DFC

The U.S. Federal Reserve proposed guidelines for what sorts of financial institutions can have access to accounts at the central bank and its related payment services. "With technology driving rapid change in the payments landscape, the proposed Account Access Guidelines would ensure requests for access to the Federal Reserve payments system from novel institutions are evaluated in a consistent and transparent manner that promotes a safe, efficient, inclusive, and innovative payment system, consumer protection, and the safety and soundness of the banking system."

"What if Tether announced tomorrow that they don’t want to enforce convertibility anymore, and oh by the way, “we don’t really have a 1-to-1 reserve pool”? The company could keep issuing USDT as it sees fit, feeding the marketplace with enough liquidity to “keep it going”. If indeed all USDT holders consider they have good reasons to hold Tether, because it helps them trade, there’s is really no reason for them to dispose of it. A “Nixon shock” whereby Tether would announce it will not enforce the 1-to-1 parity anymore could be followed by a new rule of floating exchange rate. Would there be a fundamental problem with that?"

"In the early days of DeFi, many believed that decentralized stablecoins were fundamentally impossible. For now, it seems that these claims were premature. There is a large design space, and some designs are genuinely more robust than others."

Facebook's Diem project is shifting its main operations from Switzerland to the United States, and withdrawing its application for a license from Switzerland's FINMA, as it is not required under the new model. Diem will partner with Caliafornia state-chartered Sivergate Bank who will become the exclusive issuer of Diem's USD stablecoins and will manage the USD reserve. And Diem Networks US will register as a money service business (MSB) with the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN).

"For a company with nearly $60 billion in assets, these pie charts are pathetic. I’m sure the folks at the Office of the NY AG are rolling their eyes. The only thing backing tethers is once again, smoke and mirrors. "

"All of this flurry of non-audit attestations and press-release reports is handwaving. The only thing Tether has to do is satisfy the requirements of the NYAG settlement. And they still have a few days for that, if nine lines of text and two pie charts isn’t sufficient."

According to Paul Amery (New Money Review): Permissible investment rules for US money transmitters vary state by state but typically allow them hold corporate bonds, currency, foreign government debt, asset-backed and mortgage-backed securities. US dollar money market funds, which closely resemble stablecoins in their objectives, operate according to more detailed and stringent reserve and disclosure obligations set by the Securities and Exchange Commission (SEC). Permissible investments are limited to cash, direct obligations of the US government, certain securities issued by US government instrumentalities with a remaining maturity date of 60 days or less, and securities that mature or are subject to a demand feature exercisable and payable within five business days.

Terra is a three-year-old project from the South Korean developer Terraform Labs, built to support a basket of decentralized stablecoins. Demand has surged in cryptocurrency markets for Terra’s LUNA token, which works as part of an automatic balancing system that helps to keep prices for the stablecoins, well, stable.

"Smoke and mirrors may maintain the peg for a while, but people won’t be fooled forever. If Tether is serious about delivering “unrivalled transparency”, it should publish the composition of its assets in sufficient detail to eliminate all doubts about their safety and liquidity. And if it wants the par peg to hold under all circumstances, it must significantly increase its capital. If it won’t do either of these, then eventually the mirror will crack, the peg will break and Tether will be doomed. "

According to Tether’s General Counsel, Stuart Hoegner, the commercial paper held as USDT reserves are mostly investment grade, but with no independent verification of his statement. However, Tether’s terms of service says that if Tether is unable to raise the cash to meet USDT redemption requests, it can either delay redemption or redeem USDT by in-kind redemptions of securities and other assets held as reserves. So the liquidity or quality of reserve assets doesn't matter since Tether will never have any significant need for cash.

"USDTs look like real money to users because exchanges and arbitrageurs maintain a peg to the dollar – the price of every cryptocurrency is the same for USD as for USDT. However, USDTs come with a very important caveat: their apparent value relies exclusively on trust and hope that this peg will hold. There are no guarantees that USDT will be worth anything tomorrow – which is a pretty sweet deal for exchanges who keep the balances of their clients in USDT, instead of USD. If Tether collapses, it’s the users who will get shafted, not the exchanges."

Tether is now one of the biggest money market funds in the world, holding more commercial paper than companies like Amazon and Google. According to JP Morgan analysts, although Tether might prefer the simpler solution of holding their USDT reserves with US banks, they have been pushed into a corner because of their limited access to such banks caused by their reputation for shady behavior, including, in the past, misrepresenting the sufficiency and quality of those USDT reserves. The kind of big banks that could accommodate a material portion of these reserves, including JP Morgan themselves, would likely steer clear of Tether due to reputational risk concerns.

"Stablecoins that alter their supply to maintain their value are struggling to keep up with volatile markets."

Centre is late in releasing its USDC reserves attestations, the last one posted on their website dating back to March when the stablecoin had a market cap of $11 billion. This fact and the sudden growth the crypto-asset experienced in the last few months (there are now almost $21 billion outstanding) is raising alarms about the delay of these documents (the March 31 report was published on May 24). There has not been a public disclosure of why the tardiness is happening, and the reports remain vague about how the reserves are invested: "held...at federally insured US depository institutions and in approved investments" with zero clarity as to what "approved investments" are.

It has been previously reported that the publication of Circle's USDC stablecoin attestation reports have become very tardy. However, JP Koning also notes that between February and March 2021, the reports have gotten a bit less transparent. Circle no longer discloses the precise amount of U.S. dollars it holds in custody. Whereas they used to say "US Dollars held in custody =..." in March they started saying "US Dollars held in custody accounts are at least equal or greater than the USDC tokens outstanding..." One possibility is that Circle is investing in assets that cannot be easily valued, and going down the same slippery slope as Tether.

Circle announced that it will be offering investors the opportunity to deposit USDC and earn as much as 7% annually through high-yield accounts with locked-in terms ranging from one month to a year. The interest is paid out in USDC, generated by Circle lending the digital dollars to a network of institutional investors that are willing to pay an interest rate for access to additional capital. The service will launch imminently in the U.S. and Switzerland. The Gemini exchange offers a similar scheme called "Gemini Earn" based on Gemini Dollars (GUSD) that promises returns of up to 7.4% annually.

This is a great summary of the potential systemic risks around Tether by Timothy Massad, ex-Chairman of the US Commodity Futures Trading Commission. He calls for a strengthening of the regulation of crypto-assets generally and in particular stablecoins. He seems supportive of the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, introduced in Congress last December, that would require that stablecoins be issued by a bank and would impose certain standards.

This is a great summary of the potential systemic risks around Tether by Timothy Massad, ex-Chairman of the US Commodity Futures Trading Commission. He calls for a strengthening of the regulation of crypto-assets generally and in particular stablecoins. He seems supportive of the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, introduced in Congress last December, that would require that stablecoins be issued by a bank and would impose certain standards.

According to Coinmetrics, none of the major stablecoins became seriously unpegged during the May 19 crypto flash crash. As prices drop, investors often rush to trade their crypto-assets into stablecoins, while the liquidations can cause stablecoins being used as collateral to be sold. This sudden shift in supply and demand can potentially knock stablecoin prices from their $1 peg, and threaten their stability. Although I and some others observed some USD stablecoins below 90 cents on some trading screens, apparently none actually traded there.

Regulators have waited too long to act on so-called stablecoins, to the point where exposure to schemes like that being run using Tether has infected the entire digital asset industry—and even beyond it. This is thanks to a network of exchanges which surround and rely on Tether and who perform a vital role in Tether’s ability to mint new USDT and get them to market, all while maintaining a paper-thin illusion that the so-called stablecoins are backed by anything at all. In return, the exchanges get to sell the apparently value-less USDT in exchange for BTC."

"Tether is very nearly the same size as the 25th largest mutual fund or ETF. At their average rate of printing for 2021 it will take approximately 20 days until Tether would be larger than entities on this list."

How can crypto custodians, crypto trading exchanges, and (ultimately) crypto banking institutions prove to external parties that reserves are indeed what they say they are? This is a pivotal question that continues to come to the surface, with a potential solution recently put forward; Proof of Reserves (PoR).

"This isn’t just a story about a tiny fraudulent company. As I’m writing this, Tether is now valued at nearly $63 billion, which would rank it amongst the largest financial crimes in history. It’s a ticking time bomb, and this article will provide a quality summary of why Tether is a systemic risk you shouldn’t overlook, or ignore."

Judge Sarah Netburn of the District Court of New York has denied the US Securities and Exchange Commission's (SEC's) request for documents related to Ripple's lobbying efforts, stating that Ripple's lobbying efforts are not relevant in the case. However, the Judge approved the SEC's request to extend the pre-trial discovery phase by two months, to have more time to respond to Ripple's earlier motion compelling the SEC to turn over the internal BTC, ETH, and XRP documents. In other words, if no settlement is reached soon, the case is likely to drag on to early 2022. The SEC launched its action against Ripple and two of its executives in December 2020, alleging that they raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.

A cryptocurrency has just re-enacted the Weimar hyperinflation. On June 17, 2021, the price of the cryptocurrency TITAN crashed to zero, and its related stablecoin IRON fell off its USD peg, trading as low as 69 cents to the dollar. It was a sudden and dramatic collapse that left investors shocked and bewildered. It was a speculative attack on the IRON stablecoin's peg, aided and abetted by panic selling (which was no doubt what the speculators hoped for).. And it succeeded, because the peg relied on a fundamentally flawed mechanism.

A Tether confidence crisis would likely result in a black swan event and a re-shuffling of the market. While there’s a chance that large players would counteract the crisis by buying back large amounts of USDT to restore the peg, or by successfully reassuring the market that all USDT can be redeemed at par, there’s no way to be sure that this will happen, unless you put a whole lot of trust in Tether and its affiliates.

USDT issuance has begun to stagnate while the circulating supply of USDC continues. There has also been an increase in USDC deposited onto exchanges while the amount of USDT has declined. This is significant because Tether printing has historically been the impetus for major market moves, but its continued legal challenges and questions regarding assets held in reserve have made holding the token more of a liability as regulators increasingly crackdown on the cryptocurrency market.

"Well-managed and properly regulated stablecoins may be useful for certain purposes and players, like those operating in the DeFi world. But stablecoins will never be as stable as dollars, physical or digital – and may even require a bailout when panic over broken promises spreads."

"This memorandum reviews this recent FDIC guidance, as well as related guidance from the Securities and Exchange Commission (“SEC”) concerning when a broker-dealer or other intermediary6 may have created a separate obligation to its customers that would be a “security” for purposes of the Securities Act of 1933 (“Securities Act”), rather than merely acting as a custodian for customer assets. In our view, failure to comply with the SEC’s guidance concerning the creation of a separate security would pose a significant threat to the availability of “pass-through” deposit insurance."