Sept. 1, to petition the court to stop the release of the documents.
Tether General Counsel Stuart Hoegner has said in the past that the company would publish its reserves as well as submit documentation about the reserves to the NYAG’s office.
“Tether proposed ongoing publication of the reserve breakdown as part of our settlement agreement with the New York Attorney General’s Office, and we committed to make that information available to both the Attorney General’s office and the public,” Hoegner said in May.
Lance Koonce of Klaris Law, who represents CoinDesk in this matter, said of Tuesday’s filing, “We were disappointed, but not surprised, to see that Tether has filed a proceeding to block the release of documents sought pursuant to CoinDesk’s Freedom of Information Law request, after the Office of the Attorney General agreed with CoinDesk on release of those documents. We look forward to seeing the OAG’s decision vindicated in court.”
A Tether Spokesperson Said:
Today, we have filed an Article 78 proceeding to prevent the release of certain materials we provided to the New York Attorney General’s Office as part of our reporting commitments under the settlement agreement signed earlier this year. This information was provided at our suggestion and in good faith to demonstrate to the Attorney General’s Office that the information they relied on to agree to the resolution remains consistent.
As outlined in our filings, disclosure of this information beyond the Attorney General’s Office will harm Tether’s competitive position in the marketplace and unnecessarily and unduly invade the privacy of third parties. The original Records Access Officer in the Attorney General’s Office agreed with us.
We understand our evolving industry creates a desire for transparency and understanding of how stablecoins work. Tether continues to lead the industry in providing information about its reserves to give clarity and transparency into our operations. Tether is also in the process of obtaining audited financial statements and hopes to produce these within the coming months.
However, Tether is a private business. As all private companies do, we maintain certain proprietary details about our operations to continue our competitive advantage as a leader in the industry. In any other industry, this type of proprietary, competitively sensitive information would be clearly and strongly protected, and the same should be true for us and for any other company in the crypto ecosystem.
Therefore, we vigorously oppose the notion that proprietary information of our company, or any company in our community, should be made public simply to satisfy Internet trolls or other detractors.
Our customers continue to place their trust and confidence in Tether, as exhibited through our growth. In doing so, they are telling us and the market that our disclosures are sufficient to make well-informed decisions.
Finally, contrary to the wild and false speculation of online trolls, Tether and Bitfinex have provided the New York Attorney General’s Office with complete and timely quarterly reports under the settlement agreement.
We look forward to a judicial determination of this matter by the New York Supreme Court.
As of Tuesday, Tether’s market capitalization based on the total amount of USDT in circulation amounted to $65.5 billion. USDT usually trades at $1, and is theoretically redeemable 1-for-1 from Tether.
Sen. Elizabeth Warren Calls Crypto The ‘New Shadow Bank‘
The Massachusetts senator said that it’s “worth considering” banning U.S. banks from holding the reserves to back private stablecoins.
United States Senator Elizabeth Warren, one of the most vocal cryptocurrency skeptics in the U.S. government, has called the cryptocurrency industry the “new shadow bank.”
In a Sunday interview with the New York Times, Warren said that the cryptocurrency industry offers “many of the same services” as shadow banks but still lacks “consumer protections or financial stability that back up the traditional system.”
Warren expressed concerns over the rapidly growing market for stablecoins, a type of cryptocurrency whose value can be pegged to that of other assets, including fiat currencies like the U.S. dollar, the euro or commodities like gold.
The senator said that it’s “worth considering” banning U.S. banks from holding the reserves to back private stablecoins, a move that “could effectively end the surging market.”
The total market capitalization of stablecoins like Tether (USDT) and USDC Coin (USDC) has surged parabolically this year, jumping from around $37 billion in January to $123 billion at the time of writing, according to data from Statista and CoinMarketCap, respectively.
Large stablecoin accumulations have been widely perceived as an indicator of buying power for cryptocurrencies like Bitcoin (BTC) as fiat-pegged stablecoins enable a tool for traders to easily deposit on exchanges to buy and sell crypto.
Warren’s latest remarks come as global financial regulators pay more attention to stablecoins like USDT. According to online reports, the Ontario Securities Commission has recently banned USDT trading services by Canada’s first two registered crypto exchanges, Wealthsimple and Coinberry. In mid-July, U.S. Treasury Secretary Janet Yellen called on financial authorities to establish a proper regulatory framework for stablecoins.
US Treasury Officials, Financial Industry Executives Met To Discuss Stablecoins
In meetings this week, the officials and executives discussed regulation and related topics.
Officials from the U.S. Department of the Treasury held meetings with financial services executives this week to discuss the risks and advantages of stablecoins, according to a Reuters article on Friday.
* The report, which cited three unnamed sources, said the meetings with banks and other organizations, including a Friday meeting, considered potential regulation and related topics
* According to two of the sources, the Treasury officials inquired if stablecoins would need direct oversight if demand for them increased markedly.
* The officials also inquired how regulators might limit the risk potentially occurring if too many people tried to cash in their stablecoins at roughly the same time, and whether the most significant stablecoins should have traditional assets’ backing.
* In addition, the meetings covered how stablecoins could be structured and used and whether there is sufficient regulatory structure in place to address security concerns.
* The officials seemed to be collecting information and did not offer opinions on potential regulatory moves, according to one individual cited in the article.
* In a statement cited by Reuters, Treasury spokesman John Rizzo said that in examining “potential benefits and risks of stablecoins for users, markets, or the financial system,” the department was “meeting with a broad range of stakeholders.”
Stablecoins Face Crackdown As U.S. Discusses Risk Council Review
U.S. officials are discussing launching a formal review into whether Tether and other stablecoins threaten financial stability, scrutiny that could lead to dramatically ramped-up oversight for a fast-growing corner of the crypto market.
After weeks of deliberations, the Treasury Department and other federal agencies are nearing a decision on whether to launch an examination by the Financial Stability Oversight Council, said three people familiar with the matter who asked not to be named in commenting on closed-door discussions.
FSOC has the power to deem companies or activities a systemic threat to the financial system — a label that typically sets off tough rules and aggressive monitoring by regulators.
Such a designation would likely be a gamechanger for stablecoins, which are considered crucial to the crypto market because traders widely use them to buy Bitcoin and other virtual currencies.
Stablecoins have thrived in the unregulated shadows, with tokens in circulation now worth more than $120 billion, according to CoinMarketCap.com. And they are increasingly being used for transactions that resemble traditional financial products — like bank savings accounts — without offering anywhere near the same level of consumer protections.
A hallmark of stablecoins is that they are pegged to fiat currencies, meaning they are supposed to be immune to the wild price swings that have plagued Bitcoin. Tether and other firms achieve that by backing their tokens with assets like U.S. dollars and corporate debt.
The President’s Working Group on Financial Markets, which is led by Treasury Secretary Janet Yellen, has been particularly focused on Tether’s claims that it holds massive amounts of commercial paper — debt issued by companies to meet their short-term funding needs.
In a private meeting U.S. officials held in July, they likened the situation to an unregulated money-market mutual fund that could be susceptible to chaotic investor runs if cryptocurrencies plunge.
The President’s Working Group plans to issue stablecoin recommendations by December, and a consensus is building among regulators involved that an FSOC review is warranted, the people said.
The groups overlap, as Yellen, Federal Reserve Chairman Jerome Powell and Securities and Exchange Commission Chair Gary Gensler are members of both the PWG and oversight council.
A Treasury spokesman declined to comment.
The FSOC process includes a lengthy study and an assessment of which federal agencies should respond and how. In the end, the council could direct those agencies to intervene in the market and reduce the dangers posed by stablecoin transactions.
While Tether is the most popular stablecoin, there are multiple rivals, including Coinbase Global Inc.’s USDC token and a dollar-linked offering from Binance Holdings Ltd.
Scrutiny has been ratcheting up as stablecoins proliferate. Coinbase made headlines this week by disclosing the SEC had threatened to sue if the crypto exchange launched a product that would allow customers to earn 4% yields for lending out their USDCs to other traders.
The SEC believes the Coinbase proposal is an investment contract that should be registered with the agency, a view the company aggressively contested in a blog post and a series of tweets.
Watchdogs have also privately expressed worries about Diem, a stablecoin being developed by an association that includes Facebook Inc. A top concern is that the token’s market impact could be massive because of its potential for widespread adoption — Facebook’s social media network has almost 3 billion active users.
Treasury held meetings this week with industry representatives to ask them about the potential dangers associated with stablecoins. As it and other agencies consider taking action, they’re facing intense pressure from Capitol Hill.
“I urge FSOC to act with urgency and use its statutory authority to address cryptocurrencies’ risks,” Senator Elizabeth Warren wrote in a July 26 letter to Yellen that flagged the stablecoin market’s interconnectedness and its susceptibility to investor runs.
“The longer that the United States waits to adapt the proper regulatory regime for these assets, the more likely they will become so intertwined in our financial system that there could be potentially serious consequences.”
Stablecoins already face another threat from the U.S. government, as the Fed is discussing whether to launch its own digital currency. Powell told lawmakers in July that a central bank token would make stablecoins obsolete.
“That’s one of the stronger arguments in its favor,” he said.
US Treasury Reportedly In Talks For Stablecoin Regulation
Treasury officials are studying the risks if too many people decide to withdraw their stablecoins all at once.
Amid massive growth of the stablecoin market, the United States Treasury Department has reportedly discussed potential regulation for private stablecoins.
The Treasury conducted several meetings last week to examine the risks of stablecoins for users, markets or the financial system as well as to learn about their benefits and consider potential regulation, Reuters reported on Sept 10.
“The Treasury Department is meeting with a broad range of stakeholders, including consumer advocates, members of Congress and market participants,” Treasury spokesman John Rizzo said.
Citing three anonymous sources familiar with the matter, the report notes that one of the Treasury’s meetings took place last Friday, with officials asking the crypto community whether stablecoins would require direct oversight if this type of cryptocurrency becomes widely adopted.
They also reportedly discussed how regulators should mitigate the risks if too many people decide to withdraw their stablecoins all at once, and whether major stablecoins should be backed by traditional assets.
Treasury officials also previously met with a group of banks and credit unions to discuss potential stablecoin regulation. One Reuters source said that the officials were collecting information and did not share their thinking on how stablecoins should be regulated.
The Treasury’s increased attention to the stablecoin market follows a parabolic surge of stablecoins over the past year. The total market capitalization of major stablecoins like Tether (USDT) and USDC Coin (USDC) has jumped to more than $125 billion at the time of writing from just around $37 billion in January.
Many traditional finance companies like payment giant MasterCard have reiterated their commitment to support stablecoin-related solutions, with Visa claiming that stablecoins are “starting to live up the promise of digital fiat.”
The news comes shortly after U.S. Senator Elizabeth Warren called the cryptocurrency industry the “new shadow bank,” suggesting that it’s “worth considering” banning U.S. banks from holding reserves to back private stablecoins. Previously, U.S. Treasury Secretary Janet Yellen urged the government to act quickly to establish a regulatory framework for stablecoins.
Treasury Plots Stablecoin Crackdown Even As Tether’s Dominance Wanes
While Tether’s dominance has fallen to 56%, USDC and BUSD have surged to 23.9% and 10.4%, respectively.
The United States Treasury Department is reportedly preparing a review highlighting challenges posed by stablecoin redemptions and the effect of a possible run on the crypto asset market.
According to a Sept.1 report from Bloomberg citing anonymous sources, Treasury officials are readying policy recommendations designed to ensure stablecoin holders can freely convert between their tokens and other assets.
The report states the lawmakers hope to mitigate “the most urgent risks” associated with Tether (USDT) and other stable tokens, also emphasizing the threats of a “fire-sale run” on crypto assets could wreak for financial stability broadly.
Critics have long scrutinized Tether’s redemption process and backing and have found it wanting, with some holders claiming to have been unable to redeem USDT for fiat using the company’s website over the years.
After years of failing to deliver promised audits, Tether has recently published attestation reports claiming its stablecoin is backed by $62.6 billion in assets — 49% of which is commercial paper, while cash and bank deposits compose just 10%.
While Treasury officials reportedly are most concerned about Tether, the once hegemonic status of USDT over the stablecoin markets has been waning — with the token’s relative market share receding by 25% since the start of 2021.
After starting the year representing roughly 76% of stablecoin capitalization, Tether’s dominance over the sector has fallen by one-quarter to represent 56.5% of the combined stablecoin market capitalization today, according to CoinGecko.
This year has seen USD Coin (USDC) and Binance USD (BUSD) capture significant market share amid Tether’s decline, with USDC and BUSD growing from 13.7% and 3.40% of stablecoin capitalization to 23.9% and 10.4% today, respectively.
Decentralized stable tokens have also shown notable growth during 2021, with TerraUSD (UST) growing from 0.65% to 2.11%, while MakerDAO’s Dai increased from 4.23% to 5.13%.
CoinGecko’s data also notes a decline in the market share of Paxos Dollar (USDP), which shrunk from 1.15% to 0.85%. However, every stablecoin tracked by CoinGecko saw its overall market cap grow during 2021.
SEC Chair Compares Stablecoins To Casino Poker Chips
“We’ve got a lot of casinos here in the Wild West, and the poker chip is these stablecoins at the casino gaming tables,” said Gary Gensler.
United States Securities and Exchange Commission Chair Gary Gensler has doubled down on his “Wild West” analogy for cryptocurrencies, calling stablecoins instruments for gambling at old-timey casinos.
Speaking to Washington Post columnist David Ignatius on Tuesday, Gensler said most projects in the crypto space dealt with securities that fall under the regulatory purview of the SEC, while the Commodity Futures Trading Commission, or CFTC, was better suited for enforcement for others.
The SEC chair described the authority of both agencies as “robust” but said there were gaps in the coverage, particularly for stablecoins, which “may have attributes of investment contracts.”
“Stablecoins are almost acting like poker chips at the casino right now,” said Gensler. “We’ve got a lot of casinos here in the Wild West, and the poker chip is these stablecoins at the casino gaming tables.”
Gensler hinted that both the SEC and CFTC would benefit from “help from Congress” in regards to regulation and enforcement of stablecoins. However, according to the SEC chair, the laws currently in place are seemingly broad when it comes to handling a modern financial instrument like crypto.
“I do really fear that we’ll keep bringing these enforcement cases, but there’s going to be a problem. There’s going to be a problem on lending platforms, on trading platforms. Frankly, when that happens, I think a lot of people are going to get hurt.”
The SEC chair’s statement comes following major U.S.-based cryptocurrency exchange Coinbase announcing it would abandon its plan for a crypto lending program. The SEC previously threatened legal action against the exchange, saying it deemed the program a security.
Cointelegraph reported in August that Gensler hoped to introduce crypto-related policy changes surrounding token offerings, decentralized finance, stablecoins, custody, exchange-traded funds and lending platforms. He has long urged crypto projects to register with the SEC, saying specifically that they should work with regulators to survive over the long term.
New Decentralized Stablecoin In China Targets International Trade
Conflux will provide the technology to launch an offshore RMB stablecoin pegged to China’s CBDC, the digital yuan.
As financial authorities around the globe become increasingly concerned about stablecoin regulation, a jurisdiction in China is preparing to pilot a new yuan-pegged stablecoin for international trade.
Chris Banbury, head of global operations at permissionless blockchain project Conflux, told Cointelegraph on Sept. 21 that the firm will provide its technology to launch an offshore renminbi (RMB) stablecoin pegged to China’s central bank digital currency (CBDC), the digital yuan.
“This is going to be pegged to the digital yuan in price only with no formal integration,” Banbury noted, adding that the project will be exploring how the token trades against other currencies.
The new stablecoin project will facilitate international trade in Shanghai’s Lin-gang Special Area after the Chinese government granted the free economic zone permission to explore free trade with an offshore RMB stablecoin in July.
“While the use case for the offshore RMB stablecoin has been approved by the government of China and Shanghai, the pilot program is not endorsed by or connected with the government,” Banbury noted.
In contrast to popular stablecoins like Tether (USDT) and USD Coin (USDC), the upcoming offshore RMB stablecoin will not be a private stablecoin because it is fully decentralized, Banbury said. The executive said that the new stablecoin is called the “offshore RMB stablecoin” because its functionality will be limited to global trading:
“The term ‘offshore’ refers to the RMB’s use for international trading purposes — not domestic trading. The digital yuan is used exclusively for domestic purposes. As such, the offshore RMB is not an ‘offshore yuan.’ The digital yuan is for domestic purposes overseen by the People’s Bank of China.”
According to Banbury, the offshore RMB stablecoin is being held through the Shanghai ShuTu Blockchain Research Institute, a branch of the Conflux Tree-Graph Institute for blockchain research and development. The stablecoin has not yet received a dedicated ticker as the development team is still determining when to launch, he added.
One of the world’s first nations to debut a CBDC, China has continued to crack down on cryptocurrency trading and mining, with local authorities shutting down multiple mining farms and suspending crypto trading transactions this year.
Stablecoins In Spotlight As U.S. Begins To Lay Ground For Rules On Cryptocurrencies
Sponsors say stablecoins are safe, but regulators are concerned about potential risks to financial stability
The Biden administration is taking aim at so-called stablecoins as it begins to lay the ground for stricter regulation of cryptocurrencies that could shape the future of digital money.
Stablecoins are a form of digital currency issued by companies such as Tether Ltd. and Circle Internet Financial Inc. and designed to combine the stability of national currencies like the dollar with the ability to trade quickly online like bitcoin.
Because stablecoins are backed by safe assets such as Treasurys, they should maintain a tight link to the dollar and easily be redeemed for dollars, the issuers say. This contrasts with cryptocurrencies like bitcoin that aren’t backed by assets and can fluctuate wildly in value.
But current and former regulators worry that stablecoins could be vulnerable to the equivalent of a bank run if large numbers of investors suddenly rush to redeem them, forcing sponsors to sell the assets at fire-sale prices and potentially putting stress on the financial system.
That is what happened to some money-market mutual funds—long treated by investors as safe as cash in the bank—during the 2008 financial crisis. The government moved then to prop up money funds, and again in March 2020, as part of a broader effort to stabilize markets roiled by the coronavirus epidemic.
If a stablecoin issuer has no capital and its reserves fluctuate in value, “that inherently creates run risk,” said Sheila Bair, former head of the Federal Deposit Insurance Corp. “Having stringent rules requiring investment in assets that are stable, true cash equivalents, that’s the best way to address the instability.”
Startups issuing stablecoins invest in assets that make them sizable players in capital markets. But there are no clear rules about how those assets should be managed to ensure stability.
That is likely to change. “We’ve got a lot of casinos here in the Wild West, and the poker chip is these stablecoins at the casino gaming tables,” Securities and Exchange Commission Chairman Gary Gensler said this week in a virtual event hosted by the Washington Post.
As early as next week, the Federal Reserve is set to lay out its views in a paper some officials have informally described as a blueprint on “the future of money,” including stablecoins. It is also expected to seek public comment on whether it should issue its own digital currency that would likely compete with stablecoins, a question that appears to have divided Fed officials.
Next, the President’s Working Group on Financial Markets is expected to make recommendations for a framework to regulate stablecoins. The group includes Mr. Gensler, Treasury Secretary Janet Yellen and Fed Chairman Jerome Powell.
And in the coming months, a smaller group of bank regulators, including the Fed and the Office of the Comptroller of the Currency, may address whether U.S. banks are legally permitted to hold cryptocurrencies on their balance sheets and potentially lay out a framework for the capital treatment of lenders’ exposures to such instruments, administration officials say.
“Collectively, the regulatory measures will help determine how financial innovation and technology will be integrated into the banking sector for years to come,” said David Portilla, a former Obama-era Treasury staffer who is now a partner at law firm Cravath, Swaine and Moore LLP, which represents banks and financial technology firms.
Stablecoin issuers generally say they look forward to working with officials to support transparency and compliance. Jeremy Allaire, chief executive of the USD Coin issuer, Circle, has said the focus of the president’s working group is a good thing for stablecoins and that he supports developing clear standards.
“Circle believes that well-regulated digital dollars, built on public blockchains, can play a vital role in making the movement of value faster, safer and less expensive,” he said in a statement.
In a statement, Tether said it would “continue to work with counterparts across the world to enhance transparency and dialogue about the current and future benefits of stablecoins.”
Stablecoins, which are based on the same blockchain technology as assets like bitcoin, are a relatively small but fast-growing corner of the $2 trillion crypto world. The value of the three largest—Tether, Circle’s USD Coin and Binance USD—has swelled to about $110 billion from about $11 billion a year ago.
For now, stablecoins are used mainly by investors to buy and sell crypto assets on exchanges such Coinbase, which process trades 24 hours a day. They are also used as collateral for derivatives—contracts to buy or sell an underlying security at a specified price—and many of those contracts are settled in stablecoins.
Administration officials say that if the coins are adopted more broadly as a swift means of payment for consumers and businesses, that would put them into competition with banks and firms such as Visa Inc. and MasterCard Inc. Diem Association, a group backed by Facebook Inc. and 25 other members, is preparing to launch a stablecoin that will leverage the social network’s three billion users.
The rapid growth in the sector could exacerbate run risk, administration officials say. To address those concerns, they are weighing whether to recommend bank-like capital and liquidity requirements for stablecoin issuers.
They are also considering whether to regulate them more like money funds, which are subject to strict limits on the types of short-term assets they are allowed to invest in.
Stablecoin issuers say they can meet redemptions on demand. Circle, the second-largest, said that as of this month, it will begin to hold all of its reserves in cash and short-duration Treasury securities. It also said it would seek to become a federally regulated bank.
Administration officials working on the presidential panel’s report say even seemingly safe reserves, such as cash held at commercial banks, could pose risks for U.S. lenders if stablecoin issuers are forced to withdraw deposits to meet a rush of redeeming investors, the officials said.
Tether Scores Win In Class Action Case As Court Dismisses RICO Claims
“Litigation will expose this case for what it is: a clumsy attempt at a money grab, which recklessly harms the whole cryptocurrency ecosystem,” said Tether.
The judge in the class-action lawsuit filed in the Southern District of New York against stablecoin issuer Tether and crypto exchange Bitfinex has granted motions to dismiss many of the claims in the case.
According to court documents filed Tuesday in the Southern District of New York, District Judge Katherine Polk Failla has granted motions from Tether’s and Bitfinex’s parent company iFinex to dismiss key claims in the plaintiffs’ case that the two firms manipulated the crypto market. Altogether, Judge Failla granted motions to dismiss five complete claims and part of one, while denying six others.
Specifically, the judge said she would not allow investors to bring claims against Tether and Bitfinex under the Racketeer Influenced and Corrupt Organizations Act, or RICO, nor allegations related to racketeering or using the proceeds of racketeering for investments.
She also said Tether and Bifinex investors could not “inadequately allege” the companies’ monopoly power in the stablecoin market.
“This case is doomed,” said Tether in a Wednesday blog post. “Even for the remaining claims, the Court’s order raises substantial issues that will ultimately be fatal to the plaintiffs’ case.”
The Firm Added:
“Litigation will expose this case for what it is: a clumsy attempt at a money grab, which recklessly harms the whole cryptocurrency ecosystem.”
The initial complaint against iFinex in October 2019 alleged that the firm manipulated the crypto market by issuing unbacked Tether (USDT) “in an effort to signal to the market that there was enormous, organic demand for cryptocommodities.” The plaintiffs allege that the firm wanted to inflate the price of cryptocurrencies like Bitcoin (BTC), “thereby creating and sustaining a ‘bubble’ in the cryptocommodity market.”
While Bitfinex and Tether settled its case with the Office of the New York Attorney General in February over mismanagement of USDT reserve funds, the civil action with a group of aggrieved crypto investors continues.
In the former case, Bitfinex and Tether agreed to pay $18.5 million for damages to New York and submit to periodic reporting of their reserves in addition to stopping service to customers in the state.
Pro-Crypto Senator Lummis Says Stablecoins Should Be Audited
A full audit would be more rigorous than the attestations the coins’ two top issuers have produced.
Sen. Cynthia Lummis (R-Wyo.) took aim at stablecoins on Wednesday, saying they “must be 100 percent backed by cash … and this should be audited regularly.”
In a speech on the Senate floor that largely focused on the potential development of a U.S. central bank digital currency (CBDC), Lummis expressed her concern that stablecoins are not fully backed “in a transparent manner,” echoing the concerns of many in the crypto community.
The two largest stablecoin issuers – Circle and Tether – have revealed that their products were backed by a combination of cash, cash-like products, short-term securities and commercial paper. In attestations published earlier this year, Tether executives announced that roughly half of Tether’s reserves are held in commercial paper, while Circle said its reserves are largely comprised of cash and highly liquid money-market funds.
Those attestation reports, however, differ from full audits in that third-party auditing firms merely verify the information provided by the issuer. A full audit as suggested by Lummis would be a first in the stablecoin sphere.
Lummis isn’t the first crypto-friendly lawmaker to express concerns about stablecoins. Earlier this year, Rep. Warren Davidson (R-Ohio) suggested that stablecoins might meet the definition of a security, which would subject them to regulatory oversight from the U.S. Securities and Exchange Commission (SEC).
A highly anticipated Treasury Department report on stablecoins is expected to be made public in the coming weeks.
In her speech on Wednesday, Lummis also established her guiding principles for the development of a U.S. CBDC.
Lummis’ remarks come a day after Federal Reserve Chairman Jerome Powell called on Congress for new legislation to authorize the Fed’s plans to create a digital dollar.
The key tenets of a digital dollar laid out in Lummis’ speech included legitimate need, financial inclusion, programmability, avoiding systemic risk and privacy.
“Americans must have confidence that a CBDC is not being used for surveillance purposes … we cannot allow a CBDC to become a panopticon, as will soon be the case with China’s CBDC,” Lummis concluded.
Biden Admin Weighing Bank-Like Regulation For Stablecoin Issuers
The United States government appears keen to tame the rapidly growing stablecoin market, according to reports.
The Biden administration is reportedly considering a new legal framework for stablecoin issuers that would put them in the same category as banks, raising questions about the future of crypto regulation in the country.
Citing people familiar with the matter, The Wall Street Journal reported Friday that the administration is looking to convince Congress to create a new “special-purpose charter” for stablecoin issuers and other companies that fall within the same category. Although it’s not entirely clear how the legislation will look, it’s expected to be tailored specifically to these types of business models.
Policymakers have been sounding the alarm over stablecoins in recent months because they believe these dollar-pegged assets aren’t properly regulated. Earlier this week, Federal Reserve Chairman Jerome Powell told the Financial Services Committee that stablecoins like Tether (USDT) and USDC Coin (USDC) should be regulated within the same parameters as money market funds like bank deposits.
Nevertheless, he remained steadfast in stating that no blanket ban on Bitcoin (BTC) or other digital assets was in the cards.
As Cointelegraph reported in July, joint research by the Fed and Yale University outlined two regulatory frameworks for stablecoins in a 49-page paper called, “Taming Wildcat Stablecoins.”
In that paper, the authors argued that policymakers have only two choices with respect to stablecoin regulations: make them equivalent to public money or tax them out of existence via central bank digital currency.
Stablecoins — digital currencies that are wholly or in part pegged to a form of fiat money like the U.S. dollar — have swelled to become a $128 billion market, according to the latest market capitalization figures.
Tether accounts for over half of the total market, though competitors such as USDC and Binance USD (BUSD) have made significant headway this year. As these markets have grown, concerns over the liquidity and reserve status of stablecoin issuers have made eye-grabbing headlines.
After reaching a settlement with the Office of the New York Attorney General, Tether Holdings Ltd. agreed to publish periodic reports proving its currency reserves. In May of this year, the company disclosed its full reserve breakdown for the first time.
SEC Subpoenas USDC Stablecoin Backer Circle
Circle said it is “fully cooperating” with the investigation but has declined to elaborate on its scope.
Circle Financial is under investigation by the U.S. Securities and Exchange (SEC), the payments company disclosed Monday.
Circle, a key supporter of the USDC stablecoin, said in a regulatory filing that it received an “investigative subpoena” from the SEC’s Enforcement Division in July. That subpoena requests “documents and information regarding certain of our holdings, customer programs and operations,” the filing said.
“We are cooperating fully with their investigation,” Circle said in the filing, which was issued as part of Circle’s plan to go public. In the documents, it didn’t elaborate on what the SEC’s investigation was focused on. Circle told CoinDesk late Tuesday it could not provide additional information.
The subpoena arrived one month after Circle began onboarding corporate USDC holders into its first high-interest yield product, Circle Yield. It pitched U.S. corporations on a “well regulated” crypto yield product in a subsequent announcement that boasted its licenses in Bermuda.
That was more than Coinbase, the other member of the USDC-issuing Centre Consortium, could tout when the SEC effectively iced the exchange’s planned lending program last month. The SEC has come out swinging at crypto this year, repeatedly arguing for more enforcement authority.
Circle first disclosed the investigation’s existence in an August filing that went largely unnoticed at the time.
It’s not the firm’s first disclosed run-in with the SEC as it prepares to go public in a special purpose acquisition company deal that values the company at $4.5 billion.
Circle said in August it agreed to pay the SEC over $10 million to settle charges that its one-time subsidiary, Poloniex, was operating as an unregistered digital asset exchange.
The US Inches Closer To Stablecoin Rules
The question now shifts from “How will the U.S. government regulate stablecoins?” to “What will stablecoin issuers have to do?”
Stablecoins As Not-Securities
The Biden administration is moving beyond vague hints on how it will regulate stablecoins to more concrete descriptions. There’s still a lot we don’t know yet.
Why It Matters
Stablecoins have exploded in popularity over the past year or two, with some $130 billion worth of these fiat-pegged tokens in circulation as of Sunday night, according to CoinGecko. Regulators have been eyeballing this specific sector of the broader crypto industry for nearly a year, and we’re finally seeing their response. The final regulations will determine whether some issuers have to shut down or block U.S. users, as well as what sort of transparency we can expect to see from these issuers.
Breaking It Down
Stablecoins! Yes we’re still talking about this. The Biden administration has gotten very busy around cryptocurrencies in general. The Securities and Exchange Commission (SEC) will start approving or rejecting bitcoin exchange-traded fund (ETF) applications in the next few weeks, the Office of Foreign Assets Control just sanctioned a crypto trading firm for the first time and regulators have been talking a lot about regulating the market.
Stablecoins have taken on a particular importance. The Trump administration even convened a President’s Working Group for Financial Markets meeting to discuss the issue, so it’s no surprise the current administration has been looking to enact regulations.
“What isn’t clear is what sort of regulatory framework would make the most sense for stablecoins,” I wrote in July.
We now have the first glimmer of how the Biden administration plans to answer this question: Treating stablecoin issuers in a similar way to banks.
The administration has a two-track plan here and the first depends on Congress. Should that not work out for whatever reason, officials will look to the Financial Stability Oversight Council, an interagency body established in the wake of the 2008 financial crisis to monitor risks to the system.
The congressional path seems fairly straightforward at first blush. Team Biden intends to ask Congress to draft a law that would authorize a special-purpose, bank-like charter for stablecoin issuers. This would create a federal framework for stablecoin issuance while assigning a regulator oversight authority over these businesses.
This would also impose bank regulations and supervisory requirements on stablecoin issuers, which I’m guessing would include some specific reporting or backing requirements.
Regulators have espoused the need (in their view) for any sort of regulatory oversight over stablecoins at the federal level. While some U.S.-based stablecoin issuers are regulated by state financial regulators (cough, NYDFS) there’s no one agency formally assigned at the federal level.
Federal Reserve Chair Jerome Powell reiterated this view in a hearing before the House Financial Services Committee hearing last week.
“Stablecoins are like money market funds, they’re like bank deposits but they’re to some extent outside the regulatory perimeter and it’s appropriate that they be regulated – same activity, same regulation,” he said.
SEC Chair Gary Gensler has likewise compared stablecoins to money market funds, as have lawmakers in the House of Representatives and Senate.
Bank regulations are something else.
We don’t yet know the specifics of this special-purpose charter the Treasury Department is pitching. Matthew Homer, executive in residence at VC firm Nyca Partners and formerly the fintech lead at the New York Department of Financial Services, said one of the major questions is why the Office of the Comptroller of the Currency’s (OCC) current trust bank or full bank charter framework would not suffice.
Another question is whether the OCC, a federal bank regulator, would indeed be the chartering entity here, or if a different federal agency would be given oversight of stablecoin issuers.
“Would banks with normal bank charters be able to issue stablecoins? Will this have implications for other areas like the issuers of prepaid cards?” Homer asked. “In some ways a stablecoin is no different from a stored-value product like a prepaid card where you have a third-party program manager with a bank holding the deposits.”
It’s also unclear to me how stablecoins tied to decentralized finance (DeFi) projects might fall into this new framework.
Given the attention on DeFi though, I’m sure this is an area we will see addressed.
Dante Disparte, chief strategy officer and head of policy at Circle, which manages the USDC stablecoin, said in a statement that the rumored framework “is encouraging.”
“The time has come to address the risks and seize the significant opportunities of dollar digital currencies like USD coin (USDC),” he said. “Circle has already been working toward becoming a full-reserve national commercial bank, and we strongly believe that a full-reserve banking model built on digital currency technology can lead to a more efficient, fair, inclusive and resilient financial system.”
Tether’s Trillion-Dollar Lawsuit
Last week, stablecoin issuer Tether announced it won a partial dismissal of a lawsuit it is fighting.
The case has its origins almost two years ago to the day, when a handful of crypto investors sued Tether, Bitfinex and DigFinex, as well as various current and former executives (and later adding Bittrex and Poloniex) on allegations the businesses manipulated bitcoin’s price; the investors claimed damages upwards of $1.4 trillion.
The amended complaint, filed in June 2020, filed causes of action alleging monopolization (count one); attempted monopolization (count two); conspiracy to monopolize (count three); agreement in restraint of trade; another antitrust allegation (count four); market manipulation (count five); agent liability (count six); aiding and abetting legal violations (count seven); racketeering (RICO) i.e., wire fraud, bank fraud, money laundering, etc. (count eight); two more RICO counts (counts nine and 10); fraud (count 11); and deceptive actions (count 12).
Tether and the other defendants filed to dismiss the case in September of last year.
U.S. District Judge Katherine Polk Failla, of the Southern District of New York, dismissed the third, eighth, ninth, tenth and twelfth counts and dismissed the sixth count for Bitfinex, Tether, DigFinex, Bittrex and Poloniex. The defendants now have until Oct. 28 to respond to the rest of the amended complaint (i.e., counts one, two, four, five, seven and 11).
In other words, Tether et al. will have to respond to the allegations of monopolization, market manipulation and fraud by the end of the month.
For its part, Tether seems pretty pleased with the current state of affairs.
“Even for the remaining claims, the Court’s order raises substantial issues that will ultimately be fatal to the plaintiffs’ case.
With half their case now dismissed, their primary expert debunked, and their lead law firm embroiled in its own internecine war – with its partners and former partners trading allegations of fraud and ethics violations – this case is doomed,” Tether said in a statement posted to its website.
BIS Outlines How Stablecoins Could Comply With International Money Standards
The BIS’s new report contains preliminary guidance for stablecoin arrangements and the regulators that may oversee them.
A new report published Wednesday by the BIS Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) includes preliminary guidance on how to apply the Principles for Financial Market Infrastructures (PFMI) to stablecoin arrangements.
Financial regulatory agencies around the world are showing increasing interest in regulating stablecoins. The U.S. is working toward creating a federal-level framework for stablecoin issuers. China’s central bank is concerned private stablecoins can throw financial systems out of balance. Last month, the head of the European Central Bank, Christine Lagarde, said stablecoins are not currencies but assets, and should be regulated accordingly.
The published guidance does not aim to create additional standards on stablecoin arrangements which, according to the European Central Bank, are payment systems “insofar as they permit the transfer of value between stablecoin holders.” The guidance applies to systemically important stablecoin arrangements and the regulators who follow BIS recommendations, the report said. Systemically important financial institutions are those whose failure can set off a financial crisis.
The report offers guidance on these types of stablecoin arrangements under four key principles: governance, risk management, settlement finality (the certainty that a transaction has been completed without risk of reversal) and money settlements.
“A stablecoin used by a systemically important [stablecoin arrangement] for money settlements should have little or no credit or liquidity risk,” the report says under the money settlement guidelines.
The report goes on to say that when stablecoin arrangements go about assessing the risk of a stablecoin, it should be noted if the stablecoin provides its holders with a direct legal claim on the issuer as well as “the title to or interest in the underlying reserve assets for timely convertibility at par into other liquid assets.”
A BIS press statement said that each jurisdiction can decide whether to permit stablecoin activity. If it does allow it, and if the arrangement is or has the potential to be systemic, then the PFMI would apply as instructed in the issued guidance, the statement said.
Noting that features and functions of stablecoin arrangements could evolve, some issues in the report could require further clarification and study in the coming years, according to the BIS statement.
US FDIC Said To Be Studying Deposit Insurance For Stablecoins
So-called pass-through coverage would insure the holders of these tokens against losses up to $250,000 if the bank holding the collateral were to fail.
The Federal Deposit Insurance Corp. (FDIC), a key U.S. banking regulator, is studying whether certain stablecoins might be eligible for its coverage, five people familiar with the agency’s thinking said.
The discussions are preliminary, and it’s not clear what the timetable would be for making any policy decisions or how such changes would be communicated.
The agency is trying to analyze what so-called pass-through FDIC insurance might look like for the reserves that stablecoin issuers hold at banks, the sources said. Such coverage would insure holders of the tokens against losses up to $250,000 if the bank holding the collateral were to fail.
The FDIC is also looking at what regular, direct deposit insurance might look like for banks that want to issue stablecoins, people familiar with the discussions said.
“This is all part of a process by which they are trying to bring stablecoins into the banking system in a responsible manner,” one insider said. “It depends on what’s backing the stablecoins. If it’s backed by reserves at the Fed[eral Reserve] for cash then I think you just make the argument that it’s a deposit. If it’s backed by Treasurys [bonds], I think you’ll have a hard time treating it as a deposit.”
The discussions come amid a broader debate in the U.S. about potential stablecoin regulation. This week the Wall Street Journal reported (and CoinDesk confirmed) that the Biden administration would subject stablecoin issuers to bank-like regulations. Circle, issuer of USDC, the second-largest stablecoin, disclosed that the Securities and Exchange Commission (SEC) sent an investigative subpoena to the company in July.
$250K Per Customer
Stablecoins are cryptocurrencies that are designed to trade at parity with government currencies, typically the U.S. dollar. The most popular kinds are backed by traditional financial assets such as cash in a bank or commercial paper, and are supposed to be redeemable 1-to-1 for cash on demand. The two largest stablecoins, Tether’s USDT and to a lesser degree USDC, have come under scrutiny recently over questions about their backing.
According to two other people familiar with cryptocurrency banking issues, stablecoin issuers don’t have the same kind of access to pass-through FDIC insurance that crypto exchanges have when they’re banking in the U.S. Exchanges can gain omnibus accounts where the funds that belong to each of their clients are insured up to $250,000 each but issuers of stablecoins don’t get these same kinds of protections.
“The FDIC is probably looking at whether stablecoins can count as deposits or whether someone’s ownership of a stablecoin is a deposit at the stablecoin issuer,” said Todd Phillips, a former FDIC lawyer who is now the director of financial regulation and corporate governance at the Center for American Progress, a Washington think tank.
The coverage could present challenges for issuers. Typically, these companies identify customers when they deposit cash for stablecoins or redeem the tokens for cash. But because stablecoins run on open, public blockchain networks (usually Ethereum), theoretically anyone with a crypto wallet that hasn’t been blacklisted can receive stablecoins from, and send them to, other wallets.
“One thing to remember is that each person has insurance of only up to $250,000,” said Phillips. “So, the stablecoin issuer would need to keep track of who is the current holder of their stablecoin and how many they own.”
Whatever the FDIC insures must not compromise the rest of the agency’s mission, he said.
“The FDIC basically has one overriding mission,- which is to ensure the safety of the Deposit Insurance Fund, the DIF,” Phillips said. “If the FDIC were to insure a stablecoin, that insurance would come out of the DIF and the FDIC will want to be very sure that they are on legal footing and that whatever they do doesn’t risk the DIF.”
Good Housekeeping Seal
If the FDIC went ahead and provided deposit insurance for stablecoins, it would apply only if a bank that was banking a stablecoin issuer or that was issuing a stablecoin itself went into receivership. Even in this scenario, it’s rare that FDIC insurance would enter into the picture because the agency generally takes a failed bank’s assets and deposits and sells them to a healthy bank.
How the agency proceeds could potentially help protect consumers, Phillips added.
“The FDIC has strict rules as to which institutions may call themselves FDIC-insured or use the FDIC logo for advertising,” he said. “Just as how the FDIC’s logo on a bank’s website allows savers to be confident that the bank is safe, insurance of particular stablecoins and permission to use the FDIC logo would provide clarity about which stablecoins, up to the insurance limit, will not lose value.”
It’s likely that the agency will ask for public comment from the industry before any actual policy change is taken, Phillips said.
“I also imagine there are conversations going on between the four FDIC directors, since you need a majority of them to approve a new regulation,” he said.
What Iceland’s Spectacular Banking Collapse Teaches Us About Tether
Iceland’s surreal banking bubble led to one of the biggest blowups of the 2008 financial crisis. The story holds important lessons – including a possible scenario for Tether’s collapse.
In 2008 and 2009, I was laser-focused on the global financial crisis. It impacted me directly because collapsing state budgets rugged my financial support just as I was finishing graduate school. Thanks to the shenanigans of low-rent mortgage originators and mercenary Wall Street bros, I wound up balancing writing my dissertation with flipping pancakes at a local greasy spoon.
But despite the personal stakes, the immense ramifications of the collapse were impossible to entirely track. One story that felt like little more than a footnote at the time was the collapse of the banking system in the European country of Iceland.
There were breathless news reports when the nation’s stock market lost 90% of its value (compared to a 70% drawdown in the U.S.), but at the time the impression was that the Icelandic banks, like so many others, had simply been smashed to bits by the tsunami of unwinding U.S. mortgage instruments.
That, it turns out, was not what happened at all.
As recounted in thrilling detail in the new book “Iceland’s Secret,” the Icelandic banking scandal was a beast all its own, a whole-cloth fraud that originated a full decade before the financial crisis. When the tide went out, though, it revealed an entire country had been swimming naked.
The book’s author, Jared Bibler, had a better-than-front-row seat. An American-born Icelandic citizen, Bibler did time on Wall Street before eventually winding up at Landsbanki, one of the three major Icelandic banks, shortly before the financial crisis.
Bibler opens the book by describing how the rising stock price of the three banks transformed Icelandic life. Just a generation before, the desolate northern island had consisted of isolated clusters of literal sod huts and an economy based mostly on fishing.
But the new Iceland, thanks to adventurous international banking, was full of imported SUVs, while Icelanders made regular shopping trips all the way to Boston to make the most of their new riches.
As you might have guessed, it was all a lie.
Bibler saw some of the warning signs during his time at Landsbanki, including dead-end real estate investments, a “spider web of interdependent ownership” on the bank’s balance sheet and extravagant spending that seemed impossible to justify for a bank serving just 350,000 Icelanders.
By Bibler’s telling, he eventually listened to his gut and resigned from Landsbanki. It collapsed less than a week later, on Oct. 7, 2008.
Iceland’s other two major banks followed soon after. The banks made up most of the value of the small Icelandic stock market, which most Icelanders were invested in either personally or through government pension plans. Nearly the entire country’s retirement savings were next to wiped out: As bad as things were in America and elsewhere after the crisis, Iceland may have had it worst of all.
Iceland also, the new book makes clear, had it coming. Far from victims of forces beyond their control, Iceland’s bankers, enabled by a neoliberal government, crafted a brazen fraud whose endpoint was practically inevitable.
Bibler saw this firsthand: He eventually wound up working at the FME, Iceland’s financial regulator, as part of a team trying to unravel the causes of the collapse.
Bibler tells an enthralling tale, walking readers through a financial whodunit full of well-drawn scenes and personalities. I ripped through the first half of this 400-page book the day I got it, unable to put it down.
(Bibler also holds off delivering the amazing final findings of his work until well into the book, so if you’d like to take that journey on your own, skip the rest of this review.)
What Bibler and the FME ultimately uncovered is truly gobsmacking. As early as 1998, the three major Icelandic banks were taking huge loans, including from Germany’s Deutschebank and from Credit Suisse. As early as 2003, they were indebted to the tune of €35,000 for every man, woman and child in Iceland.
This was clearly not sustainable, but the executives of the three banks figured out a devilishly simple way to, in essence, take the money and run. Using rich clients and a web of shell companies as fronts, the banks used the capital from big outside loans to buy their own stock, regularly and in large amounts.
This earned executives lavish salaries and fat bonuses as the banks’ value appeared to ratchet up steadily.
The mechanics of the fraud also illustrate why some people are so worried about the dollar-pegged stablecoin tether, whose issuer is now in essence a $70 billion investment bank.
Tether, the issuing company, has disclosed the mix of assets backing its stablecoin, which includes U.S. Treasury instruments, cash and short-term corporate obligations known as commercial paper. Commercial paper makes up roughly half of the stablecoin’s backing.
Tether has published “attestation reports” of its reserves from an auditor, but never a full formal audit of its backing. Most importantly, Tether has disclosed few details about its commercial paper holdings: We still don’t know what companies or even what regions the instruments come from.
Perhaps the most detailed disclosure Tether has ever made was denying that it held debt from a single struggling Chinese firm, Evergrande.
This lack of transparency introduces the possibility that Tether is mimicking the leveraging trick that allowed Iceland’s tiny banks to look massive. The banks would loan funds to outside companies on the condition that those loans were used to buy the bank’s own stock.
By sending tether to satellite, unrelated or even fictional firms in exchange for their commercial paper or bonds, Tether would theoretically be able to similarly pump up its balance sheet with pure hot air. (Disclosure: CoinDesk’s parent company, Digital Currency Group, is an investor in Circle, a Tether competitor.)
That kind of maneuvering kept the Icelandic banks’ stock prices going up for nearly a decade, which translated to the sense of wealth shared, for a brief time, by all the Icelanders invested in them. But it inevitably led to pure absurdity.
When it collapsed just days after Landisbank, Iceland’s Kaupthing bank had a market capitalization of $80 billion – 30% larger than Enron at the time of its collapse after years of similar fraud.
The collapse of the three Icelandic banks together would have been the third largest bankruptcy of all time, behind only Lehman Brothers and Washington Mutual, according to Bibler – and all of it built on a national population the size of a single Manhattan neighborhood.
Something was so clearly out of whack that the British Royal Treasury temporarily declared Iceland and its banks terrorist organizations to protect British clients and investors.
It took years for Bibler and his colleagues at FME to unravel the entire mystery, but they ultimately notched some of the biggest wins of the crisis’ aftermath: The heads of the fraudulent banks actually wound up in prison, unlike the leading players on the U.S. side of the crisis.
“Iceland’s Secret” is a treasure trove for those trying to learn more about how such massive frauds are built and, inevitably, collapse – or just for those fascinated with the depths human duplicity can reach. If there is a flaw in the book, it is that Bibler often seems to position himself as the hard-driving, gimlet-eyed American trying to teach the basics of financial fraud to naïve Icelanders.
But there may also be some truth to that depiction. As Bibler details, not just modern banking but even the concept of money itself didn’t arrive in Iceland until after World War II. And the banks’ practices were so normalized among staff that a former insider reviewing Bibler’s meticulous evidence of an elaborate shell game could only respond in confusion: “This is just banking.”
US Wants To Regulate Stablecoins First
Signs point to stablecoin issuers being more integrated into the banking sector. That could be a good thing.
It’s recently come to light that the U.S. Securities and Exchange Commission is investigating Circle, a principal backer of the popular USDC stablecoin. CoinDesk’s Danny Nelson broke the story by combing through filings Circle made in preparation of possibly going public. The scope of the watchdog’s investigation, which began last summer, is unknown. Ironically, though, news of the “investigative subpoena” comes at a time when USDC has never been less risky.
In its latest attestation from accounting firm Grant Thornton, Circle disclosed that it has divested itself of all but a few of its “corporate bonds, long-dated commercial paper, Yankee certificates of deposit and Treasury notes,” economic commentator and CoinDesk columnist J.P. Koning wrote on Twitter. This is part of its plan to have USDC fully backed by U.S. dollars.
The subpoena fits with the SEC’s increasingly aggressive pose set against the cryptocurrency industry. Chairman Gary Gensler has stated bluntly that he believes the vast majority of cryptocurrency businesses fall under his purview. He’s called for crypto exchanges to register with the SEC, and the agency has ratcheted up its enforcement and investigations of all numbers of crypto businesses.
Regulation over stablecoins, now a $130 billion market, is something of a puzzle – and one with a few pieces missing. They are a key component of healthy crypto markets. But many outside observers have raised concerns over the systemic risk stablecoins represent for the larger economy.
Gensler on more than one occasion has compared “stable-value coins” to casino chips, with the ability to “undermine traditional banking systems if … not brought inside the remit of banking.”
To create these fiat-pegged tokens, issuers take in and hold deposits in a process that resembles banking. Another useful analogy might be prepaid gift cards. But the SEC’s top cop has also said stablecoin issuers “could look a lot like a money market fund” depending on how they run their operations.
So has Federal Reserve Chairman Jerome Powell. So what did the crypto industry create here: digital dollars, securities, commodities?
Politicians including pro-crypto Sen. Cynthia Lummis (R-Wyo.) have called for regular audits of stablecoin issuers. A presidential working group is signalling it may create bank-like regulations for the sector. And, as reported by CoinDesk yesterday, the Federal Deposit Insurance Corp. is studying whether certain stablecoins might be eligible for its deposit insurance – which would supply up to $250,000 in protection for token holders should something go awry.
It seems like all signs are pointing for stablecoins issuers to become more integrated into the banking sector, if not become quasi-banks themselves. That’s an arrangement the issuers seem to favor.
Circle is now regulated at the state level as a money transmitter, the same licensing regime for payments companies like PayPal and Square. But it is in the process of applying to become a national crypto bank, putting itself under the remit of the U.S. Federal Reserve, U.S. Treasury Department, Office of the Comptroller of the Currency (OCC) and the FDIC. Paxos, another issuer, is also trying to become more bank-like.
“Stablecoins perform a different function than PayPal – so they should probably be regulated differently. Both are used for payments. But stablecoins also get recruited as collateral, or building blocks, for other financial products. This never happens with PayPal balances,” Koning wrote yesterday.
In that sense, stablecoins are a little bit more than money – they’re programmable money! There’s a difference between the tokens themselves and the issuers. It’s all well and good for Circle to become a bank, for the U.S. government to insure its deposits and for greater transparency across the board. But the rules need to be flexible enough so that they don’t crush the utility of the tokens themselves.
The difference between stablecoins and other digital dollars is the blockchain. Tokens like USDC run on the public Ethereum network. “Theoretically anyone with a crypto wallet that hasn’t been blacklisted can receive stablecoins from and send them to other wallets,” CoinDesk’s Nathan DiCamillo noted yesterday.
That’s important from a financial inclusion standpoint as well as for the dynamic world of decentralized finance (DeFi), where stablecoins play an important liquidity role.
In some sense, stablecoin regulation – although not yet on the books – is further along than guidance for any other subsector in the crypto industry. The sheer brainpower being directed at defining these tokens and seeing where their issuers fit into the system is impressive. It’s worrisome that Circle has been subpoenaed despite its strides to integrate itself into the financial system.
Wherever the chips may lie after this regulator debate, the outcome will help clarify things across the board for crypto. Nowhere is the intersection between securities, commodities and currencies laws more clear than in stablecoins. Rules around the tokens should reflect that, even if Circle becomes a boring old bank.
Tether Fires Back Against Report It Is Using Reserves For Investments And Making Crypto-Backed Loans
“If those loans fail, even a small percentage of them, one Tether would become worth less than $1,” said Bloomberg reporter Zeke Faux.
Tether (USDT), the largest stablecoin issuer by market capitalization, has refuted the details of a Bloomberg story on its reserves holdings.
In a Thursday report, Bloomberg journalist Zeke Faux made numerous claims against Tether, including that its chief financial officer Giancarlo Devasini has used the company’s reserves to make investments, that seem to contradict Tether’s public position that the holdings were fully backed at all times.
In addition, Faux alleges that Tether has invested in Chinese firms and issued crypto-backed loans “worth billions of dollars.” According to the report, he was only able to confirm one bank in the Bahamas was working directly with Tether.
“Tether still hasn’t disclosed where it’s keeping its money,” said Faux. “If Devasini is taking enough risk to earn even a 1% return on Tether’s entire reserves, that would give him and his partners a $690 million annual profit. But if those loans fail, even a small percentage of them, one Tether would become worth less than $1.”
Tether called the report a “tired attempt” to undermine the company based on “innuendo and misinformation.” The stablecoin issuer challenged the credibility of Faux’s sources as an attempt “to discredit Giancarlo Devasini and Tether’s executives” and continued to claim its USDT tokens are “fully backed,” citing its quarterly assurance reports.
In February, Tether and Bitfinex agreed to pay New York state $18.5 million in damages and provide extensive reports on its finances as part of a settlement with the New York Attorney General’s Office — the most recent audit was filed with information reported as of June 30. Authorities had claimed Tether misrepresented the degree to which its USDT tokens were backed by fiat collateral.
The Bloomberg report comes as many speculate whether China’s second-largest property developer, Evergrande Group, will default on $300 billion in debts. According to Faux, Tether denied holding any debt from Evergrande but would not confirm whether it held commercial paper from other Chinese firms.
Anyone Seen Tether’s Billions?
A wild search for the U.S. dollars supposedly backing the stablecoin at the center of the global cryptocurrency trade—and in the crosshairs of U.S. regulators and prosecutors.
In July, Treasury Secretary Janet Yellen summoned the chair of the Federal Reserve, the head of the Securities and Exchange Commission, and six other top officials for a meeting to discuss Tether.
The absurdity of the situation couldn’t have been lost on them: Inflation was spiking, a Covid surge threatened the economic recovery, and Yellen wanted to talk about a digital currency dreamed up by the former child actor who’d missed a penalty shot in The Mighty Ducks.
But Tether had gotten so large that it threatened to put the U.S. financial system at risk. It was as if a playground snowball fight had escalated so wildly that the Joint Chiefs of Staff were being called in to avert a nuclear war.
Tether is what’s come to be known in financial circles as a stablecoin—stable because one Tether is supposed to be backed by one dollar. But it’s actually more like a bank. The company that issues the currency, Tether Holdings Ltd., takes in dollars from people who want to trade crypto and credits their digital wallets with an equal amount of Tethers in return.
Once they have Tethers, people can send them to cryptocurrency exchanges and use them to bet on the price of Bitcoin, Ether, or any of the thousands of other coins.
And at least in theory, Tether Holdings holds on to the dollars so it can return them to anyone who wants to send in their tokens and get their money back. The convoluted mechanism became popular because real banks didn’t want to do business with crypto companies, especially foreign ones.
Exactly how Tether is backed, or if it’s truly backed at all, has always been a mystery. For years a persistent group of critics has argued that, despite the company’s assurances, Tether Holdings doesn’t have enough assets to maintain the 1-to-1 exchange rate, meaning its coin is essentially a fraud. But in the crypto world, where joke coins with pictures of dogs can be worth billions of dollars and scammers periodically make fortunes with preposterous-sounding schemes, Tether seemed like just another curiosity.
Then, this year, Tether Holdings started putting out a huge amount of digital coins. There are now 69 billion Tethers in circulation, 48 billion of them issued this year. That means the company supposedly holds a corresponding $69 billion in real money to back the coins—an amount that would make it one of the 50 largest banks in the U.S., if it were a U.S. bank and not an unregulated offshore company.
On Twitter, on business TV, and on hedge fund and investment bank trading floors, everyone started asking why Tether was minting so many coins and whether it really had the money it claimed to have. An anonymous anti-Tether blog post titled “The Bit Short: Inside Crypto’s Doomsday Machine” went viral, and CNBC host Jim Cramer told viewers to sell their crypto. “If Tether collapsed, well then, it’s going to gut the whole crypto ecosystem,” he warned.
As far as the regulators are concerned, the size of Tether’s supposed dollar holdings is so big that it would be dangerous even assuming the dollars are real. If enough traders asked for their dollars back at once, the company could have to liquidate its assets at a loss, setting off a run on the not-bank. The losses could cascade into the regulated financial system by crashing credit markets. If the trolls are right, and Tether is a Ponzi scheme, it would be larger than Bernie Madoff’s.
So earlier this year I set out to solve the mystery. The money trail led from Taiwan to Puerto Rico, the French Riviera, mainland China, and the Bahamas. One of Tether’s former bankers told me that its top executive had been putting its reserves at risk by investing them to earn potentially hundreds of millions of dollars of profit for himself. “It’s not a stablecoin, it’s a high-risk offshore hedge fund,” said John Betts, who ran a bank in Puerto Rico Tether used. “Even their own banking partners don’t know the extent of their holdings, or if they exist.”
The Bank of Crypto
A green pentagon emblazoned with a white T represents the Tether coin on the company’s website, which promises “Digital money for a digital age.” The logo doesn’t look like much, but it’s probably the most normal thing about Tether Holdings, which is weird in almost every way imaginable. Only a dozen employees are listed on LinkedIn, a tiny number for a company with $69 billion under management.
Tether’s website also touts a settlement with New York’s attorney general, but the announcement of that settlement made it sound like the company had been up to some horrible stuff. Tether Holdings had been “operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system,” Letitia James, the attorney general, said in a statement.
Elsewhere on the website, there’s a letter from an accounting firm stating that Tether has the reserves to back its coins, along with a pie chart showing that about $30 billion of its dollar holdings are invested in commercial paper—short-term loans to corporations. That would make Tether the seventh-largest holder of such debt, right up there with Charles Schwab and Vanguard Group.
To fact-check this claim, a few colleagues and I canvassed Wall Street traders to see if any had seen Tether buying anything. No one had. “It’s a small market with a lot of people who know each other,” said Deborah Cunningham, chief investment officer of global money markets at Federated Hermes, an asset management company in Pittsburgh. “If there were a new entrant, it would be usually very obvious.”
It wasn’t clear which regulatory body is responsible for overseeing Tether. On a podcast, a company representative said it was registered with the British Virgin Islands Financial Investigation Agency. But the agency’s director, Errol George, told me in an email that it doesn’t oversee Tether. “We don’t and never have.”
The chief executive officer listed on Tether’s website, J.L. Van der Velde, is a Dutchman who lives in Hong Kong and seems never to have given an interview or spoken at a conference. The chief financial officer is Giancarlo Devasini, a former plastic surgeon from Italy who was once described on Tether’s website as the founder of a successful electronics business.
The only reference to him that turned up in a search of Italian newspapers showed he was once fined for selling counterfeit Microsoft software. He didn’t respond to emails or messages on Telegram, where he goes by Merlinthewizard.
“There’s no agenda or plot. They are not Enron or Madoff. When there’s a problem, they fix it honorably”
Tether’s lawyer, Stuart Hoegner, told me by phone that Van der Velde and Devasini prefer to avoid the limelight. He called Tether’s critics “jihadists” set on the company’s destruction. “We maintain a clear, comprehensive, and sophisticated risk management framework for safeguarding and investing the reserves,” he said, adding that no customer had ever asked for money back and been refused.
But when I asked where Tether was keeping its money, he declined to say. Nor was I reassured when he told me the company had more than enough cash to cover the most money it had ever had to pay out in a single day. Bank runs can last longer than 24 hours.
Hoegner later responded to follow-up questions with an emailed statement saying my reporting was “nothing more than a compilation of innuendo and misinformation shared by disgruntled individuals with no involvement with or direct knowledge of the business’s operations.” He added: “Success speaks for itself.”
It was hard to believe that people had sent $69 billion in real U.S. dollars to a company that seemed to be practically quilted out of red flags. But every day, on cryptocurrency exchanges, traders buy and sell Tether coins as if they’re just as good as dollars.
Some days, more than $100 billion in Tether changes hands. It seemed the people with the most at stake in the crypto markets trusted Tether, and I wanted to know why. Luckily, in June, 12,000 of them were gathering in Miami for what was billed as the biggest crypto conference ever.
At the Mana Wynwood Convention Center, I found the usual cringey crypto signifiers. Models walked the floor body-painted with Bitcoin’s logo. A podcast host screamed, “F— Elon.” A dumpster full of Venezuelan bolivars was labeled “cash is trash.”
The place was full of people who held Tether.
Sam Bankman-Fried, a 29-year-old billionaire who was in town to rename Miami’s basketball arena after his cryptocurrency exchange, FTX, told me he’d bought billions of Tethers, using them to facilitate trading other coins. “If you’re a crypto company, banks are nervous to work with you,” he said.
His explanation doesn’t make much sense if you still think of Bitcoin as a peer-to-peer currency, an ingenious way to transfer value without an intermediary. But most people aren’t using cryptocurrencies to buy stuff.
They’re trading them on exchanges and betting on their value, hoping to make a real money score by picking the next Dogecoin, which spiked 4,191% this year after Elon Musk started tweeting about it, or Solana, up 9,801% in 2021 for seemingly no reason at all.
Think of crypto exchanges as giant casinos. Many of them, especially outside the U.S., can’t handle dollars because banks won’t open accounts for them, wary of inadvertently facilitating money laundering. So instead, when customers want to place a bet, they need to buy some Tethers first. It’s as if all the poker rooms in Monte Carlo and the mahjong parlors in Macau sent gamblers to one central cashier to buy chips.
The biggest traders on these exchanges told me they routinely bought and sold hundreds of millions of Tethers and viewed it as an industry standard. Even so, many had their own conspiracy theories about the currency. It’s controlled by the Chinese mafia; the CIA uses it to move money; the government has allowed it to get huge so it can track the criminals who use it. It wasn’t that they trusted Tether, I realized.
It was that they needed Tether to trade and were making too much money using it to dig too deeply. “It could be way shakier, and I wouldn’t care,” said Dan Matuszewski, co-founder of CMS Holdings LLC, a cryptocurrency investment firm.
The Start of Stablecoin
In the 1800s the hunters, trappers, and cowboys on the American frontier faced a currency shortage. The U.S. government didn’t issue paper money at the time, only gold and silver coins, because its early leaders were fearful of inflation—“an infinity of successive felonious larcenies,” according to John Adams. So some states allowed banks to print their own notes, redeemable for U.S. coins on demand.
But certain banks didn’t bother to hold the corresponding reserves. These institutions came to be called “wildcats,” supposedly because they discouraged borrowers from bringing notes in to exchange by locating branches in remote areas where wild animals roamed.
Many of these banks failed. One in Michigan filled boxes with nails and glass, then covered them with a thin layer of silver coins to fool examiners, who weren’t fooled. “What a temptation was this for the unscrupulous speculator, the adventurer, dreaming only of wealth, and ready to hazard all in pursuit of it,” Alpheus Felch, a state bank commissioner at the time, later wrote.
Almost two centuries later, the same temptation appeared before Brock Pierce, a former child actor who’d played the younger version of Emilio Estevez’s character in the Mighty Ducks films. Now Pierce wears loud hats, vests, and bracelets, like Johnny Depp in Pirates of the Caribbean, and speaks in riddles, like Johnny Depp in Charlie and the Chocolate Factory.
After founding a successful brokerage for buying and selling video game items—at which he employed, of all people, future Trump consigliere Steve Bannon—Pierce was one of the few early Bitcoiners with real money to invest. “I’m not an amateur entrepreneur throwing darts in the dark,” he told me by phone as he prepared for a trip to promote Bitcoin in El Salvador. “I’m a doula for creation. I only take on missions impossible.”
Pierce said he came up with the idea for a stablecoin in 2013, along with programmer Craig Sellars. To run the company, Pierce recruited Reeve Collins, who holds the dubious distinction of inventing pop-under web browser ads. They teamed up with Phil Potter, an executive at an offshore Bitcoin exchange, Bitfinex, who was working on a similar project, and adopted his name for it: Tether.
Working from a bungalow in Santa Monica, Calif., they pitched the venture capital firm Sequoia Capital, Goldman Sachs Group Inc., and others. No one was interested.
The problem was that Tether, like other cryptocurrencies, broke just about every rule in banking. Banks keep track of everyone who has an account and where they send their money, allowing law enforcement agencies to track transactions by criminals.
Tether Holdings checks the identity of people who buy coins directly from the company, but once the currency is out in the world, it can be transferred anonymously, just by sending a code. A drug lord can hold millions of Tethers in a digital wallet and send it to a terrorist without anyone knowing.
The concern isn’t theoretical. Zhao Dong, a prominent Tether trader in China, is serving three years in prison there for using the currency to launder $480 million for illegal casinos. And in May 2013 the creator of a proto-stablecoin, Liberty Reserve, was arrested in Spain and eventually pleaded guilty to a money-laundering conspiracy charge.
Prosecutors said the anonymous online currency appealed to scammers, credit card thieves, hackers, and other criminals. “The U.S. will come after Tether in due time,” Liberty Reserve founder Arthur Budovsky wrote me in an email from a Florida federal prison where he’s serving a 20-year sentence. “Almost feel sorry for them.”
This prospect caused Pierce and Collins to give up on Tether after about a year in 2015. But Potter, the exchange executive, was less worried about its legality, because, as he said on a 2019 podcast, his exchange was already operating in a gray area.
His boss there was Devasini, the former plastic surgeon. (Devasini is CFO on paper, but people who have dealt with the company say he’s in charge.) Potter and Devasini agreed to buy their partners out of Tether for about what they’d put into it, less than $1 million. Pierce said he handed over his shares for free.
Then 50, Devasini was almost elderly by cryptobro standards. Property records show he split his time between Milan and Monaco, where his home overlooks the Mediterranean. Pictures show a tall, handsome man with long, curly hair and a scarf wrapped around his neck.
He modeled for a photo exhibition at an art gallery in Milan in 2014, appearing in front of a mirror, his face half covered with shaving cream, looking into his own eyes with an expression that suggested he didn’t recognize himself. The show was about turning points, and in an accompanying interview he said that his came in 1992, when he walked away from his career as a plastic surgeon. “All my work seemed like a scam, the exploitation of a whim,” he said.
He got into the low end of the electronics business, founding a series of tech companies that imported memory chips and set-top TV boxes. He started an online shopping site in Italy and licensed a copy protection technology for adult DVDs, according to a press release announcing a special bonus scene in the 2008 film Young Harlots: In Detention.
In 2012 he invested in Bitfinex, then a nascent exchange that had been built by a young Frenchman who’d copied the source code from a defunct one. He soon became the de facto head of the company. In early posts on the forum bitcointalk, Devasini called complaining customers whiners.
“Are [you] just blowing hot air out of your mouth or you forgot to switch your brain on?” he asked one. But compared with other exchanges, which tended to collapse after stealing or losing customers’ funds, Bitfinex was pretty reliable. After about a third of its money was stolen in a hack in 2016, the exchange repaid customers.
Bitfinex and Tether struggled from the start to gain access to the regulated financial system. They’d resorted to a series of shaky workarounds to keep their bank accounts open—“lots of sort of cat-and-mouse tricks,” as Potter put it during an online chat with traders. But as more people traded on Bitfinex, and other exchanges started accepting Tether’s currency, it got harder to fly under the radar. By March 2017 more than $50 million in Tether was in circulation.
The following month, the banks in Taiwan that Tether and Bitfinex had been using closed their accounts, which left Devasini’s executives so desperate that they considered chartering a jet and flying pallets of cash out of the country, according to a person with knowledge of the plan.
Eventually they found a startup in Puerto Rico, called Noble Bank International LLC, that was willing to work with them. Its founder, John Betts, whom I met in Manhattan, puffed on a vape pen as he explained that Tether was a legitimate business, or at least had been when he was its banker: “During the time Tether banked with Noble, we held in excess of 98% of their cash reserves and received and validated monthly statements from their other account.”
The Bitfinex Connection
From the start, cryptocurrencies have attracted skeptics who are just as fervent as the boosters I met in Miami, and in April 2017 they started coming for Tether. That month, an anonymous critic on Twitter who goes by Bitfinex’ed claimed Tethers weren’t backed by anything at all. He asked where the company was keeping its money and why it hadn’t produced audited financial statements.
“They are literally Dave & Busters/Chuck-e-Cheese Tokens,” Bitfinex’ed tweeted of the coins. These claims, and others like them, circulated around the cryptocurrency world and eventually in Washington, where the Commodity Futures Trading Commission and the FBI opened investigations.
Meanwhile, crypto trading boomed and the stablecoin grew more popular, with more than $1 billion worth in use by the end of 2017. That year, according to an investor presentation, Bitfinex made a $326 million profit. Devasini’s share would have been more than $100 million.
That made Tether and Bitfinex Noble’s biggest customers, and Betts felt Devasini was putting the bank at risk by allowing rumors about Tether’s reserves to spread.
He told me he urged Devasini to hire an accounting firm to produce a full audit to reassure the public, but Devasini said Tether didn’t need to go that far to respond to critics.
Devasini may have had reason to be cagey. Tether’s website had long displayed a pledge: “Every Tether is always backed 1-to-1, by traditional currency held in our reserves.” But, according to Betts, Devasini wanted to use those reserves to make investments. If the $1 billion in reserves Tether said it had at the time earned returns at, say, 1% a year, that would be $10 million in annual profit.
Betts saw this as a conflict of interest for Devasini, since any investment gains would go to Devasini and his partners, but Tether holders would potentially lose everything if the investments went bad. When Betts objected, Devasini accused him of stealing.
“Giancarlo wanted a higher rate of return,” Betts said. “I repeatedly implored him to be patient and do the work with auditors.”
Tether’s leader wanted to pull the company’s cash from Noble. Potter disagreed, so Devasini and his other partners bought him out in June 2018, for $300 million. That same month, Betts stepped down from his position at Noble for what he said were health and family reasons.
His partners would later accuse him in court of spending company funds on high-end hotels and trips on private jets; he said the travel was for work. In any event, Devasini got his way and withdrew his deposits, and the bank failed soon after.
Devasini faced another crisis that summer. His Bitfinex exchange had entrusted $850 million to a Panamanian money-transfer service, Crypto Capital Corp., one of the workarounds for its banking issues, according to documents later revealed in a lawsuit filed by New York’s attorney general.
But suddenly, Crypto Capital refused to send the money back to Bitfinex, leaving it unable to pay customers who wanted to withdraw their cash, the documents show. It was a dangerous situation—if the public found out, it could set off a bank run.
So Devasini made various excuses to customers, while begging Crypto Capital to send some cash. His chats were published as part of the lawsuit. “We are seeing massive withdrawals and we are not able to face them anymore unless we can transfer some money,” Devasini wrote to Crypto Capital’s founder in 2018. Another time, he said: “Please understand all this could be extremely dangerous for everybody, the entire crypto community.”
It turned out that prosecutors in Poland had seized Crypto Capital’s accounts. They’d later allege that Crypto Capital laundered money for customers, including Colombian drug cartels. U.S. prosecutors would charge Oz Yosef, one of its principals, with bank fraud. He hasn’t responded to the charges in court. (Hoegner, the lawyer for Tether and Bitfinex, said the firms were tricked by Crypto Capital and believed it was following regulations.)
Rather than disclose that Bitfinex was insolvent, Devasini filled the hole with loans from Tether’s reserves, which left the stablecoin partially unbacked.
In February 2019, Tether revised its 1-to-1 pledge, changing its website to read: “Every Tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”
That change signaled that Tether was lending from its reserves, but few noticed at the time. The loans only became known to the public in April 2019, when New York sued Tether, seeking to force it to turn over documents.
Surprisingly, given that Devasini had lost much of his customers’ money, the cryptocurrency world didn’t lose confidence in him. In May 2019 a coalition of major traders bailed out Bitfinex, investing an additional $1 billion in the business. The exchange used the money to pay back the loans to Tether Holdings. The next year, when crypto trading took off during the pandemic, the company grew exponentially, selling 17 billion Tethers. It has sold more than 48 billion so far this year.
In February, Tether agreed to pay $18.5 million to settle the New York suit without admitting wrongdoing. Supporters spun this as an endorsement of Tether—would the state attorney general settle if Tether were a massive fraud?—but in Washington, investigations continued.
Earlier this year, prosecutors from the U.S. Department of Justice sent letters to Devasini and other Tether executives informing them that they’re targets of a criminal bank fraud investigation. The government is examining whether they deceived banks years ago to open accounts. “Tether routinely has open dialogue with law enforcement agencies, including the DOJ, as part of our commitment to cooperation and transparency,” the company said in a statement.
The Paper Trail
Tether still hasn’t disclosed where it’s keeping its money. The only financial institution I could find that was willing to say it’s currently working with the company was Deltec Bank & Trust in the Bahamas. I met the bank’s chairman, Jean Chalopin, in Deltec’s office, on the top floor of a six-story building ringed with palm trees in a nice part of Nassau. In a past life, Chalopin co-created the cartoon Inspector Gadget, and a painting of the 1980s trenchcoat-wearing cyborg policeman hung on his office door.
Magazine covers featuring Chalopin’s wife, a former model, and his daughter, a singer, were displayed on a shelf. Now 71, Chalopin has a mop of red hair and wears rimless round glasses. As we sat down, he pulled a book about financial fraud, Misplaced Trust, off the shelf. “People do funny things for money,” he said, cryptically.
He made himself a cup of tea and told me he’d come to the Bahamas in 1987 after selling his first animation studio, DIC Entertainment. The sale had made him rich—he bought a castle outside Paris and a pink colonial in the Bahamas, which later served as the villain’s home in the 2006 James Bond film Casino Royale. He banked at Deltec, then befriended its aging founder.
The bank, which once conducted investment banking throughout Latin America, had dwindled to just a few billion dollars of assets. Chalopin invested, eventually becoming the biggest shareholder. Bahamian banks are often depicted in movies as a haven for money launderers, but Chalopin said Deltec’s edge was customer service, not secrecy.
He decided to seek out clients in new lines of business, such as biotech, gene editing, and artificial intelligence, that were too small to get personal attention from bigger banks. Another area was cryptocurrencies. “Crypto was like, ‘Don’t touch, it’s very dangerous,’ ” he said. “Well, if you dig a little bit deeper, you realize it’s not, actually.”
He said he was introduced to Devasini in 2017 by a customer who’d gotten rich from Bitcoin. Devasini cooked Chalopin a risotto lunch and impressed him with his forthrightness. When they discovered that Devasini had grown up in the same Italian village as Chalopin’s mother, they began calling each other cugino (cousin).
Devasini bought a house near Chalopin’s in the Bahamas, and together they purchased and divided the waterfront lot between the two properties. Chalopin told me Tether had been unfairly maligned. “There’s no agenda or plot,” he said. “They are not Enron or Madoff. When there’s a problem, they fix it honorably.”
Chalopin said he investigated Tether for months before taking the company on as a client in November 2018. He signed a letter vouching for its assets. He was surprised that critics still insisted Tether’s currency was not backed by cash. “Frankly, the biggest thing was at the time ‘the money doesn’t exist,’ ” he said. “We knew the money exists! It was sitting here.”
But when I asked Chalopin if he knew for sure that Tether’s assets were fully secure now, he laughed. It was a difficult question, he said. He only held cash and extremely low-risk bonds for Tether. But recently the company had started using other banks to handle its money. Only a quarter of it—$15 billion or so—is still with Deltec. “I cannot speak about what I cannot know,” he said. “I can only control what’s with us.”
After I returned to the U.S., I obtained a document showing a detailed account of Tether Holdings’ reserves. It said they include billions of dollars of short-term loans to large Chinese companies—something money-market funds avoid.
And that was before one of the country’s largest property developers, China Evergrande Group, started to collapse. I also learned that Tether had made loans worth billions of dollars to other crypto companies, with Bitcoin as collateral.
One of them is Celsius Network Ltd., a giant quasi-bank for cryptocurrency investors, its founder Alex Mashinsky told me. He said he pays an interest rate of 5% to 6% on loans of about 1 billion Tethers. Tether has denied holding any Evergrande debt, but Hoegner, Tether’s lawyer, declined to say whether Tether had other Chinese commercial paper.
He said the vast majority of its commercial paper has high grades from credit ratings firms, and that its secured loans are low-risk, because borrowers have to put up Bitcoin that’s worth more than what they borrow. “All Tether tokens are fully backed, as we have consistently demonstrated,” the company said in a statement posted on its website after the story was published.
Tether’s Chinese investments and crypto-backed loans are potentially significant. If Devasini is taking enough risk to earn even a 1% return on Tether’s entire reserves, that would give him and his partners a $690 million annual profit. But if those loans fail, even a small percentage of them, one Tether would become worth less than $1. Any investors holding Tethers would then have an incentive to redeem them; if others did it first, the money could dry up. The bank run would be on.
The officials who gathered in July at the Treasury Department are discussing regulating Tether like a bank, which would force Devasini to finally show where the money is, or even undermining it by issuing an official U.S. stablecoin. The strange thing is that, at least for now, most participants in the crypto market, including some very large and sophisticated operators, don’t seem to care about any of the risks.
Just last month, traders bought $3 billion in new Tethers, presumably sending billions of perfectly good U.S. dollars to the Inspector Gadget co-creator’s Bahamian bank in exchange for digital tokens conjured by the Mighty Ducks guy and run by executives who are targets of a U.S. criminal investigation.
The situation has parallels to the wildcat banking days. The customers patronizing those not-banks weren’t rubes; sketchy notes were the only money they could find. But that ended when, in the early days of the Civil War, President Abraham Lincoln started printing federal paper money and instituted a prohibitively high tax on other currency.
The wildcat notes, which once fueled frontier cities’ economies, fell into disuse. Some gave them to children to play with. In rural areas, they were used for wallpaper.
Tether Has Loaned $1B To Celsius Network: Report
The stablecoin issuer has loaned billions of dollars to crypto companies, according to a Bloomberg investigation.
Tether, issuer of the eponymous stablecoin, has loaned $1 billion to Celsius Network, a crypto lender that has drawn the ire of financial regulators in several U.S. states.
* Celsius Network CEO Alex Mashinsky said the company pays an interest rate of 5%-6% to Tether, Bloomberg reported Thursday as part of an investigation into the stablecoin provider’s reserves.
* The investigation found that Tether had loaned billions of dollars to crypto companies using bitcoin as collateral.
* Tether was the lead investor in Celsius Network’s $30 million funding round in June 2020.
* Last month, Celsius Network received a cease-and-desist order from Kentucky’s securities regulator over interest earned on certain crypto accounts. The regulator says the accounts violate the state’s securities laws and fail to disclose to customers what happens to their deposits and whether they are protected under state regulation.
* Bloomberg’s investigation also found that Tether’s reserves include billions of dollars of short-term loans to large Chinese firms, something that has been speculated on widely.
* In response, Tether described Bloomberg’s investigation as “a one-act play the industry has seen many times before.”
* “This article does nothing more than attempt to perpetuate a false and aging story arc about Tether based on innuendo and misinformation, shared by disgruntled individuals with no involvement with or direct knowledge of the business’s operations,” Tether said in a statement.
“It’s another tired attempt to undermine a market leader whose track record of innovation, liquidity and success speaks for itself.”
FSB Says Adoption Of Global Stablecoin Regulations Shows ‘Gaps’ And ‘Fragmentation’
The international body said last year’s recommendations on global stablecoin regulation were still at an “early stage.”
The Financial Stability Board (FSB) published a report Thursday outlining progress made, or lack thereof, by 48 jurisdictions on the “Regulation, Supervision, and Oversight of ‘Global Stablecoin’ Arrangements” since it was introduced by the global watchdog last year.
The FSB, an international body charged by the G20 with monitoring and making recommendations regarding the stability of the global financial system, said the implementation of its 10 “recommendations” for regulating stablecoin data safeguards from October 2020 was still at an “early stage.”
“Jurisdictions have taken, or are considering, different approaches towards implementing the recommendations,” the FSB said in a statement Thursday. “To address the risk of regulatory arbitrage and harmful market fragmentation and the greater financial stability risks that could arise were stablecoins to enter the mainstream of the financial system, effective international regulatory cooperation and coordination are critical.”
Recommendations range from vesting relevant authorities with regulatory oversight on global stablecoins to a “comprehensive governance framework” as it relates to cryptos pegged 1:1 to a sovereign fiat currency.
The report also highlighted standard-setting bodies, such as the Basel Committee on Banking Supervision and the International Organization of Securities Commissions, which were assessing how existing international standards apply to global stablecoin arrangements, identified a number of “issues” that may not be “fully covered” by ongoing work from countries attempting to regulate stablecoins during a time of increased adoption.
“Ensuring appropriate regulation, supervision and oversight across sectors and jurisdictions will therefore be necessary to prevent any potential gaps and avoid regulatory arbitrage,” FSB said in its report. “Differing regulatory classifications and approaches to stablecoins at jurisdictional level could give rise to the risk of regulatory arbitrage and harmful market fragmentation.”
The FSB also said authorities had identified several issues relating to the implementation of its recommendations that warranted further consideration. Those include conditions for qualifying a stablecoin as a “global stablecoin” as well as investor protection and other requirements for issuers, custodians, and wallet providers relating to global stabelcoins.
Redemption rights, cross-border cooperation and coordination among jurisdictions, and mutual recognition have also been outlined by regulators, the international body said.
A review of its recommendations, in consultation with other global standard-setting bodies, is expected to be completed in July 2023.
Stablecoin Rules Must Come From Congress, Senator Tells Yellen
Congress, rather than U.S. financial regulators, should decide the fate of cryptocurrencies such as Tether, a key Republican senator told Treasury Secretary Janet Yellen.
Pennsylvania Senator Pat Toomey, the ranking Republican on the Senate Banking Committee, said it “would be very unfortunate” if rules for stablecoins, a crypto subset often pegged to fiat currencies such as the dollar, were set by the Financial Stability Oversight Council.
“Rather than have regulators stretch existing laws or take advantage of ambiguities to cover stablecoins, Congress should enact new clarifying legislation,” Toomey said in a letter Thursday to Yellen. Letting the FSOC declare stablecoins a potential hazard would “cause tremendous damage to an emerging technology” and run counter to the council’s authority, he contended, “since stablecoins do not pose a threat to the stability of the U.S. financial system.”
Though the President’s Working Group on Financial Markets is leaning toward favoring congressional intervention, people familiar with the talks have said, they’ve also discussed taking the matter to the FSOC. Stablecoins have become necessary to the plumbing of the crypto market because they’re often used in transactions to buy and sell tokens such as Bitcoin that see wild price swings.
In the U.S., the rapidly surging stablecoins — with more than $120 billion in circulation — are facing future regulations, but it remains unclear whether a push to treat them like banking deposits will win out over an ongoing campaign by the Securities and Exchange Commission to approach most cryptocurrencies as if they’re securities.
The industry has had little chance to make its own case to the regulators who are close to deciding on oversight recommendations, Toomey said in his letter. Global standard setters already suggested this week that top stablecoin issuers may one day be subject to the same payment, clearing and settlement rules as financial-market infrastructure companies.
Big Tech-Issued Stablecoins Could ‘Amplify Shocks’ To Financial System, Says ECB Exec
CBDCs could therefore represent “an anchor of stability,” according to a member of the ECB’s executive board.
Fabio Panetta of the executive board of the European Central Bank (ECB) has described the risk of Big Tech-issued stablecoins to the global financial system.
* Given the massive footprint of Big Tech firms, the assets backing such stablecoins would increase to the point that traditional banks’ funding becomes more scarce and therefore more expensive, Panetta said in a speech Friday.
* Banks may therefore resort to more expensive short-term sources of funding, while the increase of deposit holdings under the control of Big Tech would make banks’ deposit base more concentrated.
* “Without proper regulation, these developments could amplify international shocks and undermine financial resilience globally,” Panetta said. “We could see risk-biased technological change, whereby the digitalization of finance favors business models that are riskier for the global economy.”
* Central bank digital currencies (CBDCs) could thus represent “an anchor of stability” for digital finance, he added, highlighting the work being carried about by central banks into CBDCs that could be used by consumers and companies alongside cash.
SEC Expected To Head US Stablecoin Regulation And Enforcement
The report is also expected to clarify the regulatory jurisdiction of the Treasury Department and CFTC with regards to stable tokens.
United States regulatory bodies have reportedly agreed that the Securities and Exchange Commission will lead the U.S.’ efforts to regulate the stablecoin sector.
According to a Tuesday Bloomberg report citing anonymous sources “familiar with the matter,” the SEC has reached an agreement with other U.S. agencies to take the reins on proposing legislation and overseeing the stablecoin industry.
The sources add that the SEC’s newfound “significant authority” over the sector will be formally announced in the Treasury Department’s forthcoming stablecoin report that is scheduled to be published this week.
The report will also clarify the regulatory jurisdiction of the Commodity Futures Trading Commission and the Treasury Department with regard to stable tokens.
The Treasury’s report was announced during a meeting of The President’s Working Group for Financial Markets (PWG) in July, with the PWG stating its intention to explore creating a new type of banking charter for stablecoin issuers among other regulatory measures at the time.
The PWG comprises representatives from top U.S. regulatory agencies, including Treasury Secretary Janet Yellen, SEC Chair Gary Gensler, Federal Reserve Chair Jerome Powell and acting CFTC head Rostin Behnam.
Bloomberg’s sources claim that Gensler has been pushing for further expansion in the SEC’s regulatory domain over stablecoins, including allowing the commission to pursue enforcement actions against issuers. Gensler also reportedly sought to clarify what powers the SEC has to oversee stablecoin-based investment transactions.
The report is also expected to call on Congress to enact similar regulations to those overseeing bank deposits for the stablecoin sector.
Last month, Gensler called on Congress to assist the SEC and CFTC in regulating stablecoins, with Gensler likening the dollar-pegged assets to “poker chips at the casino.”
The stablecoin market has seen significant growth in 2021, and the market capitalization of leading stablecoin issuer Tether (USDT) has exploded this year, with its market cap growing by 229% since the start of the year to sit at $69.5 billion.
Second-ranked USD Coin (USDC) has also seen meteoric growth, with its capitalization growing 706% year-to-date to tag $32.52 billion as of this writing.
Stablecoins Won’t Be So Stable, And That’s Fine
As the cryptocurrency market matures, issuers will compete on the basis of quality, innovation and price.
Stablecoins have gone from an obscure corner of crypto to near the center of it. Major institutions, such as Mastercard, are now trying to create alternate payment networks based on stablecoin and crypto.
I am rooting for such efforts to succeed, but in the meantime I have news for you: Stablecoins aren’t always stable. Unlike a lot of critics, however, I view fluctuating prices for stablecoins as not only acceptable but also desirable.
The potential for stablecoins is obvious. Imagine if software, using crypto, could circumvent some of today’s banking and financial institutions, and all of their attendant costly bureaucracies.
You could send remittances at lower cost, make payments more quickly, and receive a higher return on your deposits, at least if the transaction technology can be improved. Underlying these systems would be blockchains, with the coins pegged to dollars on a one-to-one basis by reserve backing. In fact, such assets already exist, and they are growing rapidly.
Even if all goes well, why should those different brands of stablecoins remain priced at $1 apiece? In most well-functioning markets, suppliers compete on innovation, quality and price. That diversity is the natural outcome of trying to figure out which coin systems — fully stable or not — are best.
If market prices do not communicate this information, how can you discover it? In my vision, higher prices will signify a coin’s quality and attract more business; the coins with strictly fixed prices will fill a niche; and the coins with lower prices will lose business, or otherwise serve as discount issues for those of lower means.
Stablecoin critics focus on fraud and the possibility of dramatic plunges in prices, and indeed many coins already have failed.
Even conceding that regulation and the market will limit the more dramatic episodes, some coin issuers will be more stable and innovative than others. With market success will come market exit, and some issuers’ prices will fall on the way out the door.
On a more positive note, if you think stablecoins serve so many new and marvelous functions, you would expect many of those assets to sell for more than a dollar.
Here I will date myself: I used to buy traveler’s checks for my trips abroad. In many cases you had to pay a premium of a few percentage points; a hundred dollars in traveler’s checks might cost you $102 or $103. That is because the checks offer theft protection services that cash does not.
More concretely, you might use other coins, less than fully backed, to underpin your lending through decentralized finance.
Returns could be higher, but of course there is a risk that the backer could become insolvent. Prices for those coins would vary, though one goal would be to make them more stable than Bitcoin.
For another look at why prices won’t stay fixed, consider the incentives of a stablecoin issuer. Let’s say your issue is currently one-to-one with the U.S. dollar and you are holding 100% reserves of very safe assets. Might you then be tempted to go down to 98% reserves? 95%? If the price of your coin stays at $1, fine, you come out ahead.
If the price declines in proportion to the new and higher risk, you as an issuer still have broken even. So it seems that coin issuers will have an incentive to test the one-to-one exchange rates by diluting their backing.
You will have some issuers pledge never to deviate from 100% reserves, as Gemini currently does. But they are likely to be only one brand of many. You might also be dealing with coins backed by euros, yen or other currencies.
You might think that regularly fluctuating prices on these various coins would be terribly inconvenient. But information technology allows you to call up exchange rates with the single press of a key, or by asking your smart phone (soon enough).
Besides, these coins are to be only one part of the financial system, not something you use every day to buy a cup of coffee.
If my scenarios turn out to be accurate, will they be called “stablecoins” for long? “Unstablecoins” won’t work. How about “stablercoins”? I’d like some of those — depending on the price, of course.
SEC Chairman Says Crypto Market Won’t Mature Without Oversight
Gary Gensler’s comments Tuesday came a day after a Treasury Department-led panel issued a report on stablecoins, asking Congress to set up a regulatory framework.
Securities and Exchange Commission Chairman Gary Gensler said the regulator will be “very active” in bringing the digital currency market under its investor protection framework, as the Biden administration increases scrutiny of cryptocurrencies.
Mr. Gensler’s comments Tuesday at a conference hosted by the Securities Industry and Financial Markets Association came a day after a Treasury Department-led panel issued a report on stablecoins, which are cryptocurrencies pegged to assets such as the U.S. dollar. The report asks Congress to impose a new regulatory framework around stablecoins and to limit the issuance of such digital assets to banks.
Stablecoins are issued by companies such as Tether Ltd. and Circle Internet Financial Inc. and are designed to combine the ability to trade quickly online like bitcoin with the stability of national currencies such as the dollar. But the panel said stablecoins could fuel instability if users come to doubt the value of the underlying assets that keep their prices stable, among other risks.
Mr. Gensler at the conference compared cryptocurrency technology, which has been around for about 13 years, to a teenager, adding that he believes the technology won’t reach “adulthood” if it isn’t brought within broader regulatory oversight for issues such as anti-money-laundering and tax compliance.
“There’s a lot of hype. There’s a lot of investors on one hand, reaching for yield, who are hoping to have a little bit better future, but these platforms right now, generally, have not come into either the [Commodity Futures Trading Commission] or the SEC to be within an investor protection framework,” Mr. Gensler said.
Many tokens in the crypto markets have died and many existing ones are raising money from the public, posing risks such as fraud and manipulation, Mr. Gensler added.
Stablecoins hold about 5% of crypto asset market value, but represent 75% or 80% of the crypto transactions volume, Mr. Gensler said. He suggested that members of the securities trade group work with their lawyers and accountants to ensure consumer protections are in place, rather than simply seeking approval from bank and market regulators.
The US Treasury’s Stablecoin Report Would Treat Issuers Like Banks, But Doesn’t Address How
The U.S. government’s stablecoin report is finally out. Bank regulators are having a big day.
The President’s Working Group on Financial Markets wants prudential bank regulators to oversee stablecoin issuers.
Insured Depository Institutions
The Biden Administration published its long-anticipated stablecoin report yesterday, confirming that the President’s Working Group on Financial Markets is recommending the U.S. Congress enact a law to treat stablecoin issuers like they’re banks.
Why It Matters
Whether and how stablecoins, which make up some $138 billion of the crypto market, might be federally regulated could have a major impact on the broader crypto market in the U.S. Further, the development of this regulatory framework could shape how startups launch stablecoins.
Breaking It Down
Oh, hey, this stablecoin report is finally out. It’s 26 pages long and you can read it at the link above. If you’d rather read a summary, I wrote it up for CoinDesk here. If you want the really brief version, the report essentially says:
* Stablecoins Pose A Number Of Potential Risks To Consumers, The Crypto Market And Financial Stability In The “Real Economy.”
* Stablecoins Also Have The Potential To Become A Key Tool For Payments.
* Congress Should Pass A Law Requiring Stablecoin Issuers To Be Insured Depository Institutions.
* If Congress doesn’t take action, federal regulators might seek to leverage existing authorities to oversee stablecoin issuers instead.
Rather than give the Securities and Exchange Commission or Commodity Futures Trading Commission specific oversight over stablecoins, the regulators working on the report recommended that Congress take action. If Congress doesn’t take action, the report suggested that federal regulators might just do their own thing.
Still, there’s a few questions about the actual implementation of these recommendations. Chief among them is whether Congress will actually act.
But the group’s warning that the Financial Stability Oversight Council (FSOC) or federal regulators might have to take action in the wake of congressional inaction may be a nudge to Congress that lawmakers should do something sooner rather than later.
Treasury Under Secretary for Domestic Finance Nellie Liang told CoinDesk that “there have been discussions” with members of Congress about how to regulate digital assets.
“Both sides of Congress have been soliciting views about what’s the appropriate framework for regulating digital assets and stablecoins. And the administration is leading some work on digital assets and other crypto assets,” she said. “They’ve been open to discussions.”
Assuming Congress does pass such a bill, we’d have to see how exactly federal agencies would implement the new requirements. The Federal Deposit Insurance Corporation (FDIC) is evaluating how to provide deposit insurance for stablecoins but it does not appear that we’ll see anything in the immediate term.
If the legislation doesn’t force the FDIC to finalize its stablecoin insurance plan, we might see a scenario where stablecoin issuers are bound to secure insurance cover that doesn’t exist.
While the report restricted itself to stablecoins and did not address decentralized finance (DeFi was mentioned, but regulations for DeFi weren’t discussed), other types of cryptocurrencies or businesses that aren’t stablecoin issuers or custodial wallet providers, any regulations would naturally still affect the broader crypto sector.
Regulating stablecoin issuers would restrict which stablecoins users can transact with, which could have a major impact on the broader trading atmosphere.
My inbox pretty much blew up with unsolicited responses to the report. Here’s what the regulators are officially saying.
In a statement, Treasury Secretary Janet Yellen said stablecoins could support payment options.
“Treasury and the agencies involved in this report look forward to working with Members of Congress from both parties on this issue,” she said. “While Congress considers action, regulators will continue to operate within their mandates to address the risks of these assets.”
Michael Hsu, the Acting Comptroller of the Currency, said stablecoins need supervision “to grow and evolve safely.”
Hsu pointed to the recent growth of the stablecoin market in his statement.
“The interagency paper identifies the risk of stablecoin runs as the top concern. For the OCC, this hits close to home. The agency was created 158 years ago in response to the instability of the financial system, which was prone to frequent bank runs,” Hsu said.
“There are some interesting similarities between the bank notes of that time and the stablecoins of today. Just as the creation of the OCC helped address the risk of bank runs then, we stand ready to work with our interagency partners to ensure the safe and sound integration of stablecoins into the financial system and mitigate the risk of stablecoin runs today and into the future.”
Sen. Sherrod Brown (D-Ohio), who chairs the Senate Banking Committee, said the report pointed out the risks inherent in stablecoins.
“We must work to ensure that any new financial technologies are subject to all of the laws and regulations that protect investors, consumers and markets, and that they compete on a level playing field with traditional financial institutions. I look forward to working with Secretary Yellen and financial regulators to foster responsible innovation in the financial system,” he said in a statement.
His Republican counterpart, Ranking Member Pat Toomey (R-Pa.), emphasized that Congress should be responsible for defining regulatory authority over stablecoins.
“While Congress works on thoughtful legislation, I hope the administration will resist the urge to stretch existing laws in an effort to expand its regulatory authority. Digital assets have the potential to be as revolutionary as the internet. It’s important lawmakers and regulators alike work to continue America’s longstanding tradition of fostering technological innovation, not stifling it,” he said.
Sen. Cynthia Lummis (R-Wyo.), also on the Banking Committee, expressed concerns about the depository institution requirement proposed in the report. Only allowing these types of institutions to issue stablecoins might benefit established firms like banks, she said.
“There are other, safer ways of achieving the same objectives. For example, we could require 100% of stablecoin reserves to be maintained off-balance sheet, or require stablecoin reserves to be maintained at a Federal Reserve Bank, which is, by definition, risk-free. We already have a case study in this – Wyoming’s special purpose depository institutions are already doing this,” she said.
Consumer Finance Protection Bureau Director Rohit Chopra weighed in, noting that while his agency wasn’t part of the group that issued the report, it will continue evaluating stablecoins as part of its push to examine tech company forays into finance.
Stablecoins used in payments may fall into the CFPB’s remit as well.
“Given the rapid growth in stablecoins, we will closely engage with other members of the Financial Stability Oversight Council to determine whether to initiate designation proceedings and ascertain whether certain nonbank stablecoin-related activities or entities are systemically important,” he said.
John Ryan, the president and CEO of the Conference of State Bank Supervisors, stressed the role of state regulators in overseeing crypto entities in a statement. The group was not involved in the development of the report.
“As we work with our federal counterparts on solutions, state regulators remain committed to ensuring sound financial regulation that protects consumers and supports an innovative and diverse financial services ecosystem,” the statement said.
Acting Commodity Futures Trading Commission (CFTC) Chair Rostin Behnam said his agency is ready to become the chief regulator for cryptocurrencies, should Congress choose to expand its authority, during his confirmation hearing before the Senate Agriculture Committee.
SEC Won’t Lead Regulation, Congress Urged To Act
The SEC was denied a monopoly over the stablecoin sector, yet the risk of being designated “systemically important” persists.
On Nov. 1, the United States President’s Working Group on Financial Markets (PWG) released its long-anticipated report and policy recommendations on stablecoins. The document’s main focus is on prudential risks that “payment stablecoins” — or those meant to maintain a stable value against a reference fiat currency — could pose to users and financial stability.
The PWG’s key message is that while stablecoin use is currently largely limited to facilitating digital asset transactions, under certain conditions the asset class could achieve much wider retail adoption, necessitating a comprehensive federal prudential framework to be enacted by Congress soon.
Here is a rundown of the consequential points that the report raises — and some that it does not.
All The President’s Men And Women
The PWG is composed of the heads of the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) and Federal Reserve System, with the secretary of the Treasury Department leading the group. The Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) also contributed to the interagency report.
Given this formidable concentration of federal financial regulators, the results of their joint effort have been eagerly anticipated as a reliable representation of where the current administration stands on stablecoin regulation.
Anonymous reports that emerged shortly before the document’s publication alleged that the group had agreed on a plan to hand the SEC significant authority over stable tokens. This further added to the suspense around the interagency report, as such a regulatory designation would necessarily require an attendant recategorization of the underlying asset class.
The prospect of the SEC taking the lead in stablecoin regulation left some actors in the crypto space unsettled. Speaking to Cointelegraph ahead of the report’s publication, C. Neil Gray, partner at law firm Duane Morris, said:
“Industry participants likely see the SEC’s push to take point in this area just as another example of SEC overreach in the cryptocurrency space, and fear that the SEC will regulate stablecoins by enforcement rather than by rule, as some perceive it to be doing in other areas.”
For compliant crypto players, however, any kind of certainty is better than the lack thereof. Sujit Raman, partner in the privacy and cybersecurity practice of law firm Sidley and a former associate deputy attorney general at the U.S. Department of Justice, observed that clarity on the limits of each regulator’s responsibilities was still welcome. Raman noted:
“In the absence of new legislation, stablecoins remain subject to the concurrent and potentially overlapping jurisdiction of a number of federal and state regulatory regimes. That is why any agreement among the relevant federal agencies about who will take the lead in regulating stablecoins is important.”
Claims To Authority
In the buildup to the report’s publication, there had been signs that the SEC was not the only U.S. regulator seeking to expand its presence on the digital asset scene.
Marc Powers — a law professor, former SEC attorney and Cointelegraph Magazine columnist — believes that while the SEC has been more active in enforcement and guidance on digital assets in the past four years, the CFTC has asserted jurisdiction over Bitcoin (BTC), which it has deemed a commodity.
Furthermore, the acting chairman of the CFTC, Rostin Behnam, claimed last week that as much as 60% of digital assets can be classified as commodities, which amounts to proposing that the agency become the lead U.S. cryptocurrency regulator.
Ultimately, contrary to expectations, the interagency report did not give precedence to either of the regulatory bodies. The authors concluded that “Stablecoins, or certain parts of stablecoin arrangements, may be securities, commodities, and/or derivatives,” invoking the jurisdiction of the SEC and/or CFTC accordingly.
This language remains very similar to what the PWG used at the initial stages of exploring the stablecoin realm. For one, a December 2020 statement from the working group said that “Depending on its design and other factors, a stablecoin may constitute a security, commodity, or derivative subject to the U.S. federal securities, commodity, and/or derivatives laws.”
Furthermore, nothing in the language of the interagency report pointed to the SEC “taking the lead” in supervising the stablecoin sector.
Waiting For Congress
While the central message of the report is the recommendation for Congress to step in and pass relevant legislation as soon as possible, the framers of the document also expand on the way regulators should address stablecoin-induced risks before the legislature takes action.
In addition to the SEC and CFTC, which are to continue applying their existing authorities to safeguard against the outlined prudential risks, the report calls on other relevant authorities — including the Department of Justice, Consumer Financial Protection Bureau (CFPB) and the Financial Crimes Enforcement Network (FinCEN) — to consider how existing laws could be applied to stablecoin activity in domains such as consumer protection, payments and money transmission services.
Notably, the report also leaves it up to the Financial Stability Oversight Council (FSOC), a group of U.S. regulators that was created following the 2008 financial crisis, to designate some stablecoin activities — such as payment, clearing and settlement — as “systemically important,” which would trigger additional oversight. This is a scenario that crypto-friendly Senator Pat Toomey warned against in a recent letter to Treasury Secretary Janet Yellen.
The designation of stablecoins as systemically important doesn’t seem unfeasible, especially in the light of some regulators’ statements in response to the report. For one, CFPB Director Rohit Chopra has pledged to engage with other members of the Financial Stability Oversight Council to determine whether to initiate designation proceedings for certain non-bank stablecoin-related activities or entities to be systemically important.
In For A Long Wait?
The part of the intergroup report that concerns the distribution of regulatory responsibilities prior to (or absent) congressional action is especially relevant given that the legislature is not at all likely to act fast on the stablecoin matter. Gray commented to Cointelegraph:
“Any significant action from Congress in this area is not expected in the short term, leaving the SEC and other agencies to occupy the space in the interim.”
Powers further validated the point, adding that “The odds are great Congress fails to act with a comprehensive framework covering all kinds of digital assets.”
In the meantime, it remains to be seen how much actual regulatory activity the report will spark, given its non-binding nature.
Jackson Mueller, director of policy and government relations at digital asset firm Securrency, spoke to Cointelegraph shortly before the PWG report’s publication, saying that he expected it to resemble a series of Treasury reports from several years ago responding to former President Donald Trump’s executive order on core principles for regulating the U.S. financial system.
Many of its recommendations, Mueller maintained, were “quite vague or limited to simply encouraging regulators or Congress to continue their work on a particular matter.” In the end, it was unclear “just how many of the recommendations proposed moved beyond the pages of those reports.”
While some of the PWG report’s recommendations are also rather generic, at least one major implication — the potential acceleration of the FSOC designating some aspects of stablecoin activity as systemically important — could affect the sector in very tangible ways.
Regulators Might Yet Head Off A Stablecoin Disaster
A highly anticipated federal report offers smart guidance. Lawmakers and agencies should act on it promptly.
The U.S. government has unveiled a much-awaited plan to address one of the most pressing issues in the realm of cryptocurrencies: how to regulate stablecoins, digital representations of fiat currency that present grave dangers but also hold great promise.
The proposals are good, and should be implemented as quickly as possible.
Stablecoins remedy the volatility of cryptocurrencies by tying their value to government-issued money. They’re used primarily in the unregulated realm of decentralized finance — to park funds between speculative bets, to earn interest in lending pools, or to avoid detection by law enforcement.
But as a unique form of digital bearer instrument, they also have the potential to make global payments much easier, faster and cheaper, saving consumers billions of dollars a year and helping to connect the world’s unbanked. The technology could also help governments to issue their own digital currencies, if and when they choose to.
Problem is, stablecoins aren’t necessarily stable. It’s often unclear what backs the promise to redeem each token for a dollar. A Bloomberg Businessweek investigation into Tether — among the largest issuers with about $70 billion outstanding — found a questionably managed mix of investments including short-term Chinese corporate debt and loans collateralized by Bitcoin.
If doubts about issuers’ finances arise, they could trigger devastating runs, as everyone rushed to redeem before the money ran out. The bigger stablecoins get, the greater the threat of broader contagion.
This week, a working group headed by Treasury Secretary Janet Yellen published a report that acknowledges the risks and calls on Congress to empower officials to address them. This would involve regulating stablecoin issuers as the bank-like entities they are, providing a potentially essential payment service.
It would entail limits on issuers’ investments, and capital and other requirements to protect against hacks, technical glitches, conflicts of interest, consumer mistreatment and crime. And it would insist on interoperability, so that customers’ dollars wouldn’t be tied to a specific issuer.
The report also recognizes that somebody needs to be in charge while legislators get around to legislating. To that end, it emphasizes the powers regulators already have.
The Financial Stability Oversight Council, for example, can enable much of the necessary oversight by designating stablecoins as systemically important, and by coordinating the efforts of often-uncooperative regulators, including the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Consumer Financial Protection Bureau.
The Department of Justice, for its part, can police the unauthorized issuance of deposit-like instruments, which stablecoins arguably are.
Getting a grip on financial innovation is never easy. The working group’s report is an excellent start. It’s pragmatic about what can be done in the short term, without losing sight of the overarching goal: Anything that purports to represent a dollar must be worth a dollar in any state of the world. The sooner Congress and regulators act on this guidance, the better.
The Stablecoin Scourge: Regulatory Hesitancy May Hinder Adoption
U.S. Treasury’s recommendations, if adopted, could hinder stablecoin innovation in the near future, but in the long run, they might be a boon.
The stablecoin market has been growing exponentially — from only $21.5 billion in mid-October of last year to $130 billion at the start of November; a six-fold increase — so it was only reasonable to expect that the United States government would have to come to grips with these digital assets that are designed to maintain a stable value relative to a fiat currency like the U.S. dollar (USD) or a commodity like gold.
The Treasury Department revealed its latest thinking on the subject this week with the much-anticipated President’s Working Group on Financial Markets’ (PWG’s) report on Stablecoins. That report recommended that Congress act promptly to enact legislation to ensure that payment stablecoin issuers be regulated more like U.S. banks. That is, stablecoins might be issued only through “entities that are insured depository institutions.”
Surprisingly, the report didn’t provoke much industry pushback. Perhaps the crypto community was just relieved that the government wasn’t looking to ban stablecoins outright? The report did raise some questions, though.
If enacted, what impact will such legislation have on the global stablecoin market? Could it stifle innovation as some in the crypto community have warned? Or, rather, could it bring regulatory certainty to a sector whose lack of supervision may have turned off institutional investors, corporations and even retail investors from exploring crypto alternatives?
An Edge For Legacy Banks?
With regard to the first question, Salman Banaei, head of policy at cryptocurrency intelligence firm Chainalysis, told Cointelegraph that assuming the recommended legislation were passed and signed into law — a big “if,” given the current legislative stalemate in Washington — its provisions “would put current bank-backed stablecoins like JPM Coin in a prime competitive position versus non-bank stablecoin issuers.”
Non-bank stablecoin issuers would need, at minimum, to renegotiate arrangements with their current banking service providers, with the latter obtaining more leverage in these partnership arrangements, continued Banaei.
The PWG Report contemplates that many of these relationships would be subject to the Bank Service Company Act.
“Alternatively, these non-bank stablecoin issuers could apply to become depository institutions or acquire depository institutions, although these options can be expensive and slow.”
But, would it discourage financial start-ups and hinder innovation — as some in the crypto community fear? In the short term, it would likely hinder innovation, answered Banaei, as it would limit the pool of potential stablecoin issuers to depository institutions.
“In the longer term, however, the legislation would encourage innovation” because clear regulatory “rules of the road” would eliminate the regulatory risk that has been the primary hindrance to broad adoption of stablecoins.
This, in turn, could “encourage the adoption of stablecoins in a variety of contexts across the financial markets,” continued Banaei. The fixed costs associated with a depository institution issuing a stablecoin are relatively low, and this could “encourage depository institutions to compete to offer stablecoins and to adopt or facilitate their use” in a variety of circumstances.
A Gateway To The Crypto World?
In an August blog, Chainalysis’ chief economist Philipp Gradwell wrote that “Stablecoins are vital for many institutional investors because they’re the fundamental gateway into the world of digital currency.” If that is the case, wouldn’t institutional investors and corporations prefer more market and regulatory certainty vis-a-vis stablecoins? That is, wouldn’t they arguably be supportive of the PWG’s recommendations?
In Europe, regulatory uncertainty is “without doubt discouraging them [i.e., institutional investors] from holding stablecoins, investing in cryptocurrencies through stablecoins and using stablecoins for yield in DeFi or issuing stablecoins themselves,” Patrick Hansen, head of strategy and growth at Unstoppable Finance, told Cointelegraph, adding further:
“But, contrary to many retail investors, most institutions don’t buy cryptocurrencies through stablecoins anyway — but either with fiat money or through some form of crypto trust, certificate or derivative — and, in the future, probably more and more through ETFs.”
Sidharth Sogani, CEO of crypto research firm CREBACO Global, admittedly no fan of stablecoins, tended to agree. “Nobody wants to own a stablecoin until and unless required to book profit. Also, with more ways to invest now, including ETFs, etc., I think people are reducing exposure to stablecoins,” he told Cointelegraph.
“The chief benefit of the legislation recommended by the PWG Report is it would provide a path to enter the ‘gateway’ into new financial services and technology,” commented Banaei, adding: “The PWG Report presents one model of how to open this ‘gateway’ to new, more efficient and competitive ways of delivering financial services.”
Unlocking An Opportunity
The report might have directed regulatory agencies like the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC) to open that “gateway” using their existing regulatory authority, added Banaei, but it didn’t. Instead, it recommended a longer but arguably more enduring path: congressional legislation.
Banaei’s fear is that if legislation fails, then “the PWG Report will fail to spur regulators to implement the rules necessary to comprehensively address the risks detailed in the report” like illiquidity or failure to redeem or illicit finance problems and never realize “the opportunities unlocked by the widespread use of stablecoins.”
The report met with approval from a fairly wide spectrum of players that are involved. Rohan Grey, assistant professor at Willamette University College of Law, who helped craft the STABLE Act — i.e., stablecoin legislation earlier introduced in Congress — said that the proposals were generally positive, further explaining to Cointelegraph:
“This was the underlying vision behind the STABLE Act that we introduced at the end of 2020. Bringing stablecoins squarely within the purview of banking regulation and under the umbrella of deposit insurance would be unequivocally positive for financial stability.”
Elsewhere, Michael Saylor, an ardent Bitcoinist, stated that the PWG report should be “required reading for anyone interested in bitcoin or crypto,” while Quantum Economics founder and crypto crusader Mati Greenspan wrote in his newsletter that the Treasury report is “insanely bullish for the entire crypto space, and we can already see prices reacting.”
Olya Veramchuk, director of Tax Solutions at Lukka, a crypto data and software provider, flagged the report’s view that stablecoin issuers should be restricted to be “insured depository institutions, which are subject to appropriate supervision and regulation,” a restriction that would essentially equalize “stablecoin issuers to traditional banks,” clarifying further for Cointelegraph:
“This would most certainly increase compliance costs and would likely make it more difficult for stablecoin issuers to be profitable. On the flip side, however, more regulation could increase institutional investor comfort.”
What About The Rest Of The World?
Of course, the White House paper applies to a single jurisdiction: the United States. This is a world that continues to struggle to find the optimum balance between regulation and innovation for the cryptocurrency and blockchain sector.
“The crypto regulatory space is getting increasingly heated, and not only in the U.S. but also in the rest of the world,” Firat Cengiz, senior lecturer in law at the University of Liverpool, told Cointelegraph previously, adding: “DeFi and stablecoins — rather than exchange or store-of-value coins such as BTC or ETH — will be the key target of emerging regulations.” For instance, drafts of European Union regulations “will ban interest on stablecoins.”
Eloisa Cadenas, CEO at CryptoFintech and co-founder of PXO Token, the first Mexican stablecoin, applauded the attempt to impose some regularity on the stablecoin market, telling Cointelegraph:
“The regulations being developed around stablecoins, specifically collateralized fiat, contrary to what one might think, are very necessary and fundamental since they will guarantee that there is a healthy monetary policy — without it, there is the possibility of systemic risk and liquidity risk.”
Others suggested, however, that the regulatory “cure” could be worse than the “disease” of regulatory uncertainty. In Europe, Hansen, formerly head of blockchain at Bitkom, an association of German companies operating in the digital economy, said that the stablecoin rules being discussed in the context of the EU’s Markets in Crypto-Assets Regulation (MiCA) “will stifle European innovation in that sector.”
Issuers of so-called e-money tokens, for example, will have to get authorized as credit or e-money institutions and face very high compliance requirements.
“I don’t expect many projects and startups in the EU to be willing to go through that expensive and lengthy authorization process in order to issue a euro-denominated stablecoin,” he told Cointelegraph.
Asked about the PWG’s proposals, Sogani, whose firm is based in Mumbai, India, agreed that legislation to regulate the stablecoin market is necessary. At present, many stablecoin issuers “may not be able to handle certain things like fiat liquidity,” so some capital requirements could be useful. Also, many issuer’s reserves “are not being audited systematically by recognized auditors.”
For example, “USDT is now available on five-plus chains for transactions,” including ERC-20, BEP-20, Solana, Tron and BEP-2. “To audit on multiple chains” where funds are changing hands 24/7 is well nigh “impossible,” he suggested.
Holding stablecoins over fiat dollars?
Meanwhile, stablecoins continue to proliferate. Chainalysis’ data shows that in mid-March 2021, large investors began buying an increasing number of stablecoins and holding them for longer time periods than was previously the case.
Gradwell wrote that since many are willing to significant wealth in stablecoins over fiat, “there’s an untapped market for any company that would start offering that. This is one reason why Facebook’s Diem coin caused so much excitement.”
But, stablecoins have also been dogged by controversy. It was suggested earlier this year that not every stablecoin is backed 1:1 by USD or U.S. Treasury bills, “with some holding a high percentage of riskier assets in their reserves,” i.e., other digital assets, commercial papers, corporate bonds, etc., Veramchuk told Cointelegraph, adding:
“There are no standards governing the reserve composition. That, combined with the regulatory uncertainty and the relative novelty of the asset class, results in the institutional investors behaving cautiously.”
Regulations will also have to account for differences among different types of stablecoins. “There needs to be a clear distinction between centrally issued stablecoins with a central reserve and, on the other side, decentralized and algorithmically generated stablecoins on top of open permissionless public blockchains,” said Hansen.
Grey, too, mentioned algorithmic, or hybrid, stablecoins that aren’t backed by fiat currencies or commodities — but rather rely on complex algorithms to keep their prices stable. “An outstanding question from the [PWG] report’s findings is what would happen to so-called ‘algorithmic’ stablecoins, which the report distinguishes from ‘fiat-backed’ stablecoins in ways I’m not sure are justifiable or helpful.”
“Regulation For Stablecoins Is Very Necessary”
All in all, the arrival of the PWG report appeared to be greeted with some relief within the crypto community — at least the U.S. Treasury Department wasn’t proposing to outlaw stablecoins. The deposit insurance requirement didn’t appear to be insurmountable — at least no hue and cry has yet emerged — and innovation in the industry wouldn’t be throttled in any meaningful way because stablecoins really aren’t about innovation, others noted.
Many viewed that regulatory uncertainty is the real scourge here, and while the devil is in the details, as Grey observed, the government proposals weren’t seen as an unwelcome development on balance. People generally like to have someone overseeing the sausage-making process — even if they don’t want to watch sausage being made themselves. Cadenas added:
“Stablecoin projects like the one we are creating in Mexico are faced with various barriers including not knowing where or if they will be able to operate. In short, regulation for stablecoins is very necessary.”
Banking Industry Likely To Capitalize On Stablecoin Deposit Demand, Says Morgan Stanley
The stablecoin market cap has grown to $137.7 billion from $20 billion a year ago.
The banking industry will most likely try and capitalize on the demand for stablecoin deposits on the back of the market’s exponential growth, Morgan Stanley’s lead cryptocurrency strategist, Sheena Shah, said in a report.
* Some notable features of these coins is that they provide access to crypto-deposit interest rates and decentralized finance (DeFi). Crypto lenders offer over 5% interest on some of these coins, which in turn will cause regulators and governments to respond, Morgan Stanley said.
* Stimulus from governments and central banks have led to risky assets reaching all time highs and cryptocurrencies are no different, Shah said. Cryptocurrencies are trading “similarly to risky assets” with the support from the leverage growth in their markets, she added.
* Shah notes that “institutional investor interest in participating in the upward price momentum is building,” adding that bitcoin’s dominance is slipping as “alternative coins outperform due to their lower [U.S. dollar] prices and potential use cases.”
* “The battle of the blockchains” is likely to continue as each picks up market share, Shah said, noting that stablecoin issuance has risen 20 times since 2020.
* As more institutions, such as asset managers, exchanges and corporates, decide to buy crypto, bitcoin units will end up in the possession of fewer participants, which will result in centralization, she said.
* Bitcoin was trading at $65,962 as of publication time.
ECB Sounds Alarm Over Linkages Between Stablecoins And Conventional Financial Markets
The central bank said exotic market segments, such as crypto, remain subject to “speculative bouts of volatility.”
The search for higher yields amid rising inflation and falling interest rates has led investors to take greater risks, making a broad section of the market, including crypto, vulnerable to corrections, the European Central Bank (ECB) said.
* The ECB acknowledged that cryptocurrencies have grown in popularity and relevance, and said that the crypto markets are subject to “speculative bouts of volatility.”
* The increasing use of leverage by crypto investors can lead to “large, concentrated losses,” the central bank said in its bi-yearly financial stability review, which was released on Wednesday.
* The ECB also warned against the growing link between stablecoins, cryptocurrencies that are pegged to fiat currencies, and the traditional financial market.
* The central bank has been discussing the creation of a central bank digital currency (CBDC) since the start of this year, and in July said it decided to launch the investigation phase of a digital euro project that would last 24 months.
* Fabio Panetta, a member of ECB’s executive board, earlier this month laid out a detailed roadmap for CBDC inclusion.
Fed’s Quarles Says Regulators Should Show ‘Constraint’ On Stablecoins To Avoid Hampering Innovation
Quarles said some of the approaches on stablecoin regulation from the President’s Working Group on Financial Markets’ November report are unnecessary.
Speaking publicly for the last time as a member of the Board of Governors of the Federal Reserve System, Randal Quarles urged regulators to exercise restraint on stablecoins.
In a prepared statement for his speech at the American Enterprise Institute on Dec. 2, Quarles expressed concern that regulations could hamper innovation in the digital asset space, particularly when it comes to stablecoins.
According to the Fed governor, some of the approaches on stablecoin regulation from the President’s Working Group on Financial Markets’ November report are unnecessary, including “limiting wallet providers’ affiliation with commercial entities.”
“It is one thing to say that a stablecoin issuer itself must be a regulated bank — I think that is probably overkill, as there are perfectly effective ways for nonbanks to meet our legitimate regulatory concerns, but there is at least a clear relation between the existing framework of bank regulation and the specific measures that stablecoin issuers must address to operate safely,” said Quarles.
“It is, however, quite another thing to contemplate that wallet providers may need to be completely separated from commercial firms.” The fed governor added:
“It is not at all clear what regulatory interest would be furthered by such a limitation, which is much more restrictive than we require for nondigital assets.”
On Nov. 8, Quarles resigned his position at the Federal Reserve where he had been serving since 2017. He will remain on the Board of Governors until the end of December, at which point there will likely be three open seats for the group of seven regulators.
During his time at the Fed, Quarles said that federal agencies needed to consider the right regulatory approach before creating a framework to oversee the crypto market.
Prior to the 2017 bull run, he claimed that wide-scale usage of cryptocurrencies could pose “serious financial stability issues,” suggesting that the government partner with banks to create solutions for digital payments.
“While digital asset-related activities may be novel, regulators need not treat these activities differently simply because of the nature of the technology,” said Quarles in his Thursday speech. “We must focus with care on the unique risks posed by these activities and avoid unnecessarily impeding their promise.”
U.S. President Joe Biden has not yet announced his picks for the Fed’s empty seats, but said in November he planned to nominate replacements with a focus on “improving the diversity in the Board’s composition.”
He has already said Jerome Powell is his pick to remain Fed chair after his first term expires in February, with governor Lael Brainard to serve as vice-chair after the departure of Richard Clarida.
Tether Fails To Dispel Mystery On Stablecoin’s Crucial Reserves
The latest financial disclosure from Tether, which serves as a controversial foundation for much of the cryptocurrency market, didn’t shed any more light on where its reserves are held.
Tether Holdings Ltd. had assets totaling at least $69 billion as of Sept. 30, according to an assurance from Cayman Islands-based Moore Cayman. That includes $30.6 billion in commercial paper and certificates of deposit, $7.2 billion in cash, almost $1 billion in money market funds and $19 billion in Treasury bills.
The disclosure showed that Tether shifted about $1 billion in “reverse repo notes” holdings to money-market funds. However, they don’t specify in which countries the money funds are based. It also noted a reduction in the percentage of total assets held in commercial paper from the end of June.
Bennett Tomlin, an independent researcher who has been critical of Tether and the affiliated crypto exchange Bitfinex, said today’s disclosure is “very similar to the last several attestations,” despite new language defining the credit rating companies referenced in the report.
Tether is holding “a lot of commercial paper — it’s not clear from where or how,” Tomlin said. Other unanswered questions include the type of digital assets in its holdings, the counterparties for its secured loans, and the use of yields from the holdings.
Tether had been at the center of speculation for years that the coin, used to facilitate trades in the crypto market, wasn’t backed one-to-one with dollars as claimed.
In February, the companies agreed to provide quarterly reports to New York as part of a settlement over allegations that it hid the loss of funds and lied about reserves in prior years.
The disclosure in March that Tether held commercial paper triggered a guessing game in both the crypto and fixed income world as investors tried to figure out what securities were held beyond the amounts listed.
Sherrod Brown, Democratic senator of Ohio who serves as the chairman of the Senate Banking Committee, has asked Tether and other major stablecoin issuers and exchanges for information on their risks.
The latest assurance also listed $3.5 billion in secured loans to non-affiliated entities, $3.6 billion in corporate bonds, funds and precious metals, and $3.8 billion in other investments that include digital tokens.
Tether has denied holding Evergrande debt but Stuart Hoegner, Tether’s lawyer, had declined to say whether Tether had other Chinese commercial paper in an interview with Bloomberg Businessweek. He said the vast majority of its commercial paper has high grades from credit ratings firms.
What The Heck Is A ‘Reverse Repo Note’ And What Happened To All Of Tether’s?
Tether published its latest ‘proof of funds’ last week.
The figures are a snapshot of the controversial stablecoin issuer’s assets as of Sept. 30, 2021 and show it holding some $69.2 billion in reserves to back its tokens, which form an important backbone of the cryptomarket, and for Bitcoin in particular.
The Breakdown Looks Like This:
Look closely and you’ll see a line for “Reverse Repo Notes” that’s immediately followed by a big fat $0.
When Tether first provided an update on its holdings earlier this year it said it had 3.6% of its ‘cash equivalent’ assets in reverse repo notes (which worked out to about $1.11 billion based on total assets of $41 billion).
Cash and cash-equivalents are used to back up the value of the stablecoin, and allow it to maintain a 1-to-1 peg against the dollar. In Tether’s June 30 release, reverse repo notes totaled $1 billion.
But there is one big problem with Tether’s reverse repo notes.
No one knows what they are, or perhaps we should say what they were.
It’s not a commonly used term. Search the Bloomberg terminal — which contains oodles of financial data stretching back to the 1990s — and nothing comes up. It’s the same story for Google. Industry participants have never encountered the term before either.
Here, for instance, is Barclays Plc Strategist and long-time repo expert Joseph Abate writing in a note this week that:
“The definitions of what we consider fairly standard money market instruments lack transparency in Tether’s attestation. For example, we have never seen a “reverse repo note.” Likewise, the footnotes accompanying the description of cash and bank deposits are a bit opaque.
Reported balances include cash that can be withdrawn with 2d advance notice as well as term deposits. There is no information about the relative maturity distribution of these deposits or, significantly, if these are located at U.S. banks or offshore (at U.S. or non-U.S. banks).”
So What Are Tether’s Reverse Repo Notes?
But that’s hardly enlightening. Reverse repurchase agreements don’t typically involve structured notes or fund vehicles, but rather an agreement to sell securities and buy them back a little while later.
It might help instead, if we try to answer where all those reverse repo notes actually went.
Tether began investing in money market funds for the first time according to its latest breakdown. These investments now total $999 million — which isn’t too far off from the $1 billion of reverse repo notes that seems to have disappeared since June 30.
However, “money market funds” comes with its own definitional footnote, described as comprising “funds investing in highly liquid, short-term money market instruments, including but not limited to deposits, treasury bills, commercial paper, and reverse-repurchase agreements.”
Unless Tether has been using a very unusual definition of ‘reverse repurchase agreement,’ it seems like reverse repo notes would not be included in the “money market fund category.”
That leaves another possibility — secured loans, which rose from $2.05 billion in June to $3.45 billion between June and September.
Back to Barclays’ Abate:
“[Tether] invested $1bn in money market funds, and it increased its holding of “other assets,” which include crypto of $1.8bn to nearly $4bn and 5.5% of its portfolio. Tether had not previously owned any money funds. It also shifted $1bn out of ‘reverse repo notes’.
But this is more likely a reclassification as the description of these instruments did not look like a repo transaction but more like a secured loan. In fact, its reported secured loans increased by about the same amount in September.”
Tether’s sometimes lauded for creating a new kind of currency, one that preserves the most desirable aspects of crypto while simultaneously limiting its volatility. But Tether’s creative ingenuity arguably goes even farther, all the way to the new and not very well-understood terms it’s using to describe the assets backing up its stablecoin.
‘DeFi Is The Most Dangerous Part Of The Crypto World,’ Says Senator Elizabeth Warren
The U.S. lawmaker claimed that the value of stablecoins would “take a nosedive,” with small investors largely feeling the effects of a potential downturn.
Massachusetts Senator Elizabeth Warren did not hold back in her criticism of decentralized finance (DeFi), expressing concern about how a run on stablecoins would affect the average investor.
In a Tuesday hearing with the Senate Banking Committee discussing stablecoins, Warren questioned Hilary Allen, a professor at the American University Washington College of Law, as to whether a run on stablecoins could potentially endanger the United States financial system.
Though Allen said an “en masse” redemption of stablecoins from people who had lost faith in the tokens would be unlikely to have “systemic consequences” for traditional markets at present, the DeFi system would be more likely to feel the effects.
Warren countered that because stablecoins provided “the lifeblood of the DeFi ecosystem” outside of regulated markets, she believed their value would “take a nosedive precisely when people most need stability,” with the impact affecting traditional finance.
“DeFi is the most dangerous part of the crypto world,” said Warren. “This is where the regulation is effectively absent, and — no surprise — it’s where the scammers and the cheats and the swindlers mix among part-time investors and first-time crypto traders. In DeFi, someone can’t even tell if they’re dealing with a terrorist.”
Allen added that the potential threat Warren posited may be in DeFi’s future, without addressing her claim about illicit transactions:
“I don’t think DeFi can grow without stablecoins. I think it would struggle. Right now, I think DeFi is contained to the point where it won’t impact financial stability, but if it grows, I think there’s a real threat there, particularly if it becomes intertwined with our traditional financial system.”
The discussion among U.S. lawmakers present at the hearing — named “Stablecoins: How Do They Work, How Are They Used, and What Are Their Risks?” — follows committee chair Sherrod Brown requesting crypto firms release information related to consumer and investor protection on stablecoins.
Allen appeared as a witness alongside Alexis Goldstein, director of financial policy at Open Markets; Jai Massari, partner at Davis Polk & Wardwell; and Dante Disparte, chief strategy officer and head of global policy at Circle.
Warren has previously used hearings and public statements to claim cryptocurrencies are mainly tied to illegal activities.
In a June hearing discussing central bank digital currencies, the Massachusetts senator said the “crypto world currently has no consumer protection” and referred to many tokens as “bogus” investments. She has also criticized the Ethereum network’s high transaction fees during periods of price volatility.
Witnesses Offer Differing Opinions On Approach To Stablecoins At Congressional Hearing
Every witness who appeared in front of the committee seemed to have their own rallying cry for U.S. lawmakers, from calling for greater KYC/AML compliance to “avoid policies that encourage the growth of stablecoins.”
The Senate Committee on Banking, Housing and Urban Affairs heard from several expert witnesses with knowledge of stablecoins who urged lawmakers to establish a clear regulatory framework but could not seem to agree on where lines would be drawn.
In a Tuesday hearing on “Stablecoins: How do They Work, How Are They Used, and What Are Their Risks?” Hilary Allen, a professor at the American University Washington College of Law, Alexis Goldstein, director of financial policy at Open Markets, Jai Massari, partner at Davis Polk & Wardwell, and Dante Disparte, chief strategy officer and head of global policy at Circle, addressed U.S. senators regarding some of the risks stablecoins may pose to the U.S. financial system and how lawmakers could handle regulating the space.
Goldstein’s written testimony included her views that decentralized finance, or DeFi, projects were “largely out of compliance” with checks on Know Your Customer, Anti-Money Laundering, Countering the Financing of Terrorism, and current U.S. sanctions.
She said that because there were “virtually no KYC/AML checks in DeFi applications,” stablecoins like the Pax Dollar (USDP) could be used to convert ransomware payments from one cryptocurrency to another.
Massari added that U.S. lawmakers could consider having stablecoin issuers operate under a federal charter rather than potentially requiring them to be insured depository institutions, like banks.
According to Massari, having a stablecoin issuer regulated similarly to an FDIC-insured bank is “unworkable” and “unnecessary.”
She said the firms are already capable of limiting the risk of their stablecoin reserves to be “short-term, liquid assets, and requiring the market value of those reserves to be no less than the par value of stablecoins outstanding.”
“A new and well-designed federal charter could accommodate a business model premised on the issuance of stablecoins fully backed by short-term, liquid assets and the provision of related payments services,” said Massari.
“This charter could impose requirements for reserve asset composition while tailoring leverage ratios or risk-based capital requirements and other requirements to the nature of the business model. And it could restrict the stablecoin issuer from engaging in riskier activities, to minimize other claims on reserve assets.”
In contrast, Disparte — the only witness directly appearing with a direct connection to a stablecoin issuer — used part of his written testimony to highlight use cases around digital assets, including empowering women and minority entrepreneurs and delivering aid.
While he did hint that a change in approach to regulation might be necessary for stablecoins, the priority for lawmakers should be to “do no harm” and encourage innovation.
“I argue that we are winning [the digital currency] race because of the sum of free-market activity taking place inside the U.S. regulatory perimeter with digital currencies and blockchain-based financial services,” said Disparte. “The sum of these activities are advancing broad U.S. economic competitiveness and national security interests.”
Not every witness who appeared in front of the committee seemed to be so optimistic. Allen said stablecoins could pose a “real threat to financial stability” in the United States.
In her opinion, the asset class could eventually grow to the point at which it could displace enough U.S. dollars to limit the Federal Reserve’s ability to respond to inflation.
“Private sector institutions — who have no mandate to serve the public interest — will have usurped control over the money supply, undermining central banks’ ability to rein in inflation or address deflation,” said Allen. “This is yet another reason to avoid policies that encourage the growth of stablecoins.”
Partisan Split Over Stablecoins Highlighted At Banking Hearing
Partisan divisions over stablecoins became more apparent during a Senate Banking Committee hearing Tuesday — with a key Republican touting the possible benefits, while Democrats argued the tokens pose risks to consumers and the economy.
Massachusetts Democrat Elizabeth Warren Elizabeth Warren expressed concern that the “talk” around stablecoins doesn’t match up to reality, noting that the value of cryptocurrencies like Tether can fluctuate even if they’re supposed to be pegged one-to-one to the dollar.
By Tether’s own report only about 10% of the assets backing its stablecoin are real dollars–but Warren warned that even that number isn’t verified by an audited financial statement or a government regulator.
Congress and federal agencies have been grappling with how best to regulate the crypto industry, including stablecoins, which are backed by another asset, such as the dollar, in an effort to reduce volatility.
“Let’s be clear about one thing: if you put your money in stablecoins, there’s no guarantee you’re going to get it back,” Senate Banking Committee Chairman Sherrod Brown said in his opening remarks.
“And if there’s no guarantee you’ll get your money back, that’s not a currency with a fixed value–it’s gambling,” he said, adding that he’s worried about a potential asset bubble.
Others like Senator Pat Toomey, the top Republican on the Banking Committee, remarked on the potential for stablecoins to increase the speed of payments and lower costs.
He said lawmakers should be careful not to stymie innovation with future legislation, advocating for stablecoin issuers to have the ability to choose from three different regulatory models, including operating under a bank charter.
The Pennsylvania Republican outlined a blueprint for future legislation in remarks at the Tuesday hearing, where he also said stablecoin issuers may be able to register as a money transmitter, which would subject them to state rules.
It’s unlikely any legislation proposed by Republicans will gain much traction anytime soon with the Senate evenly divided and most Democrats having a far less favorable view of stablecoins.
In his “guiding principles,” Toomey said stablecoin issuers would choose to either operate under a conventional bank charter, acquire a special-purpose banking charter designed in the future stablecoin legislation, or register as a money transmitter at the state level and a money services business at the federal level. He also said non-interest bearing stablecoins shouldn’t necessarily be regulated like securities.
“The legislation should address consumer protection and financial system risks, but it should also be designed to promote innovation in the rapidly evolving global digital economy,” Toomey said in a statement.
Last month, the President’s Working Group on Financial Markets published a report raising concern about risks tokens pose to the U.S. economy.
The report urges Congress to pass legislation that requires stablecoin issuers to become banks with insured deposits, capital and liquidity requirements and Federal Reserve supervision.
In fact, companies should be prohibited from offering payment stablecoins unless they are insured depository institutions, the report recommended.
Fed Chair Jerome Powell Says He Isn’t Concerned About Crypto Disrupting Financial Stability In The US
“Stablecoins can certainly be a useful, efficient consumer-serving part of the financial system if they’re properly regulated,” said Jerome Powell.
United States Federal Reserve chair Jerome Powell hinted that though the government agency should consider monitoring developments in the crypto space, he didn’t see cryptocurrencies as a financial stability concern for U.S. markets.
Addressing a question on crypto from Michael Derby of the Wall Street Journal on Wednesday, Powell supported the conclusions of a report from the President’s Working Group on Financial Markets released on Nov. 1.
The report proposed that stablecoin issuers should be subject to “appropriate federal oversight” akin to that of banks, legislation that was “urgently needed” to address risks.
“Stablecoins can certainly be a useful, efficient consumer-serving part of the financial system if they’re properly regulated,” said Powell. “Right now, they aren’t. They have the potential to scale, particularly if they were to be associated with one of the very large tech networks that exist.”
The Fed Chair Added:
“You could have a payment network that was immediately systemically important that didn’t have appropriate regulation and protections. The public relies on the government and the Fed, in particular, to make sure that the payment system is safe and reliable.”
Powell seemed to be backing the Biden administration’s most recent position on digital assets in advance of his Senate confirmation hearing to be the next Fed chair.
Having served on the Fed’s board of governors since 2012 and as chair since 2018, Powell is the U.S. president’s pick to serve in the same role until 2026.
Though the Fed chair said that crypto was likely not a financial stability concern for the U.S. at the moment, he still described digital currencies used as speculative assets as “risky” and “not backed by anything.”
Powell has previously stated his concerns about crypto — adding he would not be in favor of banning the assets the way China has — while voicing the need for regulation of stablecoins.
“Stablecoins are like money market funds, they’re like bank deposits, but they’re, to some extent, outside the regulatory perimeter, and it’s appropriate they be regulated,” said Powell in September. “Same activity, same regulation.”
Tether Lauds Myanmar Shadow Government For Making USDT An Official Currency
The stablecoin issuer called NUG’s USDT adoption a significant event that goes “beyond the potentials of cryptocurrency.”
Tether, the issuer of the eponymous stablecoin, has praised the decision of Myanmar’s parallel government, The National Unity Government (NGU), to use USDT as an official currency.
Myanmar’s NUG is a shadow government run by the supporters of Nobel Peace Prize winner Aung San Suu Kyi. As Cointelegraph reported on Monday, NUG announced Tether’s USDT as an official currency for local use in an official Facebook post. The finance minister claimed that USDT would offer much-needed trade and transaction efficiency.
In an official blog post, Tether commended the decision taken by the NUG, a government that is recognized by the European Union and has received commendations from the United States:
“The fact that it has chosen to recognize USDT as an official currency is a commendation to the strength of the US dollar and its ability to provide a safe haven to citizens of the world. The significance of this moment goes far beyond the potentials of cryptocurrency to provide financial security but points to long-standing confidence in the US dollar for those who do not have confidence in their own governments or national currencies.”
The NUG’s USDT adoption came as a surprise to many, given the controversies surrounding the stablecoin issuer’s reserves. However, from a transaction point of view, USDT is still one of the primary choices on crypto exchanges around the globe.
The NUG is currently raising funds to the tune of $1 billion, and the adoption of the USDT comes as a measure against the current military regime.
Cryptocurrency use was prohibited by the Myanmar central bank in May last year, and NUG’s adoption of the crypto stablecoin shows how these digital assets are not just reshaping financial markets but also serving as political tools.
US Financial Stability Oversight Council Identifies Stablecoins And Cryptos As Threats To Financial System
“The Council recommends that state and federal regulators review available regulations and tools that could be applied to digital assets,” says the FSOC.
In an annual report published on Friday, the United States Financial Stability Oversight Council, or FSOC, voiced its concern over the adoption of stablecoins and other digital assets.
Regarding stablecoins, the FSOC said consumer confidence could be undermined by factors such as illiquidity, lack of appropriate safeguards, opacity regarding redemption rights and cyber attacks. “A run on stablecoins during strained market conditions may have the potential to amplify a shock to the economy and the financial system,” the report said.
The report also alerted to developments in decentralized finance, or DeFi, where the use of high leverage could trigger a fire sale when the price of the underlying asset declines. This would result in a cycle of margin calls and further price declines.
In addition, the report outlined that “users of these services face the risk of loss due to market value fluctuations, operational issues and cybersecurity threats, among other risks.”
In the report’s recommendations, the FSOC calls for a unified effort between federal and state authorities to enact legislation on stablecoins and digital currencies.
Despite concerns surrounding the much-unregulated nature of the crypto industry, the report highlighted their innovative potential:
“The development of digital assets and the use of associated distributed ledger technology may present the opportunity to promote innovation and further modernization of financial infrastructure. Regulatory attention and coordination are critically important in light of the quickly evolving market for digital assets.”
Regulators Plot Plan B For Stablecoin Rules If Congress Fails
A key group of financial overseers said it will take action to rein in stablecoins if Congress fails to pass comprehensive legislation to regulate the tokens, the latest sign that the U.S. government is becoming increasingly alarmed by threats cryptocurrencies pose to the financial system.
Digital assets are some of the top concerns outlined by the Financial Stability Oversight Council in its annual report published on Friday, which also highlighted the dangers posed by climate change, meme stocks and vulnerabilities exposed by the failure of Archegos Capital Management.
The council — a panel including all the heads of the U.S. financial agencies — is ramping up again this year after remaining largely dormant during the Trump administration.
The regulators noted that purported reserves backing stablecoins aren’t reliable and any losses could spark a panic akin to a bank run. Last month, another panel, the President’s Working Group on Financial Markets, called for Congress to take the lead in setting bank-like rules for coin issuers.
But the financial council took that one step further in its report Friday, indicating it will consider additional steps “in the event comprehensive legislation is not enacted.”
That could mean directing regulatory agencies to stretch their existing powers to impose some safeguards. In a briefing with reporters, a senior Treasury Department official said FSOC expects — and hopes — that Congress will pass a law.
The council said staff is developing a “framework” to address hazards of overly leveraged hedge funds.
Also, the meltdown of Archegos — Bill Hwang’s family office that racked up billions of dollars in losses for some of the world’s largest banks — highlighted risk-management problems on Wall Street that “might have been more significant” had the fallout happened during a period of market stress, the report said.
Senate Hearing On Stablecoins: Compliance Anxiety And Republican Pushback
As stablecoins issuers were put under the pressure of Democratic witnesses, Senator Pat Toomey released his own set of regulatory principles.
On Dec. 14, the United States Senate Banking, Housing and Urban Affairs Committee held a hearing titled “Stablecoins: How Do They Work, How Are They Used, and What Are Their Risks?”
The testimonies, both spoken and written, focused largely on the last two issues, as anxieties over Know Your Customer compliance and the U.S. dollar inflation threat dominated the discussion.
Held less than a week after the House of Representatives Financial Services Committee’s hearing on digital assets, which was generally perceived as “constructive”, the meeting held by the Banking Committee was expected to be tough.
Senator Sherrod Brown, a Democrat from Ohio who chairs the Committee and had called the hearing, is infamous for his critical stance on the crypto industry, and the November report from President’s Working Group on Financial Markets (PWG) proved that stablecoins are indeed at the center of the lawmaker’s attention due to their structural proximity to fiat money.
Senator Brown let loose with his opening statement, bringing to life a ghost of the Great Depression: “These tokens can crash, with crypto markets diving by almost 30% in one day. History tells us we should be concerned when any investment becomes so untethered from reality. Look at the 1929 stock market crash.”
Brown once again manifested his hawkish approach when he observed that even in the absence of joint action by both chambers of Congress, there is a range of regulators who are already sharpening their tools to preside over stablecoins — from the Securities and Exchange Commission to the Federal Reserve and the Treasury Department.
The barrage intensified with the testimony of Alexis Goldstein, director of financial policy at Open Markets Institute. The liberal think tank, according to some observers, has become influential by spurring the Democratic party’s drive to rein in tech goliaths such as Meta and Google.
Goldstein used the opportunity to fiercely attack decentralized finance projects — which she maintained are largely “not in compliance” with existing Know Your Customer, Anti-Money Laundering and Combatting the Financing of Terrorism standards — and to question stablecoins’ potential to become a widely adopted payments settlement tool:
A recent report from the World Economic Forum found that stablecoins have no benefit for financial inclusion, as they are subject to the same or higher barriers as pre-existing financial options, including the need for internet and for smartphones. […]
As someone who’s played around with sending them [stablecoins], both personally and sort of in my work, it often makes Western Union look cheap when you rack up all of the fees that you need.
Goldstein’s scathing sentiment was counterbalanced by Dante Disparte, chief strategy officer and head of global policy at Circle, who highlighted a number of digital asset use cases, including empowering women and minority entrepreneurs and delivering aid. Disparte called for lawmakers to adopt a “do no harm” approach to regulation:
I argue that we are winning this [digital currency] race because of the sum of free-market activity taking place inside the U.S. regulatory perimeter with digital currencies and blockchain-based financial services.
The sum of these activities are advancing broad U.S. economic competitiveness and national security interests.
The Circle executive said that the stablecoin sector was still in the opening innings and that those who accuse it of failing in terms of financial inclusion wrongly presume that stablecoins have agency similar to that of the dollar.
The argument resonated with Circle’s recent announcement that its stablecoin, USD Coin (USDC), will be supported on the Avalanche blockchain, with the goal to provide lower fees and faster smart contract settlement.
The Question Of Issuance
Arguably the most technically nuanced part of the hearing had to do with the future legal classification of stablecoins.
At this point, it was Senator Pat Toomey, a Republican from Pennsylvania, who spearheaded the opposition to the Democrat’s fearmongering by proposing that stablecoin issuance not be limited to insured depository institutions. This point appeared in Toomey’s set of principles released ahead of the hearing.
Earlier, the Democrat-led PWG had advocated for limiting stablecoin issuance to insured depository institutions. Toomey’s reaction to Brown’s opening statement was a crisp message: Any final decision on stablecoins “is a question that rests with Congress.”
The need to consider stablecoin issuance a matter of federal charter was laid out by Jai Massari, a partner at international law firm Davis Polk, in her written statement:
A new and well-designed federal charter could accommodate a business model premised on the issuance of stablecoins fully backed by short-term, liquid assets and the provision of related payments services.
This charter could impose requirements for reserve asset composition while tailoring leverage ratios or risk-based capital requirements and other requirements to the nature of the business model.
According to Massari, having stablecoin issuers regulated similarly to Federal Deposit Insurance Corporation-insured banks would be “unworkable” and “unnecessary.”
She added that the firms are already capable of limiting the risk of their stablecoin reserves and of “requiring the market value of those reserves to be no less than the par value of stablecoins outstanding.”
A Quiet Reaction
The aftermath of the hearing saw the speakers’ positions unshaken. Senator Brown shared a piece of his testimony on Twitter, calling the stablecoins a “mirror of the same broken [banking] system”:
Stablecoins and crypto markets aren’t actually an alternative to our banking system.
They’re a mirror of the same broken system––with even less accountability, and no rules at all. pic.twitter.com/EvWwuFh886
— Sherrod Brown (@SenSherrodBrown) December 14, 2021
Senator Toomey once again voiced his excitement for the new technology and his determination to work closely on its friendly regulation:
Stablecoins are an exciting new technology that create opportunities for faster payments, expanded access to the payment system, programmability, and more.
Stablecoins are an exciting new technology that create opportunities for faster payments, expanded access to the payment system, programmability, and more.
I hope my colleagues will join me in working to create a sensible regulatory regime that allows this innovation to thrive. pic.twitter.com/DRUvKvErgx
— Senator Pat Toomey (@SenToomey) December 14, 2021
Key participants of the previous week’s more constructive House hearing have eloquently ignored the Banking Committee meetup on social media. Crypto Twitter, too, has largely remained silent on the matter.
While the hard work of framing new regulatory standards can take years, with stablecoin regulation there are clear signs of rapid progress going on. Not all of the developments, however, look favorable.
The report by the PWG called for the introduction of comprehensive oversight as soon as possible. Consistent with the opinion of Treasury Secretary Janet Yellen, the group urged Congress to require stablecoin issuers be insured depository institutions.
It took a little more than a month for Republicans to draft their counterplan and defend it at the Senate hearing. The obvious problem for those who want stablecoins to retain their non-bank identity is that at the moment, Senator Toomey’s set of principles is a collection of bullet points that could fit on a single sheet of paper, while the PWG report contains 26 pages of dense policy proposals.
Perhaps an even bigger issue is that the approach articulated by the PWG is backed — and likely inspired — by those within the incumbent presidential administration. If Republicans are serious about taking the non-banking side of the stablecoin divide and suggesting an alternative regulatory approach to this asset class, they had better consolidate their views in a similarly tight manner.
Treasury Says New Law Only Way To Fully Contain Stablecoin Risks
The U.S. Treasury’s top official for financial oversight said government regulators need action from lawmakers to adequately protect investors — and the wider financial system — from risks posed by stablecoins.
“If Congress does not enact legislation, the regulators will try to use what authority they have,” but they will be left without sufficient oversight powers, Nellie Liang, the Treasury undersecretary for domestic finance, said Friday in an interview with Bloomberg News, referring to what agencies can do without congressionally mandated authority.
Investors in the cryptocurrency space often use stablecoins to get in and out of trades, using them as a digital form of money, highlighting the importance of their regulation.
Liang, who formerly led the Federal Reserve’s financial-stability division, said of regulators: “They can do a little here and a little there, but if these are foundational to crypto assets and they aren’t stable, that could potentially be a big risk.”
She spoke shortly after a panel of top federal regulators released its annual report outlining threats to the U.S. financial system. In that report, the Financial Stability Oversight Council said it is prepared to take steps on its own to address stablecoins if Congress fails to pass legislation.
Not A Plan B
But Liang readily conceded that’s “not a good Plan B. We wouldn’t call it a Plan B.”
“We need congressional action to address the prudential risks of stablecoins,” she said.
In November, a smaller group of federal agencies, including the Fed, appealed to Congress to act because of “key gaps” in regulatory authority over stablecoins. They urged legislators to require that stablecoin issuers become insured depository institutions, subjecting them to oversight from banking regulators.
Liang agreed, saying such oversight would allow agencies to examine them for operational risks, apply broad safety and soundness standards and assess their ability to pose collective, system-wide risks.
Stablecoins are a fast-growing type of cryptocurreny whose value is pegged to another asset, like a traditional currency or commodity. Most, like Tether — the largest, with about $76 billion in outstanding tokens — are pegged to the U.S. dollar.
The tokens maintain a stable value by promising to keep reserves equal to their liabilities. But regulators worry those aren’t reliable, making investor runs possible. Aside from the risk to investors, such runs might also be more widely destabilizing if stablecoins continue their rapid growth.
Currently, they serve mostly as a digital-currency bridge for investors seeking to trade in cryptocurrencies like Bitcoin, whose values can fluctuate wildly. But their issuance could expand dramatically if they are adopted as a widespread tool for everyday payments.
Liang expressed optimism that U.S. lawmakers are beginning to engage seriously on the issue.
“Fortunately, Congress is thinking about this, and working on these issues and holding hearings,” she said.
Senator Pat Toomey of Pennsylvania, the top Republican on the Senate Banking Committee, touted the potential for stablecoins to make payments faster and less costly at a committee hearing Tuesday. He also released a blueprint for future legislation the same day.
But a Republican proposal would face an uphill battle in the evenly divided Senate, and with key Democrats, including Banking panel Chair Sherrod Brown of Ohio and committee member Elizabeth Warren of Massachusetts, having a much more critical take on the tokens.
Treasury Securities Market
Separately, Liang said that a group of agencies had made “considerable progress” on reforms to the structure of the market for Treasury securities. That market has grown increasingly susceptible to bouts of low liquidity during times of stress.
Several times in past years investors have briefly fled the market. In March 2020, just as the Covid-19 pandemic struck the U.S., liquidity in Treasuries nearly disappeared, threatening to freeze global credit markets and necessitating a giant buying intervention by the Fed.
Worries over the market have only grown, especially as the Fed prepares to halt its pandemic Treasuries-purchase program next spring.
Liang said the regulatory group had “a pretty aggressive work plan for the next year” covering all five areas identified in a November report, but would not give any timeline for when to expect concrete proposals.
Meantime, the Treasury undersecretary reacted positively to new rules proposed this week by the Securities and Exchange Commission for money market funds, calling them “a great step.”
The proposals would raise the minimum liquidity thresholds and introduce so-called swing-pricing for institutional funds, a mechanism that would introduce extra costs for investors who are withdrawing when a fund is experiencing net redemptions.
“If swing-pricing is executed appropriately, it should reduce the advantage of redeeming first and therefore should prevent runs or reduce significant runs,” Liang said.
Money funds, which aim to preserve the value of holdings and provide daily liquidity, have experienced two runs in the past 13 years that helped cripple short-term credit markets and forced the Fed to enter as an emergency buyer of fund holdings. Rule changes prompted after the 2007-09 financial crisis failed to prevent another run in March 2020 at the outset of the pandemic.
Are Stablecoins In or Out? Regulators Have To Decide
To a professional risk manager, cryptocurency volatility is good for financial stability because it shows the asset has value independent of the value of dollars.
The 2021 Annual Report to Congress by the Financial Stability Oversight Council released Friday illustrates the attitude toward cryptocurrencies — and stablecoins in particular — of people so deeply embedded in 20th-century government-run finance that they can sense only challenges to that system, not risks of that system.
The report’s authors seem to have missed the fact that Bitcoin was created in 2008 largely due to lack of trust in the traditional financial system. It cites the volatility of Bitcoin as a threat to financial stability. But volatility is measured in dollars per Bitcoin, and it reflects uncertainty about both dollars and Bitcoin.
Today, you can buy a very nice car for one Bitcoin. Bullish Bitcoin holders do not necessarily think one Bitcoin will buy 10 nice cars in the future, many of them fear that it might take $500,000 to buy that car in 10 years, or that dollars will not be accepted at all, or that dollars they hold today will be taxed away or lost in a financial crisis.
Certainly, a major driver of Bitcoin’s appreciation from $5,000 to $50,000 in the last two years is driven by fears of inflation, war, uncontrolled deficits, confiscatory tax proposals, exceptionally loose monetary policy, a worsening pandemic and a possible U.S. debt default more than any change in economic fundamentals of the cryptocurrency economy.
To a professional risk manager, Bitcoin volatility is good for financial stability because it shows the asset has value independent of the value of dollars. It is assets correlated to dollars that pose stability risks, because in financial crises they can all lose value at the same time.
But if your career has you entrenched in the faith that dollars represent immutable value, volatile assets are like heresies to a religious fundamentalist (in 156 pages, the FSOC report fails to mention the possibility of any problem originating from the U.S. government — default, war, shut-down, wealth tax, perverse regulation, overspending, adverse Federal Reserve actions — yet many investors fear these more than problems with cryptocurrencies).
In many plausible disaster scenarios, Bitcoin and other cryptocurrencies could be important mitigants, retaining value and facilitating transactions when traditional assets and payment mechanisms are failing.
At most it could help out in a few niches. But the fact that tens of thousands of very smart people have invested tens of billions of dollars developing alternative methods for organizing economic activity — independent of established institutions and governments—can only make things more robust.
The many mistakes in crypto — hacks and frauds and infighting and failures — have not slowed the overall growth. Rather they have helped the system evolve into something more reliable and stable.
It is precisely this experimentation and diversity of approach that makes things safer. Even if all crypto goes to zero tomorrow, we will have learned much from the enterprise.
FSOC tunnel vision extends to stablecoins. The report claims without support that stablecoins were developed to avoid the volatility of other crypto assets. But the way to avoid exposure to crypto is not to buy any. All stablecoin users I know maintain extensive crypto investments.
The real reason people use stablecoins is regulations make it difficult to convert crypto assets to traditional assets.
Stablecoins are a creature of regulation in the same sense that money market funds were created in the 1970s to get around government limits on interest banks could pay retail depositors while the economy was running at double-digit inflation.
But regulators always see the potential problems of new ideas that mitigate the harms of their mistakes.
Regulators discouraged and fought money market funds for 10 years before reversing course—after high inflation had been broken and banks were paying interest on checking accounts so the need had lessened—and taking them over so they posed similar risks to the banking system rather than being an independent alternative.
The FSOC worry about stablecoins is the same for any asset that promises a specific value, including bank accounts and money market funds. If doubt arises about the value of the asset, holders might redeem, which can put pressure on the value of the asset, and lead to a “bank run.”
This can have downstream consequences as holders of the stable asset miss payments and managers of the stable asset dump collateral at firesale prices.
It’s true that stablecoins — whether collateralized or algorithmic — are less secure than U.S.-regulated bank accounts and money market funds. But from a stability perspective, that’s not the point.
The bank-run risk for stablecoins is largely independent of the regulated economy, so it is a diversifying risk. Moreover, the risks of stablecoins are widely appreciated.
It’s not risky assets that threaten stability, but risky assets thought to be safe. If FSOC were to ban stablecoins, we would lose an independent source of stable value. If FSOC were to regulate them for security, my guess is they would acquire more systemic risk not less.
They would become more correlated to the existing financial system and the perceived reduction in risk would be much greater than the actual reduction in risk.
There is a fundamental choice here for regulators. They could embrace crypto and make it safer, or they could wall it off from the traditional financial system.
The current mixed approach means we have a chaotic border region that includes stablecoins, Bitcoin ETFs and futures and decentralized finance.
FSOC is worried about this border region because it’s messy and unpredictable. But systemic financial crises come from stable regions, not from the Wild West.
The way to clean up the border is to have a clear, consistent approach to all of crypto — either it’s part of the financial system or it’s an alternative economy outside the regulatory purview.
US Treasury Official Beckons New Stablecoin Regulations
“If Congress does not enact legislation, the regulators will try to use what authority they have,” stated the U.S. Treasury official Nellie Liang.
The United States Treasury made further hints at new laws for stablecoins on Friday. Nellie Liang, the undersecretary of the Treasury for domestic finance, fueled more stablecoin regulation speculation with comments on investors’ “potentially big risk” when using stablecoins.
Following on from the Financial Stability Oversight Council’s November 2021 report on stablecoins, the top official for financial oversight at the U.S Treasury stated that “If Congress does not enact legislation, the regulators will try to use what authority they have.”
The Treasury has limited powers as broad strokes stablecoin regulation is not possible without the backing of a congressionally-mandated authority. “They can do a little here and a little there, but if these are foundational to crypto-assets and they aren’t stable, that could potentially be a big risk,” Liang stated of regulators’ powers.
The preferred choice of leverage users and scalpers, stablecoins helps traders to get in and out of crypto assets. Tether (USDT), the largest stablecoin at over a $75 billion market cap, has been put under the microscope several times.
In the most recent report in March this year, Moore Cayman, a Cayman Islands-based accounting network, affirmed that Tether Holdings Limited’s USDT stablecoin tokens are fully backed by its reserves. However, its widespread use continues to raise concerns among policymakers.
Regulators claim that investor runs on stablecoin could wreak havoc on the market, while the sheer size of a market collapse could upset traditional financial markets if such a run took place. As a result, commentators such as Mark Cuban saw 2021 as the year of stablecoin regulation.
Liang’s comments indicate that congress and the treasury may be at loggerheads when it comes to stablecoin regulation. In its November report, the Financial Stability Oversight Council stated that it is prepared to take steps on its own to address stablecoins if Congress fails to pass legislation.
Her comments echo those of Federal Reserve Chairman Jerome Powell. At the Federal Market Open Committee (FOMC) meeting last Wednesday, he stated that “Stablecoins can certainly be a useful, efficient, consumer-serving part of the financial system if they’re properly regulated. And right now, they aren’t.”
Congress, however, remains divided. Senator Elizabeth Warren of Massachusetts has a hard-nosed approach: “Stablecoins pose risks to consumers & to our economy. They’re propping up one of the shadiest parts of the crypto world, DeFi, where consumers are least protected from getting scammed. Our regulators need to get serious about clamping down before it is too late.”
In contrast, Senator Pat Toomey for Pennsylvania welcomes stablecoins as an “exciting new technology that creates opportunities for faster payments, expanded access to the payment system, programmability, and more.”
Curiously, proponents of Bitcoin (BTC) and cryptocurrencies as a whole would argue that any regulation of the stablecoin space is a case of shutting the stable door after the horse has bolted. Dylan LeClair, a prominent Bitcoin analyst, claims that stablecoins are “preferred collateral for bulls,” which is “good to see.”
Furthermore, Alex Gladstein, Human Rights Foundation chief strategy officer tweeted that “Stablecoins are a bridge to a near future where Bitcoin users can — if they wish — peg holdings to any currency on mobile apps in a non-custodial non-Know Your Customer (KYC) way outside the banking system, without needing altcoins, with instant global cheap payments.” In this sense, stablecoins are a stepping stone to broader Bitcoin adoption.
Secure America’s Financial Strength With Stablecoins, Not Central Banks
Stablecoins are already expanding the reach of the U.S. dollar, but if the government were to restrict stablecoins in favor of a CBDC, that trend could quickly reverse.
As they say, change is hard. In a dynamic digital world, it’s tempting to protect ourselves from the pressure of change by simply refusing to acknowledge it and clinging to the status quo. But while that approach may feel comfortable, it’s a poor way for policymakers to manage a national strategy.
Thankfully, there’s another way: embrace change and use it to our advantage.
Jake Chervinsky is head of policy at the Blockchain Association.
When it comes to stablecoins, a rapidly developing type of digital asset, Americans are at an inflection point. Many of us want to embrace stablecoins and use them to improve both the financial system and our competitive standing in the world.
Others – particularly those working for legacy institutions – want to stop stablecoin innovation in favor of a central bank digital currency (CBDC) built and controlled by the federal government.
It’s imperative that we support stablecoins and reject a CBDC. Here’s why.
Stablecoins, like other digital assets, run on decentralized public blockchains, meaning anyone can use them without having to rely on a middleman or trusted third party.
Unlike other digital assets, stablecoins are designed not to fluctuate in value, instead seeking to track the value of a fiat currency like the US dollar.
This means stablecoins aren’t subject to market volatility; they work as a digital version of cash.
CBDCs are similar to stablecoins in tracking the value of a fiat currency, but the similarities more or less end there. Rather than running on permissionless public blockchains, CBDCs are managed by a single central authority with the power to surveil, censor and exclude users.
And rather than being developed openly by the private sector, CBDCs are the proprietary creations of government entities.
At last count, more than 80% of central banks were weighing their own form of digital currency, and some had already launched pilot projects.
One of the most notable examples is China, which recently cracked down on bitcoin and other digital assets in favor of its CBDC, the digital yuan. Already, roughly 140 million people have opened wallets for the digital yuan.
Some policymakers in Washington are considering whether we should copy China’s example and launch our own competing CBDC. While it’s critical for us to maintain our competitive edge in the digital era, a CBDC is the exact wrong way to achieve that goal.
First, to strengthen the dollar’s dominance as the global reserve currency, our main priority should be to spread dollars far and wide – to make them available to anyone and everyone around the world.
For generations, central banks and financial institutions have held dollars more than any other currency. Yet, in 2020, that number dwindled, falling below 60% for the first time in over 20 years.
This drop led famed investor Stan Druckenmiller to warn that he believes the dollar could lose its global reserve status within 15 years.
Stablecoins, on the other hand, are booming. The total supply of stablecoins in circulation grew from under $6 billion at the start of 2020 to nearly $140 billion today. Stablecoins are already expanding the reach of the U.S. dollar, but if the government were to restrict stablecoins in favor of a CBDC, that trend could quickly reverse.
If our priority is to spread dollars to every corner of the planet, the best way to succeed is to support the proliferation of stablecoins developed by the next generation of innovative American companies.
Second, we should seek to maximize the contribution of our vibrant and experienced private sector, rather than sidelining it in favor of a centrally-planned government project.
While other nations like China might give their central governments total control over emerging industries and technologies, that is decidedly not the American way.
We owe much of our geopolitical strength – and the robustness of our financial markets – to our economic principles of free and open markets, in which our entrepreneurs and companies compete to develop the best products and services possible.
That’s exactly what we’re seeing in the stablecoin market now, with the vast majority of leading stablecoin projects home-grown here in the U.S.. This is what our private sector does best.
As Federal Reserve Governor Randal Quarles explained, “A global U.S. dollar stablecoin network could encourage the use of the dollar by making cross-border payments faster and cheaper, and it potentially could be deployed much faster and with fewer downsides than a CBDC.”
Rather than stifling private sector innovation, the government should set common-sense rules of the road that enable innovators to build a responsible, efficient system.
Third, a financial system subject to total control by the government would jeopardize Americans’ fundamental rights to financial freedom and privacy.
These issues have come to the forefront in recent years, as the combination of cybersecurity breaches and surveillance capitalism have revealed a dire need for data privacy protection.
The last thing we need now is put all of our financial transactions in a centralized database maintained by the government, particularly after the SolarWinds hack showed that even government-held data may not be secure.
This isn’t just a minor concern; it’s an issue of constitutional import. Except in limited cases, the Fourth Amendment to the U.S. Constitution requires the government to obtain a warrant before it can search a person’s records.
The fundamental right to privacy is a prized American civil liberty and an essential feature of a functioning free society. It’s what separates a nation like the U.S., which respects its citizens’ autonomy and dignity, from one like China, which has exploited technology to create a dystopian surveillance state.
Not everyone sees it this way. For some policymakers, stablecoins – like other digital assets – represent a threat to what they perceive as their rightful hegemony over the financial system.
For example, SEC Chair Gary Gensler recently said that “the use of stablecoins . . . may facilitate those seeking to sidestep a host of public policy goals connected to our traditional banking and financial system.”
In this instance, Chair Gensler has it backwards: The best way to achieve our public policy goals is to support stablecoins, not slow them down.
We’re at the beginning of a revolutionary change to the global financial system thanks to the rise of digital assets running on public blockchains. Although it may not feel comfortable, the best way for us to safeguard America’s financial future is to embrace this new technology and put it to work on our behalf.
Stopping stablecoin innovation to make way for a CBDC would not only contradict our principles. It would harm American consumers, companies and competitiveness.
Fitch Says Improved Regulation Could Moderate Stablecoin Credit Risks
The approach taken by the U.S. would be key to medium-term development of stablecoins, Fitch notes.
Increased regulatory certainty regarding the status of stablecoin and their issuers may create market opportunities, as regulatory risks have deterred financial institutions from engaging in the space, Fitch Ratings said in a report published on Tuesday.
* Fitch notes that the European Union is the first major economy to publish draft regulations for the sector and has called for issuers to be regulated like banks or electronic money institutions.
* An important regulatory report in the U.S. has also recommended that stablecoin issuers should be treated as insured banks, it added.
* Fitch views the U.S. regulatory approach as key to the medium-term development of the sector, as the majority of stablecoins currently traded are linked to the U.S. dollar.
* If stablecoin issuers secure charters to operate as deposit-taking institutions, they could “challenge incumbent banks and potentially non-bank payment providers,” the ratings agency noted.
* Transparency around the basic aspects of stablecoin arrangements, such as the legal rights of users, and reserve asset holdings, will be foremost when assessing the credit profile of stablecoin issuers, Fitch said.
FTX Exchange Floats $1M Prize For Banks To Accept Stablecoins
Stablecoins like USDT are under scrutiny in the United States, with some lawmakers calling for greater regulatory oversight of the industry.
Cryptocurrency derivatives exchange FTX is calling on banks to reach out and discuss the possibility of accepting stablecoins in exchange for a $1 million reward.
In a Tuesday Twitter post, FTX said it was exploring forming relationships with banks in different regions to allow users to have “near-instant and near-free deposits and withdrawals” through stablecoins.
The exchange floated the idea of offering a $1 million prize for the first bank in each region to accept the tokens but hinted it would be open to giving more.
How much would it cost to convince a bank to accept stablecoins?
If we offered a $1m prize for the first bank in each region that does it is that enough?
Do you work for a bank and want to discuss this?
— FTX – Built By Traders, For Traders (@FTX_Official) December 28, 2021
The pitch to the exchange’s more than 350,000 Twitter followers came following FTX CEO Sam Bankman-Fried, or SBF, suggesting additional regulatory clarity was needed for the crypto space — including stablecoins — to move forward as an industry.
According to the CEO, creating a “reporting/transparency/auditing based framework” to confirm how the coins are backed would “solve 80% of the problems while allowing stablecoins to thrive onshore.”
FTX said it aimed for an audience including but not limited to U.S. banks in calling for an agreement on stablecoins, and would be open to speaking to credit unions. The exchange is incorporated in Antigua and Barbuda and headquartered in The Bahamas but also operates FTX US for U.S. users.
“We just acquired a bank and this is a good idea,” said Oliver von Landsberg-Sadie, CEO of the London-based BCB Group. “No prize required by us, you are already a client of ours, and we all gain in the long run.”
This year, many U.S. regulators have turned their attention to stablecoins, with The President’s Working Group on Financial Markets releasing a report in November suggesting that issuers should be subject to “appropriate federal oversight” akin to that of banks. Nellie Liang, the Undersecretary of the Treasury for Domestic Finance, has also hinted at additional laws affecting the coins.
Will US Regulators Shake Stablecoins Into High-Tech Banks?
U.S. stablecoin issuers might soon face liquidity, customer protection and asset reserve rules — and maybe even a deposit-insurance mandate like banks.
Regulators around the world have been thinking seriously about the risks associated with stablecoins since 2019 but recently, concerns have intensified, particularly in the United States.
In November, the United States’ President’s Working Group on Financial Markets, or PWG, issued a key report, raising questions about possible “stablecoin runs” as well as “payment system risk.” The U.S Senate followed up in December with hearings on stablecoin risks.
It raises questions: Is stablecoin regulation coming to the U.S. in 2022? If so, will it be “broad stroke” federal legislation or more piecemeal Treasury Department regulation?
What impact might it have on non-bank stablecoin issuers and the crypto industry in general? Could it spur a sort of convergence where stablecoin issuers become more like high-tech banks?
We are “almost certain” to see federal regulation of stablecoins in 2022, Douglas Landy, partner at White & Case, told Cointelegraph. Rohan Grey, an assistant professor at Willamette University College of Law, agreed.
“Yes, stablecoin regulation is coming, and it’s going to be a dual push” marked by a growing impetus for comprehensive federal legislation, but also pressure on Treasury and related federal agencies to become more active.
Others, however, say not so fast. “I think the prospect of legislation is unlikely before 2023 at least,” Salman Banaei, head of policy at cryptocurrency intelligence firm Chainalysis, told Cointelegraph. As a result “the regulatory cloud looming over the stablecoin markets will remain with us for a while.”
That said, the hearings and draft bills that Banaei expects to see in 2022 should “lay the groundwork for what could be a productive 2023.”
Temperature Is Rising
Most agree that regulatory pressure is building — and not just in the U.S. “Other countries are reacting to the same underlying forces,” Grey told Cointelegraph.
The initial catalyst was Facebook’s 2019 Libra (now Diem) announcement that it aimed to develop its own global currency— a wake-up call for policymakers — making it clear “that they could not stay on the sidelines” even if the crypto sector was (then) “a small, somewhat quaint industry” that posed no “systemic risk,” Grey explained.
Today, there are three main factors that are propelling stablecoin regulation forward, Banaei told Cointelegraph. The first is collateralization, or the concern, also articulated in the PWG report, that, according to Banaei:
“Some stablecoins are providing a misleading picture of the assets underpinning them in their disclosures. This could lead to holders of these digital assets waking up to a seriously devalued stake as a function of a repricing and possibly a run.”
The second worry is that stablecoins “are fueling speculation in what is perceived as a dangerous unregulated ecosystem, such as DeFi applications that have yet to be subjected to legislation as other digital assets have,” continued Banaei.
Meanwhile, the third concern is “that stablecoins could become legitimate competitors to standard payment networks,” benefitting from regulatory arbitrage so that one day they may provide “broadly scalable payments solutions that could undermine traditional payments and banking service providers.”
To Banaei’s second point, Hilary Allen, a law professor at American University, told the Senate in December that stablecoins today aren’t being used to make payments for real-world goods and services, as some suppose, but rather their primary use “is to support the DeFi ecosystem […] a type of shadow banking system with fragilities that could […] disrupt our real economy.”
Grey added: “The industry got bigger, stablecoins got more important and stablecoins’ positive spin got tarnished.” Serious questions were raised in the past year about industry leader Tether’s (USDT) reserve assets but later, even more compliant seemingly well-intentioned issuers proved misleading with regard to reserves.
Circle, the primary issuer of USD Coin (USDC), for instance, had claimed that its stablecoin “was backed 1:1 by cashlike holdings” but then it came out that “40 percent of its holdings were actually in U.S. Treasurys, certificates of deposit, commercial paper, corporate bonds and municipal debt,” as the New York Times pointed out.
In the past three months, a kind of “public hype has entered a new level,” continued Grey, including celebrities promoting crypto assets and nonfungible tokens, or NFTs. All these things nudged regulators further along.
Regulation by FSOC?
“2022 is probably too early for comprehensive federal stablecoin legislation or regulation,” Jai Massari, partner at Davis Polk & Wardwell LLP, told Cointelegraph. For one thing, it’s a midterm election year in the U.S., but “I think we’ll see a lot of proposals, which are important to form a baseline for what stablecoin regulation could be,” she told Cointelegraph.
If there is no federal legislation, the Financial Stability Oversight Council, or FSOC, might act on stablecoins in 2022. The multi-agency council’s 10 members include heads of the SEC, CFTC, OCC, Federal Reserve and FDIC, among others.
In that event, non-bank stablecoin issuers might expect to be subject to liquidity requirements, customer protection requirements and asset reserve rules — at a minimum, Landy told Cointelegraph, and regulated “like money market funds.”
Banaei, for his part, deemed an FSOC intervention in stablecoin markets “possible but unlikely,” though he could see Treasury actively monitoring stablecoin markets in the coming year.
Will Stablecoins Have Deposit Insurance?
A stronger step might require stablecoin issuers to be insured depository institutions, something recommended in the PWG report and also suggested in some legislative proposals like the 2020 Stable Act which Grey helped to write.
Massari doesn’t think imposing such restrictions on issuers is necessary or desirable. When she testified before the Senate’s Committee on Banking, Housing and Urban Affairs on Dec. 14, she stressed that a “true stablecoin” is a form of a “narrow bank,” or a financial concept that dates back to the 1930s.
Stablecoins “do not engage in maturity and liquidity transformation — that is, using short-term deposits to make long-term loans and investments.” This makes them inherently safer than traditional banks. As she later told Cointelegraph:
“The superpower of [traditional] banks is that they can take deposit funding and not just invest in short-term liquid assets. They can use that funding to make 30-year mortgages or to make credit card loans or investments in corporate debt. And that is risky.”
It’s the reason traditional commercial banks are required to buy FDIC (i.e., deposit) insurance through premium assessments on their domestic deposits.
But, if stablecoins limited their reserve assets to cash and genuine cash equivalents such as bank deposits and short-term U.S. government securities they arguably avoid the “run” risk and don’t need deposit insurance, she contends.
There’s no question, however, that fear of a stablecoin run remains on the minds of U.S. financial authorities. It was flagged in the PWG report and again in FSOC’s 2021 annual report in December:
“If stablecoin issuers do not honor a request to redeem a stablecoin, or if users lose confidence in a stablecoin issuer’s ability to honor such a request, runs on the arrangement could occur that may result in harm to users and the broader financial system.”
“We can’t have a run on deposits,” commented Landy. Banks are already regulated and don’t have issues with liquidity, reserves, capital requirements, etc. All that’s been dealt with. But, that’s still not the case with stablecoins.
“I think there are positives and negatives if stablecoin issuers are required to be insured depository institutions (IDI),” said Banaei, adding: “For example, an IDI could issue FDIC-protected stablecoin wallets. On the other hand, fintech innovators would then be compelled to work with IDIs, making IDIs and their regulators effectively the gatekeepers for innovation in stablecoins and related services.”
Grey thinks a deposit insurance requirement is coming. “The [Biden] Administration seems to be adopting that view,” and it’s gaining traction overseas: Japan and Bank of England both appear to be leaning in this direction.
Those authorities recognize that “It’s not just about credit risk,” he told Cointelegraph. There are operational risks, too. Stablecoins are just so much computer code, subject to bugs and the technology might fail, he told Cointelegraph. Regulators don’t want consumers to be hurt.
What’s coming next?
Looking ahead, Grey foresees a series of convergences in the stablecoin ecosystem. Central bank digital currencies, or CBDCs, many of which appear close to roll-out, will have a two-tier architecture and the retail tier will look like a stablecoin, he suggests. That’s one convergence.
Second, some stablecoin issuers like Circle will acquire federal bank licenses and eventually look like hi-tech banks; differences between legacy banks and fintechs will narrow. Landy, too, agreed that bank-like regulation of stablecoins would likely “force non-banks to become banks or partner with banks.”
The third possible convergence is a semantic one. As legacy banks and crypto enterprises move closer, traditional banks could adopt some of the language of the cryptoverse. They may no longer speak about deposits — but rather stablecoin staking, for instance.
Landy is more skeptical on this point. “The word ‘stablecoin’ is hated in the regulatory community,” he told Cointelegraph and might be jettisoned if and when stablecoins come under U.S. government regulators.
Why? The very name suggests something that stablecoins are not. These fiat-pegged digital coins are anything but “stable” in the view of regulators. Calling them such could mislead consumers.
DeFi, Algorithmic Stablecoins And Other Issues
Additional matters need to be sorted out too. “There is still a big issue of how stablecoins are being used in DeFi,” said Massari, though “banning stablecoins is not going to stop DeFi.” And, then there is the issue of algorithmic stablecoins — stablecoins that aren’t backed by fiat currencies or commodities but rather rely on complex algorithms to keep their prices stable. What do regulators do with them?
In Grey’s view, algorithmic stablecoins are “more risky” than fiat-backed stablecoins, but the government failed to deal with this topic in its PWG report, perhaps because algorithmic stablecoins still aren’t widely held.
Overall, isn’t there a danger here of too much regulation — a worry that regulators might go too far in reining in this new and evolving technology?
“I think there is a risk of overregulation,” said Banaei, particularly given that China appears close to launching its CBDC, “and the digital Yuan has the potential to be a globally scalable payments network that could take significant market share over payments networks coming under the reach of U.S. policymakers.”
Should Western Union Worry About Stablecoins?
For now, stablecoins are used mostly in the speculative crypto economy. Will that change?
Remittances are small transfers, usually $1,000 or less, that people living in diaspora make to loved ones back home.
These payments have become a vital form of survival not only for families left behind, but also for the developing countries themselves, which over the years have received shrinking amounts of development assistance and direct investment. Total remittances have reached $589 billion this year, according to the World Bank.
At the moment, stablecoins are used mostly in the speculative crypto economy, not the bricks and mortar economy. Cryptocurrency exchanges that lack access to the banking system rely on stablecoins such as tether (USDT) and USD coin (USDC) as substitute proto-dollar accounts.
Stablecoins also serve as the building blocks for decentralized financial (DeFi) tools.
Significant real-world usage of stablecoins, particularly remittances, would be a big “get” for the stablecoin sector. But there are some big challenges to address before this happens.
To be fair, crypto does already serve as a remittance vehicle, albeit a niche one. In a recent paper, economists Ken Rogoff, Carmen Reinhart and Clemens Graf von Luckner found that a lower-bound of 1.3% of all trades on LocalBitcoins, a peer-to-peer exchange, were related to usage of bitcoin for cross-border payments.
The authors note that bitcoin remittances often involve countries like Nigeria that have exchange controls, which bitcoin is useful for evading.
The advantage that stablecoins have over bitcoin is that they don’t suffer from bitcoin’s wild volatility. Indeed, remittance company MoneyGram is currently experimenting with them.
The first of the two major hurdles to ubiquitous stablecoin remittances is the double-hop problem.
The Double-Hop Problem
Much of the world lives in a bank account world. Our salaries arrive in our bank account. We purchase our necessities like shelter or food with a debit card or bank transfer.
Everyone else lives in a cash world. We earn money in cash and buy stuff with physical currency.
But no one lives in a stablecoin world. Except for a few privileged denizens of the crypto economy, no one receives a salary in stablecoins. Certainly no one buys supper with them. (Using a crypto-linked payment card to make purchases doesn’t count, since these cards sell crypto for fiat at the last instant and pay with bank money.)
This is the core of the problem. For most of the world’s remittance users, a stablecoin remittance forces them to temporarily leave their preferred financial environment.
A sender must jump out of cash or bank accounts onto stablecoin rails. The person who receives the stablecoins must then hop back into the world of bank accounts or physical cash.
These extra hops are inconvenient. First, they require a certain level of technical and financial expertise to expedite. No internet access? Forget about it. Secondly, they are expensive. A hop into and out of stablecoins doubles the foreign exchange transaction fees involved in remitting money.
In her recent testimony to the U.S. Senate, financial regulatory expert Alexis Goldstein crunched how much the stablecoin double-hop costs.
Using the U.S.-to-Europe remittance corridor as her example, Goldstein found that a remittance sender in the U.S. who buys $200 worth of tether stablecoins with dollars on Coinbase must pay a fee of $2.99. The $200 is then sent to a European recipient, who must pay $2.99 to sell tether on Coinbase for euros.
That’s already $6 in fees. Goldstein’s numbers didn’t include slippage – the gap between the bid and ask price for tether on Coinbase – which amplifies the all-in costs of a stablecoin remittance.
By contrast, a traditional $200 remittance carried out by Wise, MoneyGram or Western Union is just a single-hop transaction. Dollars must be sold for euros, and that’s it. A single-hop will always be cheaper than a double-hop.
The User Fee Problem
The double-hop problem that bedevils stablecoin remittances is compounded by the user fee problem. Platforms like Ethereum that are based on proof-of-work require that crypto miners be paid a fee to validate transactions.
At the time of writing this article, it would have cost me a whopping $23 in mining fees to transfer $100 worth of USDP stablecoins that I own. That’s an awfully pricey remittance.
The user fee problem can be avoided by dispatching stablecoin remittances over Ethereum’s emerging layer 2 architecture, say the Optimism or Polygon protocols. However, graduating stablecoins from the main level of Ethereum over to layer 2 and back down again incurs costly mining fees. It is also technically complex and takes time.
Competing blockchains Tron, Avalanche and Solana offer an alternative route for avoiding Ethereum’s user fee problem. These blockchains rely on proof-of-stake for security, which is much cheaper than proof-of-work.
But even if the parties to a remittance manage to route a stablecoin in a way that minimizes the user fee problem, the nagging double-hop problem remains. The jump into stablecoins and back out again will always be more costly than a single-hop remittance.
A few developments might minimize the double-hop problem and help make stablecoin remittances more competitive with regular ones.
Banks And Stablecoins Closer
One way to solve the double-hop problem would be a tighter fusion between stablecoins and bank accounts.
If banks allowed customers to automatically withdraw stablecoins from their accounts without a fee (like we already do with cash), and also freely deposit stablecoins, then people making stablecoin remittances would no longer have to pay double the fees.
For example, say that Manuel – an immigrant living in the U.S. – wants to send money to Maria in Honduras. He’d start by withdrawing $200 in Wells Fargo-approved stablecoins from his Wells Fargo bank account, for free.
He then sends them to Maria, who deposits the $200 worth of stablecoins directly into her Honduran bank account at no charge.
Maria then asks her bank to convert the funds into Honduran lempira so she can pay rent. This foreign exchange swap is the only transaction in the entire circuit that incurs a bank fee.
While no-fee bank-to-stablecoin transactions would allow for cheap remittances, it’s not evident that this option will ever emerge. Banks don’t want to lose business to stablecoin issuers, after all, unless they themselves are the issuer of stablecoins.
Stablecoins Invade The Real World
A second way to minimize the double-hop problem would be to increase the number of real-world situations where stablecoins are accepted.
If Manuel’s real-world U.S. salary was paid in stablecoins, say tether, then he wouldn’t have to do a U.S. dollar-to-tether conversion when he sends a remittance to Maria.
Alternatively, if Maria could purchase food and other basics with stablecoins, then she wouldn’t have to do a stablecoin-to-lempira conversion.
Broadening the range for real-world stablecoin transactions is not as easy as it sounds. What makes a payments network useful is the fact that other people are already connected to it. Lacking an initial set of users, a new payment network’s chances of breaking through are tiny.
Growing The Crypto Economy
If real-world acceptance of stablecoins is unlikely to occur, there’s a third way towards stablecoin ubiquity: increase the amount of people inhabiting the nascent crypto economy.
Right now the crypto economy is occupied by crypto fans, speculators and people who work in the industry.
If there were more things to do in the crypto economy – entertainment, job opportunities, socializing – then people would increasingly “immigrate” there from the real world. New arrivals would be obliged to adopt the de facto payments standard, stablecoins.
If Bob, who occupies one region of the crypto economy, wants to remit $200 to Alice in another region of the crypto economy, USD coin or tether are the most convenient options. Interposing a non-blockchain intermediary like Western Union into the mix would be a step backwards.
That would introduce an expensive double-hop, much like a stablecoin remittance in the real world introduces a double-hop.
For now, the double-hop and user fee problems prevent stablecoins from being a competitive remittance vehicle. Plenty of work remains to be done if they are to ever get to ubiquity.
CoinDesk Joins Court Case Seeking Access To NYAG Tether Documents
Tether wants the state Supreme Court to stop the attorney general’s office from sharing documents requested by CoinDesk. CoinDesk is now a party to the proceedings.
CoinDesk has joined a legal proceeding between the New York Attorney General’s office (NYAG) and Tether and its parent company as part of the news organization’s effort to shed light on the reserves backing $78.4 billion of stablecoins.
Tether, together with iFinex, which owns Tether and cryptocurrency exchange Bitfinex, petitioned the New York State Supreme Court in August to block the NYAG from providing CoinDesk with documents detailing the reserves.
CoinDesk is now a party to the case because it has a stake in the outcome – and the publication is arguing that the investing public does too.
“The public interest in disclosure of the requested information far outweighs any private interest [Tether] might have,” CoinDesk said in a memorandum filed with the court Jan. 4.
Neither Tether nor the NYAG objected to CoinDesk intervening in the case, according to a Dec. 20 filing signed by lawyers for all three parties. An order permitting the intervention signed by Judge Laurence L. Love was posted two days later.
In June 2021, CoinDesk filed a Freedom of Information Law (FOIL) request with NYAG asking for documents obtained during the office’s investigation of Tether and Bitfinex, which the companies had settled earlier that year for $18.5 million
The FOIL request also asked for a copy of Tether’s submission to the NYAG in May 2021, when the stablecoin issuer published a breakdown of its reserves for the first time.
This breakdown was identical to what Tether sent the NYAG’s office in accordance with a February settlement, Tether General Counsel Stuart Hoegner said at the time.
The NYAG’s FOIL officer initially rejected CoinDesk’s FOIL request. The news organization appealed, and the appeals officer reversed the decision. In its petition, Tether argued that the exact composition of its reserves is a competitive trade secret and revealing this information would hurt its business.
Assistant Attorney General James B. Cooney filed to dismiss Tether’s petition on Dec. 6.
A Tether spokesperson did not return a request for comment, but in a public statement published three days after CoinDesk’s filing, Tether said, “CoinDesk has sought to intervene in this proceeding in an effort to re-write the agreement between the New York Attorney General’s Office (OAG) and Tether and Bitfinex.”
“It is worth noting that CoinDesk and Circle, the issuer of USDC and a Tether competitor, share an investor: Digital Currency Group. CoinDesk’s coverage of its legal papers does not alert readers to this glaring conflict of interest. Weaponizing the media does a disservice to the ecosystem,” the stablecoin issuer claimed. (All CoinDesk articles automatically include a standard disclosure about its ownership.)
Public Interest Or Trade Secret?
Chiefly, CoinDesk argued in court papers that disclosing what, specifically, is backing the USDT stablecoin issued by Tether is in the public interest, and therefore should not qualify as a trade secret. Tether itself claimed it had proactively made the decision to publicize its reserve breakdown when announcing its settlement with the NYAG.
The filings were signed by the news organization’s chief content officer, Michael Casey, and submitted to the court by Lacy H. Koonce III and Olivia Hayes Franklin, attorneys at Klaris Law PLLC. They argued that “the requested information does not fall into any FOIL Exemption.”
CoinDesk’s attorneys submitted an expert’s affirmation to explain why Tether’s documents should be made public.
“In my opinion disclosing the information relating to USDT’s backing assets would allow its users and the public to properly assess the claims to stability Tether makes and would be beneficial for the functioning of the market,” wrote Robleh Ali, general manager of Wadagso Inc., a technology company focusing on digital currency and associated market infrastructure.
“Tether’s claim of a secret investment strategy that cannot be disclosed to users does not conform to USDT’s purported status as a stable asset supporting the functioning of the market and is more appropriate to a hedge fund – a comparison explicitly made. USDT can either be an exotic investment with a secret investment strategy to match or a stablecoin – it cannot be both.”
Ali criticized Tether’s likening itself to Ray Dalio’s hedge fund, Bridgewater Associates, in previous filings with the court.
“[T]here is a fundamental difference between the two,” he wrote. Bridgewater “holds itself out as an investment firm designed to produce returns for its investors, not as a stable asset to facilitate trading elsewhere.”
(Also, Bridgewater lists some of its public equity holdings and their value in filings with the Securities and Exchange Commission.)
Also submitted was an affidavit, signed by the site’s executive editor, Marc Hochstein, in support of CoinDesk’s answer to the Tether petition.
Hochstein noted that New York Attorney General Letitia James said in her press release announcing the settlement that “Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines” and “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie.”
Tether has until Feb. 4 to file a response to CoinDesk’s arguments. The court is scheduled to hear the parties’ arguments on Feb. 7.
Crypto Regulation Concerns Make Decentralized Stablecoins Attractive To DeFi Investors
The threat of stablecoin regulation and USDT and USDC centralization are making decentralized stablecoins like MIM, FRAX and UST attractive to DeFi investors.
Stablecoins have emerged as a foundational part of the cryptocurrency ecosystem over the past couple of years due to their ability to provide crypto traders with an offramp during times of volatility and their widespread integration with decentralized finance (DeFi). These are necessary for the health of the ecosystem as a whole.
Currently, Tether (USDT) and USD Coin (USDC) are the dominant stablecoins in the market, but their centralized nature and the persistent threat of stablecoin regulation have prompted many in the crypto community to shun them and search for decentralized alternatives.
Binance USD (BUSD) is the third-ranked stablecoin and is controlled by the Binance cryptocurrency exchange. DAI, the top ranked decentralized stablecoin, has 38% of its supply backed by USDC which, again, raises questions about its “decentralization.”
Investors’ pivot toward decentralized stablecoins can be noted by the rising market capitalizations and the number of DeFi platforms integrating TerraUSD (UST), FRAX (FRAX) and Magic Internet Money (MIM).
Here’s a look at some of the factors backing the growth of each stablecoin.
TerraUSD (UST) is an interest-bearing algorithmic stablecoin that is part of the Terra (LUNA) ecosystem and is designed to remain value-pegged with the United States dollar.
In order to mint new UST, users are required to interact with Anchor Protocol and either burn an equivalent value of the network’s native LUNA token or lock up an equivalent amount of Ether (ETH) as collateral.
The addition of Ether as a form of collateral really helped kick things into high gear for UST because it allowed for some of the value held in Ether to migrate into the Terra ecosystem and this resulted in an increase to UST circulating supply.
1/ bETH is now live on the Anchor web app!
You can now borrow $UST against bETH, a wrapped version of the stETH staking derivative for ETH 2.0.
— Anchor Protocol (@anchor_protocol) August 13, 2021
As a result of the growth of UST, the Terra network recently surpassed Binance Smart Chain in terms of total value locked (TVL) on the protocol, which now sits at $17.43 billion, according to data from DefiLlama.
Terra has also been adopted by the Curve stablecoin ecosystem which further helped its distribution across numerous DeFi protocols. This also gives UST holders another way to earn a yield alongside the 19.5% annual percentage yield (APY) offered to users who stake their UST on Anchor Protocol.
FRAX (FRAX) is a first-of-its-kind fractional-algorithmic stablecoin developed by Frax Protocol. It is partially backed by collateral and the remaining portion is stabilized algorithmically.
The real story behind the growth of FRAX starts with its adoption by the DeFi community within multiple well-known projects and decentralized autonomous organizations (DAOs) voting to add support for the stablecoin within their ecosystems and treasuries.
FRAX was adopted early on by the OlympusDAO rebase protocol as a form of collateral that could be bonded to obtain the platform’s native OHM token. It also became the stablecoin of choice within the recently launched TempleDAO protocol.
On Dec. 22, 2021, FRAX was added to Convex Finance (CVX) and was immediately thrust into the ongoing Curve Wars where a handful of major DeFi protocols are battling to accumulate CVX and Curve (CRV) to gain voting power over the Curve network and increase their stablecoin yield.
— Convex Finance (@ConvexFinance) December 22, 2021
This week, the Curve Wars received a new participant after Tokemak members voted to add FRAX and Frax Share (FXS) to its Token Reactor, vowing to “bring the fight to a massive new scale.”
Magic Internet Money
Magic Internet Money (MIM) is a collateral-backed stablecoin issued by a popular DeFi protocol called Abracadabra.Money. What differentiates this coin is that it is “summoned” into existence when users deposit one 16 supported cryptocurrencies in “cauldrons” that support MIM.
There are limitations placed on the amount that can be borrowed from the assets supported on Abracadabra and this is part of the protocol’s effort to avoid the problems faced by MakerDAO (DAI).
Namely, the presence of too many centralized stablecoins and the history of catastrophic liquidations during market volatility.
Some of the popular tokens available to pledge as collateral to mint MIM include wrapped Ether (wETH), Ether, Shiba Inu (SHIB), FTX Token (FTT) and Fantom (FTM).
Our first zero-interest lending market is here!
– Interest 0%
– Liquidation Fee 4%
– LTV 90%
– Borrow Fee 0.5%
What are you waiting for anon? Mint now!https://t.co/N3r54iPo7n
— ♂️ (@MIM_Spell) December 31, 2021
MIM has also been integrated into the pools on Curve Finance, further highlighting the important role that Curve plays for stablecoins within the DeFi ecosystem and underscoring the incentives for participating in the Curve Wars.
MIM’s cross-platform and centralized exchange integration, including its long list of collateral options, have boosted its circulating supply to $1.933 billion, making it the sixth-ranked stablecoin in terms of market capitalization.
While the amount of value held in these decentralized stablecoins is only a fraction of that held in USDT and USDC, they are likely to continue to see their market share increase in the months ahead as proponents of decentralization choose them over their centralized counterparts.
PayPal Reportedly Confirms Plans To Explore The Launch Of A Stablecoin
The development of an in-house stablecoin was first discovered in the source code of Paypal’s iPhone app by developer Steve Moser.
American fintech giant PayPal Holdings has reportedly confirmed its intent to launch its own stablecoin named PayPal Coin. The development of an in-house stablecoin was first discovered in the source code of Paypal’s iPhone app by developer Steve Moser.
Confirming the evidence found on the PayPal app, Jose Fernandez da Ponte, PayPal’s senior vice president of crypto and digital currencies, told Bloomberg News:
“We are exploring a stablecoin; if and when we seek to move forward, we will of course, work closely with relevant regulators.”
Moser’s finding uncovered that PayPal is in the works of building PayPal Coin, which will be backed by the United States dollar. However, a PayPal spokesperson clarified that the source codes of the iPhone application were developed in a recent hackathon.
While PayPal’s digital asset is in the making, the name, logo and features of the in-house token are subject to change prior to launch. Supporting the ongoing development, PayPal has previously launched new features that allow users to buy, hold and pay with digital coins.
da Ponte had also pointed out in an interview from November 2021 that PayPal has “not yet seen a stablecoin out there that is purpose-built for payments.” According to him, a stablecoin should support payments at scale while ensuring the security of the network, adding:
“There would have to be clarity on the regulation, the regulatory frameworks, and the type of licenses that are needed in this space.”
In addition to launching its own stablecoin, PayPal has also taken proactive measures to spread crypto-related services in jurisdictions out of the United States.
In September 2021, the company announced a rollout of new Bitcoin trading services for the United Kingdom market. As Cointelegraph reported, customers can trade major cryptocurrencies including Bitcoin (BTC), Ether (ETH), Litecoin (LTC) and Bitcoin Cash (BCH).
Terra Founder Do Kwon Plans To Obtain $10Billion Bitcoins For Stablecoin Reserves
* The founder of blockchain company Terraform Labs, Do Kwon, said the firm plans to buy $10 billion worth of Bitcoins to ensure the stability of the Terra USD (UST) staple.
* Terra is a decentralized blockchain platform that specializes in stablecoin mining, Its Terra USD (UST) is an algorithmic stablecoin pegged to the value of the U.S. dollar, with the value of the dollar partially supported by an equivalent amount of its native LUNA token.
Do Kwon, the founder of blockchain company Terraform Labs reported on the firm’s plans to buy $10 billion worth of Bitcoins (BTC) to ensure the stability of the Terra USD (UST) stabelcoin. He tweeted:
$UST with $10B+ in $BTC reserves will open a new monetary era of the Bitcoin standard. P2P electronic cash that is easier to spend and more attractive to hold
Terra Buys Bitcoin For Reserves
Kwon explained that the Bitcoin reserves will serve as additional support in case Terra USD owners start exchanging coins en masse for other stablecoins. According to Kwon, the company will continue to build up reserves until it becomes mathematically impossible for ‘idiots’ to claim de-peg risk for UST.
On March 17, Kwon confirmed that Terraform Labs had already begun purchasing Bitcoins. He did not name the number of coins purchased. Furthermore, he did not say how long the company plans to accumulate the $10 billion worth of coins.
To see if plans were already underway, or it was just a thought at this stage, and the founder simply replied:
I don’t understand the distinction, We’re already buying Bitcoin.
In a tweet shortly after, Kwon also noted that:
We start buying BTC and Twitter verifies me, I see you Jack,
Luna Foundation Guard, which issued the cryptocurrency Terra (LUNA), also wants to invest in Bitcoins. The firm plans to exchange LUNA for UST, sell the stablecoins to the Curve pool, and purchase Bitcoins with the proceeds. Like Terraform Labs, Luna Foundation Guard will store the coins.
L F G
— LFG | Luna Foundation Guard (@LFG_org) March 9, 2022
Terra (Luna) Notes
As a reminder, Terra’s goal is to become a reliable bridge between fiat and cryptocurrencies. The main drawback of decentralized currencies such as Bitcoin is high volatility. This prevents Bitcoin from being accepted as a means of payment. The main drawback of stabelcoins is centralization and the possibility of uncontrolled issuance.
Terra solves both of these problems, that is, UST is decentralized, and its issuance is linked to LUNA by a mathematical algorithm and does not depend on the will of the publisher.
To get a UST, the user has to burn the corresponding amount of LUNA. If the demand for USTs grows, LUNA validators’ remuneration increases and the money supply grows. If there is a surplus of coins, some of them are burned by the system.
UST’s Do Kwon Was Behind Earlier Failed Stablecoin, Ex-Terra Colleagues Say
Basis Cash, an algorithmic stablecoin project founded by the anonymous “Rick” and “Morty” in 2020, was actually the work of Terraform Labs employees.
Do Kwon, the CEO of Terra creator Terraform Labs, was one of the pseudonymous co-founders behind the failed algorithmic stablecoin Basis Cash, CoinDesk has learned.
Basis Cash (BAC) was a closely watched revival in decentralized finance (DeFi) circles when it launched on Ethereum in late 2020, just before the launch of terraUSD (UST), Terra’s flagship stablecoin. Like UST, BAC sought to maintain a $1 peg through code, not collateral.
But it failed: The token of this long-abandoned project never achieved its target of dollar parity, sank below $1 in early 2021 and was trading well below 1 cent on Wednesday. Now history appears to be repeating: Over the last three days, UST sank precipitously below its peg, going as low as 27 cents in early morning U.S. hours Wednesday.
UST’s depegging has shocked crypto markets and regulators alike as the once-$15 billion stablecoin has continued its downward spiral. While BAC’s $54.5 million footprint was far smaller in impact, it offers a historical data point for observers grappling with the feasibility of algorithmic stablecoins.
Hyungsuk Kang, a former engineer at Terraform Labs (TFL), said Basis Cash was, in fact, a side project from some of Terra’s early creators, including himself and Kwon. Kang ultimately left TFL to build a Terra competitor called Standard Protocol.
“Basis Cash wasn’t tested at the moment, and we weren’t even sure” it would work, Kang said. Kwon “wanted to just test it out. He said that this was a pilot project for doing that.”
Another Basis Cash builder who spoke to CoinDesk on condition of anonymity confirmed that Do Kwon and TFL employees were behind the project.
Both Kang and the anonymous employee tell CoinDesk Kwon was “Rick Sanchez,” the pseudonymous co-founder. CoinDesk also reviewed internal “Basis Cash Korea (BCK)” chat logs in which Kwon alludes to himself as “Rick.”
Kwon did not respond to CoinDesk’s requests for comment.
Basis Cash never reached the heights of other Kwon-linked crypto projects. Its total value locked (TVL) briefly peaked at $174 million in February 2021, two orders of magnitude below Terra’s $30 billion TVL before this week’s historic sell-off.
Revealing the real name behind an online pseudonym (even a long-discarded one) is not a decision CoinDesk takes lightly. Our default position is to respect the privacy of pseudonymous actors with established reputations under their well-known handles unless there is an overwhelming public interest in revealing their real-world identities.
In this case, there is such public interest as Kwon’s UST stablecoin death spirals, wreaking havoc across the broader cryptocurrency market. Amid this precarious situation, investors deserve to know that UST was not Kwon’s sole attempt at making an algorithmic stablecoin work.
What Was Basis Cash?
Basis Cash and its promise of an algorithmic stablecoin predated crypto Rick and Morty.
An anonymous team of builders – mostly employees of Terraform Labs, according to chat logs reviewed by CoinDesk – modeled Basis Cash after an earlier project called Basis (formerly known as Basecoin).
Basis, an erstwhile venture capital darling, raised $133 million before shutting its doors in 2018 over regulatory concerns. Founder Nader Al-Naji then said that “there would be no way” for Basis’s peg maintenance tokens to avoid securities designations; he shuttered the project rather than fight it out in court.
(Al-Naji would later launch a controversial crypto startup under a pseudonym before ultimately doxxing himself under pressure.)
But Basis’s algorithmic ideals continued to float around stablecoin circles right on through to the heat of DeFi summer 2020, when Rick and Morty stepped in. Kwon and other algorithmic stablecoin adherents have long argued that the decentralized finance space needs a decentralized stable currency without censorship risk or central points of failure.
Such an approach contrasts with that of market-leading stablecoins like Tether’s USDT and Circle’s USDC, which maintain their $1 peg by (in theory) backing every digital dollar with their centralized treasuries.
“Yo degens, anyone remember what Basis was? It was one of the early ‘DeFi’ algorithmic stablecoins with high ambitions, but it was shut down due to SEC-related risks,” said Rick’s since-deleted Telegram account in the Basis Cash Telegram channel on Aug. 20, 2020. “Today we’re bringing Basis back from the grave.”
Apparently intrigued by the early ideas behind Basis, Do Kwon directed a select group of TFL employees to resurrect what eventually became Basis Cash, Kang and another early TFL engineer say. The Korea-based project was envisioned as a way to test out the core concepts of the original Basis without falling prey to U.S. regulatory pitfalls.
CoinDesk’s sources say Kwon deliberately distanced himself from the day-to-day operations of the project, though he proposed most of the core ideas behind Basis Cash and its underlying token model. Analogous to UST, which relies on a token-burn mechanic involving its sister coin LUNA, BAC relies on a bonding mechanism to maintain its $1 peg.
Kwon also appeared to serve as a spokesperson for the project on Twitter and other forums under his “Rick” pseudonym (CoinDesk cannot confirm whether others ever filled in as “Rick,” but Kang, the other Basis Cash builder, and chat logs suggest the moniker primarily belonged to Kwon).
On its website, Basis Cash describes itself as a “Decentralized Stablecoin with an Algorithmic Central Bank,” and in a November 2020 interview with CoinDesk, “Rick” shared a vision for Basis Cash similar to that for UST.
“In the long term, we look forward to seeing Basis Cash be used widely as a base layer primitive such that there is organic demand for the asset in many DeFi and commercial settings,” he said over Telegram at the time.
Lessons For UST?
One of the first examples of an algorithmic stablecoin to be tested in the wild, Basis Cash never found its footing. Game theory and smart contracts were supposed to regulate BAC’s supply to keep it trading at the price of $1, but the token never managed to hold on to its dollar peg.
By all outward appearances, Kwon had nothing to do the Basis Cash project. He has even made statements suggesting he was a critic:
While DeFi degens are busy trapping retail in zero sum games in @emptysetsquad @BasisCash, recall the only real stabilizing force in algo stablecoins is growing adoption and usage@terra_money is the oldest and most widely used algo stablecoin in existance
Bow before the king
— Do Kwon ???? (@stablekwon) December 30, 2020
But even amid Basis Cash’s struggles, Kwon’s main account could be spotted from time to time in the project’s Telegram, sans pseudonym.
A user surprised to find Terra’s founder in the Basis Cash Telegram group once asked Kwon what he was doing there.
“I like studying new things. Especially old things that are new again,” he responded.
‘Failure Should Be An Option,’ US Sen. Pat Toomey Says of UST Turmoil
The Banking Committee’s top Republican doesn’t want asset-backed stablecoins tarnished by the UST drama.
Pat Toomey, the Senate Banking Committee’s senior Republican, said Wednesday algorithmic stablecoins may not pose a risk to the financial sector the same way fully reserved asset-backed stablecoins might.
The junior senator from Pennsylvania commented as the terraUSD (UST) stablecoin continued to languish far below the dollar peg it was designed to track.
“It does make sense that this episode with Terra would refocus attention on stablecoins generally,” Toomey told reporters on a conference call, but he defended tokens backed by assets such as cash and securities and said he doesn’t see them as a risk to the financial system, as suggested by U.S. regulators.
“And, by the way, failure should be an option,” Toomey said. “It’ll probably take some failures in this space in order for the market to figure out what works.”
Toomey, who last month pushed his own legislation for the future U.S. oversight of stablecoins, is serving out the remainder of his term before retiring in January. So he won’t be leading the committee if his party wins back the Senate majority after this year’s midterm elections.
In an exchange with U.S. Treasury Secretary Janet Yellen on Tuesday, Toomey similarly defended the broader stablecoin market by pointedly clarifying that UST was an algorithmic stablecoin not backed by the same kind of reserves that support other tokens.
Cryptocurrency TerraUSD Plunges As Investors Bail
Algorithmic stablecoin nosedived, briefly pushing it to less than a quarter of its original $1 value.
A selloff in a cryptocurrency that was supposed to be pegged to $1 accelerated Wednesday, briefly sending its price to less than a quarter of that value.
TerraUSD traded as low as 23 cents Wednesday, according to data from CoinDesk. As of about 5 p.m. ET, it had rebounded partially to about 67 cents in volatile trading.
A stablecoin, this breed of cryptocurrencies had gained favor among traders for being the one part of the crypto universe that was known for its stability.
While the most popular stablecoins maintain their levels with assets that include dollar-denominated debt and cash, TerraUSD is what is known as an algorithmic stablecoin, which relies on financial engineering to maintain its link to the dollar.
The break in TerraUSD’s peg began over the weekend with a series of large withdrawals of TerraUSD from Anchor Protocol, a sort of decentralized bank for crypto investors.
Anchor Protocol is built on the technology of the same Terra blockchain network that TerraUSD is based on. It had been a major factor in the growth of the stablecoin in recent months by allowing crypto investors to earn returns of nearly 20% annually by lending out their TerraUSD holdings.
At the same time, TerraUSD was also sold for other stablecoins backed by traditional assets through various liquidity pools that contribute to the stability of the peg, as well as through cryptocurrency exchanges.
The sudden outflow of money spooked some traders who began selling TerraUSD and its sister token Luna. Before its peg was broken, TerraUSD was the third-largest stablecoin, with a total market value of $18 billion.
TerraUSD’s fall to 23 cents at around 3:30 a.m. ET marked a 70% drop from its value 24 hours earlier, according to CoinDesk.
Even as TerraUSD began regaining some value after hitting its low, Luna continued to fall. The token was down about 95% from the previous 24 hours at around 5 p.m. ET, trading at $1.16.
“I understand the last 72 hours have been extremely tough on all of you—know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this,” wrote Do Kwon, the South Korean developer who created TerraUSD, on Twitter on Wednesday.
Stablecoins have surged in popularity the past two years and now act as the grease that moves the gears of the cryptocurrency ecosystem. Traders prefer to buy coins such as bitcoin, ether and dogecoin using digital assets that are pegged to the dollar because when they buy or sell, the price is only moving on one side. They also allow for fast trading without the settlement times associated with government-issued currencies, which can take days.
The price of bitcoin fell to $28,314.54 Wednesday, down 8.5% from its 5 p.m. ET level Tuesday. It has lost about 28% of its value over the past 7 days. It has lost about 24% of its value over the past week alone.
In the past, TerraUSD maintained its $1 price by relying on traders who acted as its backstop. When it fell below the peg, traders would burn the stablecoin—removing it from circulation—by exchanging TerraUSD for $1 worth of new units of Luna. That action reduced the supply of TerraUSD and raised its price.
Conversely, when TerraUSD’s value rose above $1, traders could burn Luna and create new TerraUSD, thus increasing the supply of the stablecoin and lowering its price back toward $1.
Such a model has drawn criticism because it relies on people’s collective willingness to support the cryptocurrency. Without that, the stablecoin can sink quickly, in what industry participants have described as a “death spiral.”
Martin Hiesboeck, head of blockchain and crypto research at digital money platform Uphold, compared what is happening with TerraUSD and Luna to a bank run. “People don’t trust it anymore, they’re running for the exit,” he said.
Mr. Kwon, the TerraUSD creator, also co-founded the Luna Foundation Guard, a nonprofit that has been helping to support TerraUSD and maintain its peg.
Earlier this week, the foundation said it lent $750 million of bitcoin to trading firms to protect the stablecoin’s peg. Blockchain records of the foundation’s wallet show that it no longer holds bitcoin in that account.
The previous day, TerraUSD’s value had rebounded to about 90 cents after falling to 61 cents, while Luna had also recovered after plunging.
Sen. Pat Toomey (R., Pa.), the top Republican on the Senate Banking Committee and an enthusiastic booster of cryptocurrencies in Congress, told reporters during a conference call Wednesday that the Terra selloff has refocused lawmakers’ attention on stablecoins.
Crash of TerraUSD Shakes Crypto. ‘There Was A Run On The Bank.’
The stablecoin, pledged to maintain a value of one dollar, plunged as low as 23 cents this week, showing cryptocurrencies’ vulnerability.
The cryptocurrency TerraUSD had one job: Maintain its value at $1 per coin.
Since it launched in 2020, it had mostly done that, rarely straying more than a fraction of a penny from its intended price. That made it an island of stability, a place where traders and investors could stash their funds in between forays into the otherwise frenzied crypto market.
This week TerraUSD became part of the frenzy too, slumping by more than a third on Monday and then tumbling as low as 23 cents on Wednesday.
The collapse saddled investors with billions of dollars in losses. It ricocheted back into other cryptocurrencies, helping drive down the price of bitcoin. Another stablecoin, tether, edged down to as low as 96 cents on Thursday before regaining its peg to the dollar.
The stock price of the largest U.S. crypto exchange, Coinbase Global, has fallen about 81% this year. It said on Tuesday that it was losing users and trading volume.
The crypto market has matured in recent years, running as a parallel financial system with its own version of banks and lending. These features attracted greater Wall Street engagement and venture investment, filling the coffers of crypto startups with cash. Crypto companies spent some of that cash on ad campaigns and lobbyists that painted the picture of an evolved market.
Yet TerraUSD’s plunge raises urgent questions about crypto developers’ ambitions to build a new form of finance. It shows that despite the hype, the nascent crypto system is still prone to the kinds of destabilizing bank runs that happen in the nondigital world.
TerraUSD’s outspoken creator, Do Kwon, directed that huge sums of money be spent to try to rescue his project. On Twitter, he tried to rally his followers.
“Terra’s return to form will be a sight to behold,” he wrote shortly after 6 a.m. Eastern time on Wednesday, when his stablecoin was trading at half its intended value. “We’re here to stay. And we’re gonna keep making noise.”
Stablecoins are a pillar of crypto’s parallel financial system. Crypto enthusiasts need to maintain a link to the government-backed currencies of traditional finance, where rent is due, cars are bought and bills are paid.
But they want to trade and invest in cryptoland only, not in dollars or euros or pounds. So stablecoins act as a kind of reserve currency, an asset whose value everyone understands—and that shouldn’t change.
Professional traders and individual investors alike use stablecoins, and had stashed around $180 billion in them as of Tuesday. A trader might sell a bitcoin for TerraUSD, then use the TerraUSD to buy ether, another cryptocurrency, without ever touching a dollar or a bank account.
Crypto companies have sought to convince Congress that stablecoins are safe places for investors to put money. The TerraUSD collapse has shaken that assumption—and with it the idea that there could be any safe place in crypto.
Stablecoins attempt to resolve a conundrum: How can you make something stable in a volatile financial system?
Some stablecoins attempt to do this by holding safe assets such as Treasury bills in a kind of reserve account: For every stablecoin that is created, $1 in Treasury bills is put in the account. Redeem a stablecoin and $1 of Treasury bills comes out of the account.
TerraUSD has a more complex approach. It’s an algorithmic stablecoin that relies on financial engineering to maintain its link to the dollar.
Previous attempts at algorithmic stablecoins ended in failure when the peg collapsed. Mr. Kwon and his colleagues believed they had created a better version, less prone to runs.
Many crypto traders believed him, and TerraUSD’s popularity surged. Mr. Kwon suggested that the coin would become the dominant stablecoin and could ultimately supplant the dollar itself.
Despite having swelled to a size of more than $18 billion, TerraUSD crumbled in a matter of days.
“I understand the last 72 hours have been extremely tough on all of you,” Mr. Kwon tweeted on Wednesday, addressing his followers, who are known as “Lunatics” because of TerraUSD’s sister cryptocurrency, Luna. “I am resolved to work with every one of you to weather this crisis, and we will build our way out of this.”
Jim Greco, a partner at crypto quantitative investment firm F9 Research, was celebrating his birthday at Manhattan’s Le Bernardin on Saturday night when he got a message notifying him that TerraUSD had dropped below 99.5 cents.
He told his team to sell the coin, which had been part of F9’s broader stablecoin holdings. Later his firm made a profitable bet that the coin would keep falling, said Mr. Greco.
“We all knew it was going to fail eventually,” Mr. Greco said. “We just didn’t know what the catalyst would be.”
Traders said the catalyst for the drop, which began over the weekend and snowballed Monday, was a series of large withdrawals from Anchor Protocol, a kind of crypto bank created by developers at Mr. Kwon’s firm, Terraform Labs. Such platforms allow digital-currency investors to earn interest on their coins by lending them out.
Over the past year, Anchor had fueled interest in TerraUSD by offering lofty returns of nearly 20% on deposits of TerraUSD. That was far higher than the rates available in traditional dollar bank accounts, and more than what crypto investors could get from lending out other, more conventional stablecoins.
Anchor, like other crypto lending protocols, would lend the TerraUSD to borrowers that used the coins for various trading strategies or for earning built-in rewards that blockchain networks provide for processing transactions.
Critics, including crypto investors who have attacked Mr. Kwon on social media, questioned whether such yields were sustainable. Still, by late last week investors had deposited more than $14 billion of TerraUSD in Anchor, according to the platform’s website. The bulk of the stablecoin’s supply was parked in the Anchor platform.
Big transactions over the weekend knocked TerraUSD from its $1 value. The instability prompted investors to pull their TerraUSD from Anchor and sell the coin.
That, in turn, led more investors to withdraw from Anchor, creating a cascading effect of more withdrawals and more selling. TerraUSD deposits at Anchor fell to $2.3 billion by Thursday, down more than 80% from their peak, the protocol’s website shows.
“There was a run on the bank,” said Michael Boroughs, managing partner of Fortis Digital Value LLC, a crypto hedge-fund firm.
Some crypto market observers claim TerraUSD was deliberately targeted. “This was a short attack,” said Ronald AngSiy, vice president at Intellabridge Technology Corp., a company that allows people earn interest on cash deposits by investing them in crypto.
This is how the stablecoin is supposed to work: If TerraUSD’s price dips below $1, traders can “burn” the coin—or permanently remove it from circulation—in exchange for $1 worth of new units of Luna. That should reduce the supply of TerraUSD and raise its price.
Conversely, if TerraUSD climbs above $1, traders can burn Luna and create new TerraUSD. That should increase supply of the stablecoin and lower its price back toward $1.
In theory, that means traders can make money when TerraUSD falls below $1 because they can buy the stablecoin at its depressed price and convert it into $1 of Luna. The idea is that the collective efforts of traders around the world keep TerraUSD in line with its dollar peg, while Luna acts as a shock absorber, buffering TerraUSD from volatility.
The system works only if traders actually want Luna. Investors did not want Luna when TerraUSD lost its peg this week. They sold Luna in a panic.
Luna lost nearly $20 billion in value as it surrendered nearly all its value in just a few days, according to data tracker CoinMarketCap. It had previously enjoyed a wild run-up over the past year as speculators bet on the continued adoption of TerraUSD.
“Once people lose confidence—and we’ve seen this before in money-market funds and commercial paper—they will run for the exits,” said Joe Abate, a research analyst at Barclays.
In a rush to get out, sellers of TerraUSD swamped buyers on big crypto exchanges, resulting in quotes for prices below $1 that spooked investors.
A spokesman for Terraform Labs said in an emailed statement that there were shortcomings in the infrastructure behind TerraUSD. “We’re currently working on a comprehensive strategy to rectify many of the existing points of vulnerability, which will be published publicly soon,” he said.
There was supposed to be a last line of defense. Mr. Kwon had sought to shield the stablecoin by amassing a huge war chest that could be used to defend its $1 peg, much as a central bank in an emerging-markets country might spend dollar reserves to protect its currency.
He co-founded a nonprofit called Luna Foundation Guard and announced earlier this year that it would buy up to $10 billion in bitcoin. Terraform Labs donated several billion dollars worth of Luna to seed the reserve fund.
By Tuesday, the fund had largely depleted its $3 billion in bitcoin and other cryptocurrency resources amid an emergency effort to salvage TerraUSD, according to the fund’s online data dashboard. The fund’s selling contributed to a sharp drop in bitcoin’s price, analysts and traders said.
Social-media forums devoted to Luna and TerraUSD have been filled with posts by investors upset about losses and debating whether Mr. Kwon can spearhead a turnaround.
He has pledged to fix TerraUSD, which is known by the ticker UST. In his series of tweets on Wednesday, he outlined technical steps that would help reduce the oversupply of the stablecoin, helping to bring it back up to $1.
The market’s confidence in TerraUSD will be shaken even if Mr. Kwon’s team succeeds in restoring the peg, said Mr. Boroughs of Fortis Digital Value. “It’s going to take a long time to bring back that trust.”
The TerraUSD crisis is a blow to the reputation of Mr. Kwon, a Stanford University graduate who worked at Apple Inc. and Microsoft Corp. before delving into crypto. He is an outspoken presence on social media, often assailing his critics in the crypto community.
“He will call anyone who questions him an idiot,” said Eric Wall, chief investment officer of Scandinavian crypto hedge fund Arcane Assets, who has clashed with Mr. Kwon online about Luna and TerraUSD.
A new father, Mr. Kwon named his infant daughter Luna, writing in a tweet after her birth last month: “My dearest creation named after my greatest invention.”
TerraUSD’s troubles could cast a shadow of doubt over stablecoins or shift customers to its competitors. One, USD Coin, has kept its link to the dollar during TerraUSD’s turbulence.
USD Coin and tether, the one that edged down to 96 cents before regaining its peg, are backed by financial assets. The companies say they have investments equivalent to the value of every stablecoin.
These stablecoins have their skeptics too, particularly tether, which has long been dogged by allegations that it isn’t fully backed. Some short-sellers have bet on a drop in tether. Traders have stepped up their bets against tether during the drama over TerraUSD, said Matt Ballensweig, co-head of trading and lending at crypto firm Genesis.
A spokesman for Tether Holdings Ltd., the company behind the stablecoin, said: “Tether is the most liquid stablecoin in the market and is 100% backed by a strong, conservative, and liquid reserve portfolio. Tether has withstood multiple ‘black swan’ events in cryptocurrency.” The spokesman added that the company has continued to process redemptions for its stablecoin during the market stress.
Current law doesn’t provide comprehensive standards for stablecoin issuers. The Biden administration has pressed Congress to pass legislation that would regulate the issuers of such assets similarly to banks.
Treasury Secretary Janet Yellen told Senate lawmakers on Tuesday that TerraUSD’s plunge has reinforced the administration’s concerns that stablecoins, including traditional asset-backed and algorithmic varieties, can be subject to investor stampedes, and that a regulatory framework is needed.
Many of the investors who rushed into trades involving TerraUSD and Luna likely didn’t know what they were getting into, said Martin Hiesboeck, head of blockchain and crypto research at digital money platform Uphold.
“You can have a bunch of developers writing an algorithm and they themselves might be 100% clear on how it works,” Mr. Hiesboeck said. “But your average crypto-crazy Joe does not read the…code. They don’t read the fine print.”
Breaking: Terra Blockchain Officially Halted Following LUNA Price Collapse
Validators decided to halt chain operations on Thursday in anticipation of governance attacks as the LUNA token plunged over 99%.
Validators for the Terra blockchain have decided to officially halt network activity on Thursday in a move designed to prevent governance attacks following the severe devaluation of the network’s LUNA token.
Terraform Labs’ official Twitter handle confirmed that the blockchain network was halted at a block height of 7,603,700. The move follows a series of dramatic events that triggered an unprecedented decline in the price of LUNA and its associated TerraUSD (UST) stablecoin. The stablecoin, which was designed to maintain algorithmic parity with the United States dollar, lost its peg earlier this week before plunging below $0.30.
The Terra blockchain was officially halted at a block height of 7603700.https://t.co/squ5MZ5VDK
Terra validators have decided to halt the Terra chain to prevent governance attacks following severe $LUNA inflation and a significantly reduced cost of attack.
— Terra (UST) Powered by LUNA (@terra_money) May 12, 2022
With LUNA’s price collapsing more than 99%, Terraform Labs is no longer confident that it can prevent governance attacks. In other words, the price decline “significantly reduced [the] cost of attack,” the ecosystem operator tweeted Thursday.
However, the downtime in block production didn’t last long, with Terra later announcing that it would restart the network once validators applied a patch to disable further delegations. “The network should go live once 2/3 of the voting power comes online,” they said.
The patch release is out:https://t.co/BZ8t86cuwA
Delegations will be disabled once block production resumes.
The network should go live once 2/3 of the voting power comes online. An update will be provided accordingly. https://t.co/vffpjw7uom
— Terra (UST) Powered by LUNA (@terra_money) May 12, 2022
As Cointelegraph reported, LUNA/USDT contracts were delisted on Binance on Thursday after the trading pair fell below 0.005 USDT. That followed a delisting of LUNA tokens by cryptocurrency exchange Huobi the previous day.
Earlier this week, Terraform Labs co-founder Do Kwon shared details about a recovery plan that would help save the UST peg from further devaluation. Terra’s official Twitter handle further elaborated on those plans on Thursday by laying out a strategy to burn $1.4 billion UST and stake 240 million LUNA. However, the details of the rescue plan have failed to deter market sell pressure.
The primary obstacle is expelling the bad debt from UST circulation at a clip fast enough for the system to restore the health of on-chain spreads.
— Terra (UST) Powered by LUNA (@terra_money) May 12, 2022
Before the events of this week unfolded, Terra LUNA was a top 10 cryptocurrency project by market capitalization, and its UST asset was the third-largest stablecoin behind only Tether (USDT) and USD Coin (USDC).
Binance Will Delist LUNA/USDT Contracts As Price Falls Below 0.005
The major crypto exchange said on Thursday it would delist the trading pair if the price fell under 0.005 USDT, which has already happened.
Major crypto exchange Binance announced it will be delisting its Tether (USDT)-margined Terra (LUNA) futures contracts following a more than 99% drop in price.
In a Thursday blog post, Binance said it would be taking “precautionary measures” around its LUNA/USDT perpetual contracts, intending to delist the pair if the price goes under 0.005 USDT. The announcement followed the exchange changing the leverage and margin tiers for the LUNA-tied contracts on Wednesday, with the maximum leverage set at eight times for positions under 50,000.
As mentioned previously, Binance Futures will conduct an automatic settlement on the $LUNA USDT-Margined Contract and then delist the Futures contract at May 12, 2022 3:30pm UTC.https://t.co/774JF0HcqP
— Binance (@binance) May 12, 2022
In addition, Binance said it would be launching Binance USD (BUSD)-margined LUNA futures contracts on Thursday, seemingly as an alternative investment vehicle should it delist LUNA/USDT. According to the exchange, it has experienced “slowness and congestion” causing a large number of Terra network withdrawal transactions to be marked as pending.
The LUNA price has fallen more than 99% in the last 24 hours, reaching $0.004 at the time of publication following a mass sell-off. The volatility has affected many tokens across the crypto market, with Bitcoin (BTC) dropping under $27,000 to a 16-month low and Ether (ETH) under $2,000 for the first time since July 2021.
Amid extreme market volatility, many exchanges have addressed FUD rumors circulating on social media regarding user funds. Celsius Network CEO Alex Mashinsky told his Twitter followers on Wednesday that the platform “has not experienced any significant losses and all funds are safe.” Coinbase CEO Brian Armstrong similarly told exchange users that the company has “no risk of bankruptcy.”
On Tuesday, Terra co-founder Do Kwon hinted at a “recovery plan” for TerraUSD (UST), later adding he supported community proposals to increase the algorithmic stablecoin’s minting capacity. However, Kwon has not posted any updates following the additional price drop of LUNA.
Binance Futures Delists Coin-Margined LUNA Perpetual Contracts
Binance suspended withdrawals for LUNA and UST amid the UST stablecoin losing its peg to the U.S. dollar on Tuesday.
Amid the collapsing Terra network’s cryptocurrencies Luna (LUNA) and TerraUSD (UST), crypto exchange Binance continues deactivating related trading services.
Binance’s derivatives arm Binance Futures has delisted coin-margined LUNA perpetual contracts, the firm officially announced on Thursday.
“Users are advised to close any open positions prior to the delisting time to avoid automatic settlement,” the statement by the platform reads.
Binance Futures has also started conducting automatic settlements on the contracts, reducing the leverage tiers and updating margin tiers for coin-margined LUNA perpetual contracts.
As such, the 8x leverage tier is now the max leverage tier available on Binance for LUNA perpetual contracts, replacing the earlier maximum available leverage of 21-25x. 11-20x leverage is reduced to 7x, while 6-10x leverage is replaced with a 6x leverage tier, according to the updated data.
According to the announcement, existing positions opened before the update will not be affected.
“Binance reserves the right to further change the max leverage and margin tiers for USDT-margined LUNA perpetual contracts without further notice,” the firm added.
The latest trading updates on Binance Futures come soon after Binance suspended withdrawals for LUNA and UST on Tuesday amid a massive selloff of tokens on the Terra network, with the UST stablecoin losing its peg to the United States dollar and crashing to $0.67.
Originally designed to hold its 1:1 peg with the U.S. dollar, the UST stablecoin crashed to as low as $0.30 on May 11, while its sister token LUNA lost more than 99% of its value at the time of writing. The events caused immediate shock for the wider cryptocurrency market, with the total market cap plummeting about $600 billion.
By design, UST is an algorithmic stablecoin based on a system of swaps between LUNA and UST as well as LUNA token burns to maintain the stablecoin’s 1:1 ratio.
In contrast to the UST stablecoin, major stablecoins like Tether (USDT) and USD Coin (USDC) are fiat-backed stablecoins, which means that they are based on equivalent cash reserves to maintain their value.
On Tuesday, Terra co-founder Do Kwon hinted at a “recovery plan” for TerraUSD (UST), later adding he supported community proposals to increase the algorithmic stablecoin’s minting capacity. However, Kwon has not posted any updates following the additional price drop of LUNA.
Luna Wasn’t On Terra Firma
Algorithmic stablecoin TerraUSD shared the weaknesses of fiat currencies like the dollar but without many of its strengths.
Algorithmic stablecoins might be a novel creation, but they couldn’t avoid some very old problems.
TerraUSD is, or was, the largest. The stablecoin part refers to how it aims to always be worth one U.S. dollar, making it a useful digital substitute for the greenback. The algorithmic part describes how it aims to accomplish this: By being swappable for another token, Luna, that had no fixed value.
If the value of TerraUSD moved below $1, it could be “burned” and exchanged for a dollar’s worth of Luna—and vice versa. But that mechanism evidently broke down, and TerraUSD has ceased to be worth $1. It now fetches around 40 cents.
Just how it failed to do what was intended isn’t fully clear, but one component is that, as events unfolded, there was a rush to get out of both TerraUSD and Luna. And in that way, for all its newness, TerraUSD managed to run into the same old problem that so-called fiat currencies issued by governments have long tried to avoid: A loss of faith.
The word algorithm is a bit of a distraction. Every digital token has rules and systems as part of its design. How it is fundamentally different from other stablecoins is in how it derives value. Stablecoins like USD Coin or Tether are expected to be fully backed by a reserve of cash or familiar instruments like Treasurys.
In other words, they operate more like a classic currency board than an ordinary peg, with issued money 100% underpinned by reserves of the anchor currency.
Meanwhile, an “algorithmic stablecoin” in some ways is like a fiat currency meant to be pegged to another. Of course it isn’t government issued, and there is no central bank. But the word “fiat” also gives a misleading impression of how government currencies develop value.
The Latin word meaning “let it be done” is most famously associated with the biblical utterance, “ Fiat lux”— let there be light. Of course, governments aren’t deities: If a currency is deemed worthless by people, even if it is legal tender, they might seek other ways to store or exchange value. Government currencies with perceived weak pegs were broken during the Asian financial crisis of the 1990s.
Governments have laws and armies and taxation to back their cause. Terra needed other means. One was to try to peg it to the U.S. dollar via the Luna mechanism to avoid the volatility experienced by typical cryptocurrencies. Another was to help fund the payment of yield to holders of TerraUSD via the Anchor Protocol.
With rates of nearly 20%, that attracted inflows, with people swapping U.S. dollars, Bitcoin or Ether to buy it. It also used a kind of foreign currency reserve—Bitcoin—to partially back TerraUSD.
Cryptocurrencies also thrive on social proof: Seeing other people using and valuing it can burnish its credibility. TerraUSD had perhaps started to achieve this, via payment and investment apps, but it evidently wasn’t sufficient.
Meanwhile, currencies must deal with crises. And just as central bankers can make policy errors, so too can the software mechanism rules on a blockchain. These are being discussed in the postmortem over Terra’s collapse.
Whether a committee of central bankers, rather than a consensus of holders, would have made better decisions is debatable. Terra and its mechanisms may ultimately be a more accountable, more transparent or more equitable version of what monetary authorities do. Regardless, it still requires some of the same faith that a so-called fiat currency does.
Calling Terra some kind of scam understates its ambition. It was trying to do no less than reinvent the wheel.
Yellen Says Terra Meltdown Shows Crypto-Stablecoin Dangers
* Treasury Secretary Cites Rapid Growth Of Tokens Pegged To USD
* Not Yet ‘Real Threat To Financial Stability,’ She Says
Treasury Secretary Janet Yellen gave the US government’s most forceful response yet to the meltdown of TerraUSD, saying that the crypto stablecoin’s woes underscore the risks associated with the asset class.
Yellen said on Thursday that Terra’s spectacular tumble shows the dangers of tokens that purport to be pegged to the US dollar. She called for new regulations and added that Treasury was working on a report about the issue.
“I wouldn’t characterize it at this scale as a real threat to financial stability, but they’re growing very rapidly and they present the same kind of risks that we have known for centuries in connection with bank runs,” she told lawmakers on the House Financial Services Committee.
Concerns around the assets have also proliferated in the past week on Capitol Hill after TerraUSD, or UST, lost its peg to the dollar over the weekend. UST is a so-called algorithmic stablecoin, meaning that it’s not backed by assets like cash or cash-equivalents.
Instead, it relies on trading and treasury management to maintain its value. In the most recent twist, one exchange-traded product tied to Terra saw its price almost evaporate in what may be the biggest ETP wipeout ever.
Washington’s concerns aren’t new. In November, the Treasury and a group of federal agencies appealed to Congress to act to address “key gaps” in regulatory authority over stablecoins. They urged legislators to require that stablecoin issuers become insured depository institutions, subjecting them to oversight from banking regulators.
In March, President Joe Biden signed an executive order directing federal agencies across the government to devote more attention to prospective regulation of digital assets and placed the “highest urgency” on research, development and design of a potential U.S. central bank digital currency. He directed the Treasury to report on the implications of a CBDC within 180 days.
On Thursday, Yellen provided a glimpse into an approach the government could take in deploying a CBDC. She suggested that traditional financial institutions, rather than the government, could deal directly with users of such a coin.
“There are a variety of design choices there, and there are issues around that,” she said. “Privacy is an issue if the central bank were to issue it directly to consumers.”
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