DFC

JP Koning writes about USD Coin transparency, focusing on the nature of its "approved investments." "What are these investments? How many does it own? Circle, USDC's issuer, has never disclosed much information on them. Because Circle is regulated by 44 state licensing boards, and each board has its own permissible investment rules (some very lenient), it's very difficult to reverse-engineer what USDC's "approved investments" might be comprised of. Responding to an inquiry, Circle said that they own 'cash, cash equivalents and short-duration investment-grade assets.' This gives us a bit more of an idea about the nature of Circle's approved investments. But why not get even more transparent? It would be a big win for stablecoin consumers if Circle provided descriptions of its approved investments in subsequent attestation reports, and broke down what proportion of customers' funds are allocated to each bucket."

"This analysis has highlighted that stablecoins have features that differ from conventional e-money. But it’s hard not to conclude that each point is just a symptom of one primary difference: stablecoins are issued on a public blockchain."

"We develop a dynamic model of stablecoins and crypto shadow banking, where the stablecoin issuer transforms risky assets, including cryptocurrencies, into digital tokens of stable values. Both the stablecoin issuer's reserve assets and users' collateral back the stablecoin. However, even under over-collateralization, a pledge of one-to-one convertibility to a reference currency can be fragile. The distribution of states is bimodal: A fixed exchange rate may persist, but once the stablecoin breaks the buck, the recovery is slow. When negative shocks drain the issuer's reserves, debasement allows the issuer to share risk with users, but it triggers a vicious cycle of depressed stablecoin demand, lower transaction volume and transaction fees, slow rebuild of reserves, and a persistent need for debasement. Stablecoin management requires the optimal combination of strategies commonly observed in practice, such as open market operations, dynamic requirement of users' collateral, transaction fees or subsidies, re-pegging, and issuances of ``secondary units'' that function as the stablecoin issuer's equity. Our model lends itself to an evaluation of regulatory proposals (e.g., capital requirement) and sheds light on the complex incentives behind the stablecoin initiatives led by the network companies (e.g., Facebook)."

Based on lessons learned from history, Gary Gorton and the Fed's Jeffery Zhang argue that privately produced monies are not an effective medium of exchange because they are not always accepted at par and are subject to runs. They present proposals to address the systemic risks created by stablecoins, including regulating stablecoin issuers as banks and issuing a central bank digital currency.

"A major driver behind stablecoins’ popularity is their pseudonymity. Folks don’t have to provide ID to use them. By failing to close this pseudonymity loophole early on, regulators themselves have sponsored the “incredibly fast” growth that they are now so worried about. If they continue to ignore the pseudonymity issue, their job will get only more complicated."

U.S. Treasury Secretary Janet Yellen convened the President’s Working Group on Financial Markets (PWG), joined by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, to discuss stablecoins. In the meeting, participants discussed the rapid growth of stablecoins, potential uses of stablecoins as a means of payment, and potential risks to end-users, the financial system, and national security. The Secretary underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place. The group also heard a presentation from Treasury staff on the preparation of a report on stablecoins, which would discuss their potential benefits and risks, the current U.S. regulatory framework, and the development of recommendations for addressing any regulatory gaps. The PWG expects to issue recommendations in the coming months.

"Through successive booms and busts, the price of Bitcoin has been manipulated by a handful of large players, using fake transactions, imaginary assets and sophisticated timing. In doing so they created real demand, as celebrities and financial institutions responded to the attention and encouraged millions of people to gamble money on a product they barely understood, in the hope that it would make them rich."

"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. These tokens are backed by illiquid and risky debt obligations – a critical weakness that no prudential regulator would allow to exist as this creates undue risk for their customers."

Paxos Trust lawyer and chief compliance officer Dan Burstein claims that Tether's USDT and Circle's USDC are unregulated "stablecoins" in name only. Paxo-issued Paxos Standard (PAX) and Binance Dollar (BUSD) are approved and regulated by the New York State Department of Financial Services (NYDFS). That means each token is backed by reserves in the safest instruments, such as bank deposits insured by the US Federal Deposit Insurance Corporation or short-term maturity US Treasuries. Gemini Dollars (GUSD) issued by Gemini Trust Company, are similarly NYDFS regulated

A U.S. Department of Justice (DoJ) probe into Tether is homing in on whether executives behind the USDT stablecoin committed bank fraud, a potential criminal case that would have broad implications for the crypto-asset market. The DoJ is scrutinizing whether Tether concealed from banks that transactions were linked to crypto-assets.

"USDC and other stablecoins are being adopted for many reasons, but one major benefit of stablecoins over traditional settlement infrastructure (e.g. Fedwire) is that they run on crypto-native payment rails that operate 24/7, 365. The heatmap below breaks down USDC activity by day of week. On-chain data show that USDC is mainly used during weekdays, but has some activity during the weekends when traditional infrastructure is largely unavailable."

According to this paper co-written by the Diem Association's Christian Catalini, fiat-backed stablecoins must rely on reserves of high-quality, liquid assets and be subject to a framework that protects coin holders from credit risk, market risk, operational risk, as well as the insolvency or bankruptcy of the issuer. Although decentralized stablecoin designs eliminate the need to trust an intermediary, they are either exposed to death spirals, or highly capital inefficient, as they must be highly over-collateralized to account for the lack of an intermediary. While these trade-offs might be acceptable for narrow use cases within the cryptocurrency space, without a breakthrough in decentralized stablecoin design, they are likely to limit the usefulness of these coins for mainstream adoption.

"For its next edition of the pie chart, Tether should consider catering to this demand by providing a long list of explanatory notes. Tether will be publishing its next pie chart sometime in the middle of August. Given its flagging issuance, Tether has every reason to do a better job than before. The whole cryptocurrency world will be watching."

Tether has released an assurance report that provides a breakdown of the company's consolidated assets on June 30, that shows that its $62.7 billion outstanding USDT stablecoin were fully backed. The report was conducted by Moore Cayman, a Cayman Islands-based auditor. Tether's latest attestation report provides much more detail on the composition of its assets, including its commercial paper (most of it which is rated A-1 or A-2). Also, its allocation to Treasury Bills has grown to around 24% from the 3% three months ago. It's very well footnoted, too.

Circle, the fintech company behind the USDC stablecoin, intends to become a US Federally-chartered national full-reserve commercial bank, according to its S-4 special-purpose acquisition company (SPAC) filing with the U.S. Securities and Exchange Commission. The firm said that a banking framework could reduce the risks around its business, including its reliance on third-party payment systems.

The Coinbase website now states that USD Coin is “backed by fully reserved assets,” contrary to the now-removed claim of “backed by U.S. dollars in a bank account.” More specifically, “each USDC is backed by one dollar or asset with equivalent fair value, which is held in accounts with US regulated financial institutions.”

"CoinDesk presents a consolidated guide to what we know, and don’t know, about the collateral behind the largest stablecoins."

Facebook's digital wallet, Novi, could abandon the Diem stablecoin in favor of fiat money if regulators do not change their tune, says David Marcus, head of Facebook Financial and Novi. The current iteration of the project involves the issue of a single stablecoin pegged to the US dollar, versus the original plan to issue a series of stablecoins backed by individual traditional currencies, as well as a token based on the currency-pegged stablecoins. Marcus claims that US authorities' "hostility" to Facebook's move into payments, is "profoundly un-American" and that the firm deserve a "fair shot" while also pointing out that it is already well embedded in the sector.

The Centre Consortium announced that USD Coin (USDC) stablecoins will only be backed by cash and U.S. Treasury Bills. Centre oversees which entities are allowed to issue the stablecoin and use its API. In July, its parent company Circle, which issues the USDC, revealed that USDC was only 61% backed by cash (including money market funds) and cash equivalents (high-quality short-term fixed income securities). The July attestation report showed that reserves included Yankee Certificate of Deposit (13%), commercial paper (9%), corporate bonds (5%) and municipal bonds and U.S. Agencies (0.2%).

Paxos is rebranding its stablecoin from Paxos Standard (PAX) to Pax Dollar (USDP) so it is more easily identifiable as a US dollar-backed token. The updated USDP smart contract will go live on August 31, 2021. PAX has always maintained reserves that are 100% cash or cash equivalents, which for Paxos means short-term Treasury bills.

Whether a stablecoin needs dollar reserves depends on its actual or potential use in the conventional payments system. A stablecoin used only within the crypto ecosystem wouldn’t need 100% dollar reserves. It would only need sufficient dollar liquidity to maintain its peg – and if exchanges are compliant and redemptions restricted, that might not be very much. However, stablecoins could replace conventional rails for international payments, potentially making them faster, cheaper and available 24/7. Stablecoins used for this purpose would need to be fully exchangeable for U.S. dollars or other fiat currencies on demand 24/7, and would therefore either need 100% dollar reserves or access to central bank liquidity. [Hence,] rather than wasting time and energy trying to regulate crypto-only stablecoins as if they are banks or money market funds, regulators should concentrate on ensuring that stablecoins that are, or show signs of becoming, payment media within the conventional financial system have 100% reserves and/or are licensed banks.

Tether reportedly said that it doesn’t hold any commercial paper or other debt or securities issued by the embattled Chinese real estate giant Evergrande. In China, there are serious concerns about Evergrande, which has run up a $300 billion debt and is struggling to pay interest. If the company were to collapse, it would have a huge impact on the financial system.

Singapore-based Conflux is piloting an offshore renminbi (RMB) stablecoin in a free trade zone (FTZ) in Shanghai, in a move to boost cross-border payments. It will run on the Conflux Network, China’s only regulatory compliant public blockchain, which has also received endorsements from the Shanghai and Hunan governments. As part of China’s five-year plan, Shanghai will be the central focus of global free trade and shipping in China. In July the Government of China granted Shanghai permission to explore free trade with an offshore RMB stablecoin; the only free trade zone in China to pilot trade with RMB.

"Stablecoin issuer Circle said that it is partnering with financial data aggregator Plaid to make it easier for consumers to move their money out of the bank and into Circle’s USDC. Like its partnership with Visa, working with Plaid is another way for Circle to become more deeply integrated with networks that allow users to move faster between fiat and dollar-backed crypto tokens via the Automated Clearing House (ACH) network."

Latin American stablecoin issuer Anclap is expanding its Stellar-based stablecoin network by launching a new stablecoin in Peru. Pegged to the Peruvian sol (PEN), the new stablecoin is designed to enable instant transactions across Anclap’s network, including conversions in other fiat currencies as well as any other digital asset. Called the “digital sol,” the stablecoin is said to be 100% backed by local fiat currency and is available on the Stellar network to be integrated into any platform, and exchangeable against several foreign currencies, including Argentine peso, Brazilian real, US dollars and the euro.

"Even centralized stablecoins operate as software running on decentralized blockchains, and it’s important to keep in mind that stablecoins involve layers of software that are not used in traditional financial institution activity. If this software doesn’t operate safely and securely, or if the decentralized networks don’t operate as expected, there could be a loss of confidence in the stablecoin or even outright theft. As it stands now, regulators, issuers, and users of a stablecoin need to understand stablecoin software and the underlying blockchain platforms they run on in order to accurately measure technical and operational risk."

Circle, a key supporter of the USDC stablecoin, received an “investigative subpoena” from the U.S. Securities and Exchange (SEC) Enforcement Division in July 2021. The subpoena arrived one month after Circle began onboarding corporate USDC holders into its first high-interest yield product, Circle Yield. The subpoena requests “documents and information regarding certain of our holdings, customer programs, and operations," but Circle did not elaborate on what the SEC’s investigation was focused on.