DFC

"There are long-running boring debates about whether certain sorts of cryptocurrencies are “securities” subject to the SEC’s jurisdiction. The SEC tends to think that almost everything in crypto is a security; most crypto companies think that almost nothing is a security. (Very few crypto companies register their token or product offerings with the SEC, and the SEC sometimes sues them for doing unregistered securities offerings.) The general rule — called the “Howey test” — is that a security is “the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” A lot of crypto projects look a lot like that, but you can debate the specifics."

“Rising market prices enticed traders to take on more leverage, in the form of borrowing stablecoins, which was then used to buy more crypto,” analysts Sheena Shah and Kinji Steimetz wrote. “Falling market prices were catalyzed by a reduction in crypto liquidity caused by traders closing long crypto positions, followed by redemptions of the stablecoin received.”

"It’s likely the Circle NYDFS complaint did not refer to the Ethereum stablecoin for which Paxos is responsible. Binance issued pegged stablecoins using the same BUSD branding on other blockchains, which were meant to be backed one-for-one by the Ethereum BUSD issued by Paxos. However, records show they were not fully backed at all times in the past. Binance claimed there was a process issue resulting in timing differences which have been corrected."

Binance issues BUSD on other chains, including its own-brand blockchain Binance Chain. Together these amount to about a third of the total issuance of BUSD. It doesn’t create it out of thin air but uses the Ethereum BUSD as the 1:1 backing asset. This wrapping of a token to make it usable on another blockchain network is commonplace in crypto, but not without risks. The obvious ones are who has keys to the wallets and how to ensure the 1:1 backing is in sync. It turns out that BUSD on other chains was not always 1:1 backed in the past, although Binance said it rectified the process last year. It claimed the issues were a timing difference and it now rebalances more regularly.

"BUSD is natively issued on Ethereum, thus limiting its usage outside of the Ethereum ecosystem. In order to extend BUSD’s utility to other blockchains, Binance offers a wrapped version of the stablecoin, Binance-Peg BUSD, which is designed to track the value of the original, ERC-20 BUSD at a 1:1 ratio. “Wrapping” tokens is blockchain lingo for creating versions of the original asset that are transportable to other chains for the sake of increasing interoperability and the interconnectedness of the digital asset space. Normally, the value of wrapped tokens is secured by locking the collateral of the original asset, which is the case with Binance-Peg BUSD."

"Recent news reports have shone a light on Binance-Peg BUSD (“PBUSD”) and how it doesn’t always appear to have been completely backed by BUSD issued by Paxos. PBUSD is minted on several blockchain networks including BNB Chain, Avalanche, Polygon, and TRON. PBUSD has always been, and continues to be, 100% collateralized. However, the collateral has not always been stored in a single, dedicated wallet in real time so that the 1:1 backing was not always immediately visible to users. Binance undertook a project to centralize the collateral in a single, dedicated wallet; this was completed on 04 January 2023 so that users have visibility into the 1:1 backing of PBUSD. Minting of PBUSD now only takes place after collateral is added to the dedicated wallet. Centralization of collateral for all Binance-backed tokens into dedicated collateral wallets will be completed by 09 February. This will be visible in the Proof of Reserves system that we are continuing to develop."

It’s clear regulators prefer interacting with banks because banks are centralized and easy to control. Reading between the lines, the real risk stablecoins pose is creating a system less amenable to government efforts of control. But technological progress is not going to stop. Economic activity is simply going to move elsewhere in the world if we continue down this path. United States regulators believe they face a choice between allowing or banning stablecoins, but in reality they face a choice between allowing stablecoins onshore or having them be primarily offshore. Already, the biggest winner of the current U.S. attack on crypto is likely Tether, the largest stablecoin issuer with a less-than-reputable past. Stablecoin tether (USDT) is growing again while Circle’s USDC and the Paxos-issued BUSD, both of which are more transparent, more regulated and safer for consumers, are shrinking.

The Banque de France (BdF) published a paper on the impact of stablecoins on the financing of the real economy. The largest stablecoins manage their peg with the US dollar by holding safe short-term assets such as US dollar-denominated commercial paper (CP). The paper suggests that US CP isssuers react to the increasing demand for stablecoins by issuing more CP. The authors exploit the fact that reserve asset policies vary across stablecoins and over time to confirm that the relationship between stablecoins and CP market is effectively due to the purchase of CP by stablecoin issuers.

"Let’s take a look at one of the biggest stablecoins in crypto, the USDC token. Using a few specific examples, we will show: (1) stablecoins are regularly used by dubious actors to move massive sums of money internationally with minimal oversight, (2) stablecoins are regularly used in fraudulent transactions, and (3) stablecoin issuers provide shadow banking services for other crypto entities that are unable to access traditional banking services. "

"For stablecoins to flourish as widely used payment vehicles they require a proper regulatory framework. A good starting point is to adhere to the principle of “same risk, same activity, same regulation.” Another worthwhile principle is to not recreate the wheel. With this in mind, this Commentary offers some suggestions as to how stablecoins and their issuers could be regulated using the existing regulatory frameworks that are applied to retail payments-system providers and deposit-taking institutions. These existing frameworks include the Bank Act, its provincial statutory counterparts, and the relatively recent Retail Payments Activities Act. We paraphrase the Financial Stability Board’s high-level recommendations for global stablecoins – many of which apply in a domestic setting as well – and assign the legislation/recommendations/authority based on the Canadian context." [Jeremy Kronick & Mark Zelmer, CD Howe]

"Proof of reserves is all the rage on crypto platforms. The idea is that if the platform can prove to its customers' satisfaction that their deposits are fully matched by equivalent assets on the platform, their deposits are safe. And if the mechanism they use to prove this uses crypto technology, that's even better. Crypto tech solutions have surely got to be much more reliable than traditional financial accounts and audits - after all, FTX passed a U.S. GAAP audit. No, they aren't. Proof of reserves as done by exchanges like Binance does not prove that customer deposits are safe. It is smoke and mirrors to fool prospective punters into relinquishing their money, just like claims that exchanges and platforms are "audited" or have "insurance". There are no audits in the crypto world, there is no insurance, and as I shall explain, proof of reserves proves absolutely nothing." [Frances Coppola]

Coinbase will support for Euro Coin (EUROC) on the Ethereum network (ERC-20 token) and trading will commence as soon liquidity conditions are met, in regions where trading it is supported. The EUROC token will launch with the "experimental" label, designated for new or low volume tokens on the exchange.

The Digital Euro Association (DEA) published a paper on the the potential of stablecoins in the European internet-of-things (IoT) and machine-to-machine (M2M) economies. The paper examines the benefits and drawbacks of M2M payments, provides industry use cases that highlight the potential benefits of stablecoin-enabled IoT and M2M payments, and discusses the need for further guidance from regulators to spur M2M payment growth.

"In principle Tether has a very good and easy business, but in practice it is weirdly difficult, and issuing USDT in exchange for Bitcoin collateral might in fact be easier and safer than issuing USDT in exchange for dollars in the bank. To get dollars in the bank, you need a bank."

Circle’s USDC stablecoin, the second-largest stablecoin at $42 billion of market cap, depegged from the USD, trading as low as $0.88 on Coinbase this morning (March 11, 2023). This followed Circle's announcement that $3.3 billion of USDC's reserves were held at Silicon Valley Bank (SVB) which was shut down yesterday by the California Department of Financial Protection and Innovation and taken over by the Federal Deposit Insurance Corporation (FDIC). Also, Coinbase announced that USDC redemptions would be temporarily suspended.

"The lesson might be that there are some industries that are bad to bank. Imagine that it was 2021, and someone was like “do you want to start the Bank of Crypto? What about the Bank of Venture-Backed Tech Startups?” You’d be tempted, right? Those industries had so much money! They seemed cool. If you were their bank — if you were the specialized bank that exclusively focused on those industries — influencers on Twitter would tweet nice things about you, and you’d get invited to fancy parties. Also, as their bank, you’d probably find a way to get a cut of growing industries with lots of potential. Provide banking services to tech startups, get warrants in those startups, get rich when they go public. Provide banking services to crypto exchanges, start some sort of blockchain-based payment network, get rich through the magic of saying “blockchain” a lot. "

USDC stablecoin issuer Circle announced that it will “cover any shortfall” caused as a result of the $3.3 billion in its funds held by the collapsed Silicon Valley Bank (SVB). Circle said it is legally obliged to “stand behind” USDC and will cover any shortfall using corporate resources—and external capital if necessary. USDC is currently collateralized 77% ($32.4 billion) with short-term U.S. Treasury Bills and 23% ($9.7 billion) with commercial bank deposits ($5.4 billion with BNY Mellon, $3.3 billion at SVB, and $1 billion at Consumer Bank). Circle also maintains USDC transaction and settlement accounts with Signature Bank.

"The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies. First, as a result of the higher interest rates, longer term maturity assets acquired by banks when interest rates were lower are now worth less than their face values. The result is that most banks have some amount of unrealized losses on securities. The total of these unrealized losses, including securities that are available for sale or held to maturity, was about $620 billion at yearend 2022. Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry. The good news about this issue is that banks are generally in a strong financial condition, and have not been forced to realize losses by selling depreciated securities. On the other hand, unrealized losses weaken a bank’s future ability to meet unexpected liquidity needs. That is because the securities will generate less cash when sold than was originally anticipated, and because the sale often causes a reduction of regulatory capital."

"The Silicon Valley Bank failure strikes me as a colossal failure of bank regulation, and instructive on how rotten the whole edifice is. I write this post in an inquisitive spirit. I don't know the details of how SVB was regulated, and I hope some readers do and can chime in. "

"The events of the last few days highlight the risks posed by excessive reliance on centralized infrastructure, and will be certain to inform future decisions. But despite a quickly-evolving regulatory environment in the U.S., some of the basic primitives granted by digital bearer assets such as bitcoin—that they are trivially self-custodied, disintermediated, and provide on-chain transparency—are more acute than ever, echoing a sentiment which sparked a pseudo-anonymous Satoshi Nakamoto to release a new project to the world amid the Great Financial Crisis in October of 2008."

"The events of the last few days highlight the risks posed by excessive reliance on centralized infrastructure, and will be certain to inform future decisions. But despite a quickly-evolving regulatory environment in the U.S., some of the basic primitives granted by digital bearer assets such as bitcoin—that they are trivially self-custodied, disintermediated, and provide on-chain transparency—are more acute than ever, echoing a sentiment which sparked a pseudo-anonymous Satoshi Nakamoto to release a new project to the world amid the Great Financial Crisis in October of 2008."

Australia's NAB has completed an intra-bank cross-border transaction using NAB-issued stablecoin on the public and permissionless Ethereum blockchain, involving deployment of stablecoin smart contracts for seven major global currencies. NAB’s AUDN stablecoin will be fully backed one-for-one with Australian dollars and managed as a liability of the bank, will be the cornerstone for NAB’s ambitions in digital assets. NAB claims this is the world’s first use case of a large financial institution leveraging a public blockchain for cross-border payment rails.

"Yes! I think that post (“Why is finance so complex?”) from Steve Randy Waldman at Interfluidity is a classic, I cite it often, and it was what I had in mind as I was writing yesterday. Waldman describes banking as, broadly speaking, an opacity mechanism for credit, a way for society to take a lot of credit risk without the people taking that risk quite knowing that that’s what they’re doing. My point yesterday was that it is also an opacity mechanism for interest rates, a way for society to borrow short and lend long. Sometimes you need to bulk up the opacity though."

"We analyze U.S. banks’ asset exposure to a recent rise in the interest rates with implications for financial stability. The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%. We illustrate that uninsured leverage (i.e., Uninsured Debt/Assets) is the key to understanding whether these losses would lead to some banks in the U.S. becoming insolvent-- unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run. "

The United Nations High Commission for Refugees (UNHCR), the Stellar Development Foundation, USDC stablecoin issuer Circle, and cross-border money transfer company MoneyGram have rigged up a system for sending aid directly to Ukrainian refugees using crypto-assets. The UNHCR delivers USDC hosted on the Stellar network, to a digital wallet that can be accessed via smartphone, even to people without bank accounts. The recipient then exchanges their USDC for local currency at any MoneyGram facility. Because the USDC is hosted on decentralized infrastructure and in the custody of individual wallet owners, funds cannot be withheld.

"This paper examines the financial stability risks associated with tokenized cash, a subset of stablecoins fully reserved with cash and cash equivalents. Using a combination of on-chain data together with uniquely collected wallet address labels, we construct empirical measures of liquidity ratios and run off rates on the largest cash token and characterize its users and their behavior. The overall circulation of tokenized cash is largely insulated from crypto price movements, though price changes correlate with re-balancing between smart contracts and private wallets. A liquidity ratio calculation, similar in concept to Liquidity Coverage Ratio (LCR), indicates that tokenized cash has at least two times the amount of High-Quality Liquid Assets (HQLA) when compared to the worst observed gross outflow over 30-day ahead periods. We discuss the implications of tokenized cash on safe asset creation, credit supply, and monetary policy transmission. The adoption of tokenized cash can reduce moral hazard risks from public guarantees and expand credit provision through market-based lending enabled by smart contracts. "

"The following policy principles reflect Circle’s real-world experience operating the world’s leading regulated dollar digital currency, USD Coin (USDC), which stands at more than $54 billion in circulation. USDC has safely powered more than $5 trillion in on-chain transactions and is available through a global network of thousands of digital wallets, exchanges and other products and services in more than 190 countries, lowering the fundamental cost of payments and financial services and establishing dollar payments utility as a native feature of the internet.

from the Ontario Securities Commission: "We would not expect to provide consent in respect of a VRCA (stablecoin) that is not fully-backed by an appropriate reserve but rather maintains its value through an algorithm. Also, a CTP providing a PRU, or a registered CTP, may not be able to satisfy their PRU commitments or regulatory obligations in respect of VRCAs that maintain their value through an algorithm, including know-your product, account appropriateness or other PRU commitments or regulatory obligations to clients."

"Cryptocurrency firm Tether estimates it will make $700 million profit in the March quarter, taking its total excess reserves to over $1 billion, the company’s technology chief told CNBC, revealing the latest figures for the first time."