ANZ customer Victor Smorgon Group successfully purchased tokenized Australian carbon credits (BCAU) using the ANZ-issued stablecoin A$DC. This transaction is an important step for ANZ as the bank explores greater circulation of the stablecoin. In this transaction, Victor Smorgon Group used A$DC as a medium of exchange to purchase the BCAU carbon tokens from Zerocap, an Australian crypto asset investment platform.
Prudential treatment of cryptoasset exposures - second consultation
The Basel Committee on Banking Supervision has published a second public consultation on the prudential treatment of banks' crypto-asset exposures. It builds on the preliminary proposals set out in the June 2021 consultation and the responses received from stakeholders. The basic structure of the proposal in the first consultation is maintained, with crypto-assets divided into two broad groups; Group 1 including those eligible for treatment under the existing Basel Framework with some modifications, and Group 2 including unbacked crypto-asset and stablecoins with ineffective stabilization mechanisms, which would be subject to a new conservative prudential treatment including an overall gross limit on such holdings. The updated proposals provide more detail on the proposed standard and include new elements such as an infrastructure risk add-on to cover the new and evolving risks of distributed ledger technologies.
"This is a quick post to share some of the things I've learnt from watching Tether over the last two months. I'm hoping other Tether watchers find this information useful and share some of their own Tether watching tricks in the comments section. (No conspiracy theories, please. Just analysis).
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Basel Committee wants to limit banks' digital asset exposure to just 1% of equity
The Basel Committee on Banking Supervision suggested during its second consultation on the prudential treatment of crypto-asset exposures that banks limit their exposure to so-called Group 2 crypto assets to just 1% of their Tier 1 capital. Group 2 digital assets include major non-stablecoin, non-tokenized cryptocurrencies like Bitcoin and most altcoins. Therefore, banks would only be able to commit 1% of their total equity or net asset value in either long or short positions toward Group 2 digital assets. Moreover, the Basel Committee is considering banks adopting a 1,250% risk premium for Group 2 digital assets. In comparison, stocks typically have a 20% to 150% risk premium attached to their nominal values, depending on the company's credit rating. Under Basel III, a bank's risk-weighted assets must not surpass 10.5% of its Tier 1 capital for prudent leverage.
Coinbase’s conflation of in-house stablecoin, US dollar sparks liquidity concerns
Coinbase announced that the platform will be “unifying USD and USDC order books,” adding that “USDC order books will be merged under USD order books to create a better, more seamless trading experience with deeper liquidity for USD and USDC.” USDC (aka USD Coin) is the stablecoin issued by Centre, a consortium of Circle and Coinbase. This may provide a ‘more seamless’ experience, but it also gets Coinbase out of a potential fiat liquidity crunch, in the wake of massive customer USD withdrawals during the current crypto crash.
Basel's bank rules for crypto-assets get stricter for stablecoins, lighter for crypto
"To fully qualify as a lower risk stablecoin, the price cannot go below 99.9 cents on more than three days in 12 months. A stablecoin outright fails the test if it drops below 99.8 cents more than ten times during a year. We assume this is at any point during the day, but that’s unclear. Using data from Messari, USDC, considered higher quality than Tether, would have failed both tests intraday every day during the past month. Tether managed to pass on six out of 30 days. However, at ‘close’ USDC would have failed the first test just four times compared to 16 times for Tether. But extrapolating to a year, that’s enough for both to be classed as a pure cryptocurrencies."
Tether Continues to Reduce Commercial Paper Holdings
Tether announced further progress towards reducing its commercial paper portfolio. As of July 1, Tether had 8.4 billion of these holdings, of which 5 billion will expire on July 31. The goal remains to bring commercial paper holdings down to zero, switching them into short-term U.S. Treasury securities.
"Many questions are yet to be answered and many avenues to be explored as part of the financial landscape’s digital revolution. But stablecoin insurance could provide a boost of confidence as more and more regular consumers take part in the blooming digital currency market."
Where do USDC stablecoin owners rank in the event of a Circle bankruptcy?
FDIC insurance only protects customers in the event of the insolvency of the bank holding the deposits. That leaves open the question of where stablecoin holders rank in the event of the stablecoin issuer's insolvency. This was recently discussed in a Twitter thread launched by JP Koning to which George Selgin and Dan Awry contributed. According to my read of the thread, which focused specifically on the Circle-issued USDC stablecoin, the answer seems to be "maybe" but the question could be tied up in courts for a long time.
This article from the Richmond Fed dives into potential answers to these questions about the failed Terra UST stablecoin. UST was backed by LUNA, but the price of LUNA was backed by its option value of converting to UST. When the confidence of this circular backing is shaken, the liquidity of algorithmic stablecoin becomes flighty. In this case, the algorithm does not fully function because Terra needs to (but can't always) defend both UST and LUNA. When market liquidity evaporated, UST and LUNA ultimately relied on the issuer's equity to support the prices, similar to the backing of a more traditional currency as seen in the Asian Financial Crisis. It is the part of economics cannot be replaced by technology.
Paxos Becomes First Stablecoin Issuer to Disclose Full Monthly Reserve Holdings
Paxos will now disclose on a monthly basis the specific financial instruments backing its USDP and BUSD stablecoins, in addition to its attestations. These reports will provide the CUSIP numbers of all instruments backing USDP and BUSD, showing that Paxos only backs its stablecoins with cash, overnight loans secured only by US Treasuries, and US Treasuries with a less than 90 day maturity. As a Trust Company chartered by the New York State Department of Financial Services (“NYDFS”), Paxos is legally required to hold all regulated stablecoin reserves in bankruptcy remote, fully-segregated accounts and in only cash and cash equivalents.
Matt Taibbi asks some tough questions about the sanctity of the reserve assets that back Circles USDC stablecoin, and the issue of bankruptcy remoteness. Circle is unlike some competitors, whose user agreements specifically spell out that reserves are, say, “fully backed by US dollars held by Paxos Trust Company, LLC,” or “custodied pursuant to the Custody Agreement entered into by and between you and Gemini Trust Company, LLC.” Those describe trust agreements, which are truly bankruptcy remote. However, Circle is not a trust, so customers are guarded only by protections afforded under state money transmission laws. However, Circle is only regulated as a money transmitter in the states where Circle has licenses, and the firm has obtained licenses only in those states were licenses are required. There are other reasons to be concerned as a USDC hodler, and I recommend reading the whole post.
"The same question could be directed at other well-known money transmitters like PayPal, Square, and Western Union... and my guess is that their answers would be equally unclear."
FSB issues statement on the international regulation and supervision of crypto-asset activities
The Financial Stability Board (FSB) announced that it will submit to the October meeting of G20 finance ministers and central bank governors a public consultation report on its review of its high-level recommendations for the regulation, supervision and oversight of “global stablecoin” arrangements, including how existing frameworks may be extended to close gaps and implement the high-level recommendations. The FSB will also submit a public consultation report that proposes recommendations for promoting international consistency of regulatory and supervisory approaches to other crypto-assets and crypto-asset markets and strengthening international cooperation and coordination.
Application of the Principles for Financial Market Infrastructures to stablecoin arrangements
The Committee on Payments and Market Infrastructures (CPMI) and International Organization of Securities Commissions (IOSCO) published their final “same risk, same regulation” guidance on regulating stablecoin arrangements (SAs). The guidance highlights that the transfer function of an SA is comparable to the transfer function performed by other types of financial market infrastructure (FMI). As a result, an SA that performs this transfer function is considered an FMI for the purpose of applying the Principles for Financial Market Infrastructures (PFMI) and, if determined by relevant authorities to be systemically important, the SA as a whole would be expected to observe all relevant principles in the PFMI.
Circle’s Detailed Reserve Report Shows Only Cash, Short-Term Treasurys Back USDC Stablecoin
Circle Internet Financial released a detailed – though unaudited – breakdown of its reserve assets for the firm’s USD coin (USDC) that showed $42.1 billion in short-term U.S. government bonds and $13.6 billion in cash. The breakdown also listed the bonds’ individual CUSIP number identifiers. The cash was comprised of deposits at Bank of New York Mellon, Citizens Trust Bank, Customers Bank, New York Community Bank, Signature Bank, Silicon Valley Bank, Silvergate Bank and US Bancorp.
Stablecoins’ role in crypto and beyond: functions, risks and policy
This European Central Bank (ECB) article analyses the role played by stablecoins for everyday payments. Transaction speeds differ by blockchain but are slow for stablecoins issued on the predominant blockchain. As an example, during testing for a central bank digital currency, the Federal Reserve Bank of Boston showed that a non-blockchain payment technology can perform ten times more transactions per second than a high-performance blockchain technology. Transaction costs of stablecoins vary depending on a number of factors, such as the complexity of a transaction or the congestion of the network, leading to higher fees. Analysis of stablecoin transaction fees by Mizrach (2022) shows that, for a large portion of stablecoins, the transaction costs are higher than those of ATM transactions or the average costs of Visa or Mastercard schemes in Europe.
The Macroeconomic Impact of Cryptocurrency and Stablecoins
In the absence of high-certainty macroeconomic models that project the macroeconomic impact of cryptocurrency and stablecoins, the World Economic Forum (WEF) has published a white paper that seeks to forecast the potential effects based on qualitative assessments from global macroeconomists and credible literature in this space. Based on projected macroeconomic outcomes, the majority of economists interviewed predict that allowing cryptocurrency to play a regulated role in the economy will bring the highest macroeconomic net benefit to society. This is contingent on the responsible design and enforcement of regulation. A separate workstream within the WEF’s Digital Currency Governance Consortium (DCGC) will deliver more detail regarding regulatory best practices at a later date. See also: https://cepr.org/voxeu/columns/macroeconomic-effects-introducing-central-bank-digital-currency
In June 2022, the New York Department of Financial Services (NYDFS) issued formal guidance for NYDFS-approved stablecoin issuers, including upgrades to the amount and quality of information that issuers must provide to the public. With the new guidance, management's assertions must now be tested and published no later than 30 days after the end of the month, but also on one randomly selected business day during the month. Secondly, stablecoin issuers will be required to submit their internal controls to audit. However, the new regulations apply to Gemini dollar (GUSD) Binance USD (BUSD) and Paxos dollar (USDP).
The Financial Services and Markets Bill 2022 has been introduced into the U.K. Parliament. Section 22 of the Bill contains a new power for the government to introduce bespoke rules on the regulation of payments, payment systems and service providers in relation to the payments that include “digital settlement assets”, which includes any digital representation of value or rights that “(a) can be used for the settlement of payment obligations; (b) can be transferred, stored or traded electronically, and (c) uses technology supporting the recording or storage of data (which may include distributed ledger technology).” The Chancellor of the Exchequer said that HM Treasury will be working to understand how distributed ledger technology could be applied to a U.K. sovereign debt instrument.
Defining the Regulatory Perimeter for Stablecoins in Canada
"Currently, there is no overarching regulatory framework for stablecoins in Canada, and no authority has asserted jurisdiction over the operations of their issuers. This article is the first scholarly work to provide a detailed assessment of the jurisdictional perimeter, and risk-informed regulatory design principles, for fiat-backed stablecoins in Canada. It provides two unique and vital contributions to policy formation in stablecoin regulation. First, it analyzes whether stablecoins are securities, investment funds, or derivatives based on statutory definitions and interpretive jurisprudence. Second, it assesses whether a securities-based regulatory framework is sufficient to mitigate the risks that stablecoins pose, or if it leaves gaps that must be filled by banking, payments, and systemic risk regulators. While securities authorities have a reasonable case for legal jurisdiction over stablecoins based on how they are currently used, there are several “gaps” if stablecoins are exclusively regulated under securities law, and while many protections are provided, the full breadth of risks will not be mitigated. If Canadian securities regulators move forward with a stablecoin policy framework, they must do so with an eye to resulting gaps. Ultimately, a comprehensive framework will require inter-agency cooperation, across the financial regulatory landscape, to adequately address all stablecoin risks. It must apply “same risk, same regulation” principles, contextualized to support innovation, financial inclusion, and competition, using tiered parameters, and parallel and complementary inter-agency oversight. It must seek international regulatory cooperation, data-sharing, and contemplate contagion, interconnection, and the consequences of the potential failure of a global stablecoin issuer."
Why Hedge Funds are Losing Money Shorting USD₮ (Tether)
Many industry participants have commented on how the gap in marketcap between Tether and its largest competitors has narrowed. However, the difference between USD₮’s 24hr trading volume and its competitors tells a clearer and more important story. For example, rather than catering to the traditional banking industry, Tether is focused on being the most used currency for peer-to-peer exchanges, remittances, a tool of freedom and inflation hedge for developing countries. This is why, while Tether’s marketcap has decreased due to the billions of cash redemptions that it's effortlessly facilitated over the past several weeks, Tether’s 24hr trading volume remains roughly 10x that of its closest competitor. This points to the utility of Tether in daily trading and is the true measure of adoption. The sheer scale of the integration of USD₮ into the financial plumbing of the crypto industry is an order of magnitude greater than its nearest competitor.
Moneyness: How profitable is the world's largest stablecoin?
In a recent blog post, the world’s largest stablecoin issuer Tether mocked its smaller competitor, Circle (which issues USD Coin), for being unprofitable. In Circle’s first quarter of 2022, it was $113 million in the red, whereas according to JP Koning’s estimates based on an analysis of Tether’s six attestation reports, Tether earned $13 million over the twelve months ending March 31, 2022. Going forward, both Circle and Tether can be expected to earn much more interest income on their base of non-interest-paying customer deposits, but Tether may face losses on its possibly riskier investments, including $62.8 billion in the collapsed lender Celsius, which is probably worthless now.
Millicent Successfully Carries Out Test of a General Purpose Full-Reserve Stablecoin
Millicent, a fintech company co-funded by the Innovate UK, has successfully performed a test of a full-reserve stablecoin aimed at the retail market. The reserves are held in a ringfenced account safeguarded by a regulated third party, directly at the Bank of England. Millicent runs on a hybrid Layer-1 distributed ledger network (DLT). A sandboxed demonstration simulated fiat on-ramping via Faster Payments from one of the UK's largest consumer banks, as well as the on-chain conversion and minting of stablecoins pegged to the British Pound Sterling, and a variety of payment and settlement scenarios.
The future of stablecoins is commercial bank money
Issuers of stablecoins have thrived while nominal interest rates have been near zero. With high positive interest rates, the opportunity cost of holding zero-interest stablecoins increases and the issuers lose business. With significantly negative rates, the value of safe reserves declines but the tokens are still redeemable at par. Issuers face insolvency and must invest in riskier reserves for a chance to survive. If stablecoins are no longer fully backed by safe and liquid assets and are widely used, this creates financial stability risks. Suppose the issuers could pass on their interest earnings (or costs if rates are negative) on reserves to the token holders on a one-on-one basis. If interest rates are high, stablecoins are a competitive liquid store of value. If they are significantly negative, the issuers’ liabilities shrink along with their reserve; the issuer remains solvent. Stablecoins could be sustainable in all interest rate environments. There is a problem though, at least for the EU with the Regulation on Markets in Crypto-assets (MiCA) that is expected to come into force in 2024. This proscribes the paying of interest on money tokens. That would force issuers to adopt a business model that is only sustainable with near-zero interest rates.
Stablecoins in Three Dimensions: Foundations of Value in the Crypto-economy
This paper identifies three main components of any stablecoin, the peg, token and backing or reserve, that can be interpreted as three dimensions of (exchange) value fulfilled by the three functions of money: a unit of account, means of exchange, and store of value. By doing so, the stablecoin concept is not be characterized as a separate and self-contained asset class, but rather as an overarching and general meta-category from which a multitude of other classes and types of crypto-assets can be derived. By noting that different types of money and financial assets emerge from the different ways in which the three functions of money interact, the paper identifies five main cases from the various ways in which peg, token, and reserve are recombined. Various types of traditional financial assets belonging to each of these five cases and discusses how the various types of crypto-assets (and stablecoins) are identified and mapped into each of them.
E-Money tokens, tokenised money-market shares, and tokenised bank deposits
This column introduces the available stablecoins and discusses the possible impact of the forthcoming Markets in Crypto-assets regulation by the European Commission on e-money issuers. The authors argue that the regulation may spur regulatory arbitrage in Europe and lead commercial banks to offer tokenised deposits on the decentralised ledger of a public blockchain.
New Auditor for Stablecoin Issuer Tether Confirms Slashing of Commercial Paper Holdings
BDO Italia has reaffirmed stablecoin issuer Tether's consolidated reserves report that showed a 58% quarterly decline in commercial paper holdings to $8.5 billion as of June 30. Tether also confirmed its expectation that commercial papers will be down to $200 million by the end of August and zero before the end of the year.
Huobi explains what went wrong with HUSD after stablecoin is back on track
The fully reserve-backed HUSD stablecoin lost its peg on August 18, 2022, trading as low as $0.82, although it regained the $1.00 peg the next day. According to the HUSD team, the depeg was caused by a decision to close market maker accounts in some regions to comply with regulations. The time difference in banking hours had created a gap that led to a liquidity problem, leading to HUSD falling from its peg.
Binance to Stop Supporting USD Coin (USDC) in Favor of Binance USD (BUSD)
Binance effectively banished USD Coin (USDC), the second-biggest stablecoin, from trading at its cryptocurrency exchange in favor of its own competing product. On Sept. 29, customers' holdings of USDC will be converted to Binance USD (BUSD). The same will happen with two smaller stablecoins: Pax Dollar (USDP) and TrueUSD (TUSD). The action effectively removes USDC as a tradable asset on one of the most prominent perches in crypto, and creates a headache for Circle Internet Financial, USDC's issuer, as the company mulls an IPO.
