DFC

Wyoming's governor has signed SF 127 enacting the Wyoming Stable Token Act, creating the Wyoming stable token commission, and authorizing the issuance of stable tokens in the state. Under the Act, a Wyoming stable token is “a virtual currency representative of and redeemable for one United States dollar held in trust by the state of Wyoming” that may only be issued in exchange for a USD. The Act also outlines criteria relating to liability limitations and requires that the commission issue at least one Wyoming stable token no later than December 31, 2023.

"Had Circle been as opaque as its competitors, no one would have known that Silicon Valley Bank was its banker and the weekend run on USDC probably would never have occurred. The lesson would seem to be: Don't be transparent or, if you need to be transparent, don't be transparent about your shortcomings."

An article by Circle Chief Economist Gordon Liao distinguishes stablecoins’ use in trading versus payment activities and their impact on financial stability. Payment stablecoins like Circle's USDC have lower speculation exposure than trading stablecoins like Tether's USDT, MakerDAO's DAI, and Binance's BUSD. Two measures are presented as evidence; the total crypto trading volume facilitated by the stablecoin in question versus the amount of it in circulation, and the correlation between the change in stablecoin circulation and crypto-asset returns. Dai shows the highest correlation with crypto-asset returns because it is collateralized with crypto-assets, so a decrease in the asset collateral’s value can prompt the forced redemption of the stablecoin.

Caitlin Long had high hopes of bringing crypto into the mainstream financial system. Long’s Custodia Bank in Cheyenne, Wyoming, a state-charted special purpose depository institution, or SPDI, was spearheading those dreams for all of cryptocurrency. Those dreams crashed into the concrete bollard of reality on January 27, 2023, when the Federal Reserve Board denied Custodia’s application to be a Federal Reserve member bank, and the Federal Reserve Bank of Kansas City denied its application for a master account. The Board’s full 86-page order, made public on March 25, details how Custodia failed to address “the heightened risks associated with crypto activities, including its ability to mitigate money laundering and terrorism financing risks.” (The Kansas City Fed’s denial letter was not made public.)

"Former senior officials at digital-asset exchange Gemini are rolling out a token backed by US Treasury Bills with around 5% yield in response to a gulf in returns between traditional finance and decentralized crypto lending. OpenEden, a DeFi platform, is offering the token known as TBILL against stablecoins, which will in turn be invested in short-term US Treasury Bills."

The Bank for International Settlements (BIS) published a paper that compares the key characteristics of stablecoins ("private tokenized monies that circulate as bearer instruments") and tokenized commercial bank deposits. It claims that stablecoins violate the "singleness of money" principle because their relative exchange values can and do depart from parity. The problem could be solved by the introduction of clearing houses to support par exchange for the stablecoins issued by its members. However, according to the paper, this is a step backwards because the problem has already been solved by the existing two-tier monetary system. Also, tokenized deposit functionality can be expanded to allow for programmable ledgers, contingent execution and composability of transactions.

"Circle's Gordon Liao recently sketched out a new distinction between 'payment stablecoins' and 'trading stablecoins,' and then places Circle's stablecoin, USD Coin, in the former category, while confining competitors Tether, Dai, and Binance USD to the trading bucket. For the time being, I think that a payments stablecoin is a fable. Everyone wants to be in that category, but an actual payments stablecoin, one who's main use-case is remittances and POS payments, doesn't exist. Stablecoins remain primarily used for trading, gambling, and speculation."

Tether's USDT opened the year at a market cap of $66.2 billion, but has grown 22% to $81 billion. Circle's USDC has moved the opposite way, losing 21% of its market cap. USDT’s share of the stablecoin space is up to 61.5%, its highest mark in two years. The collapse of TerraUSD in May 2022 and shutdown of BinanceUSD (BUSD) in February have increased concentration in the stablecoin market. USDC is struggling amid regulatory concerns in the United States and fallout from banking chaos, when Circle revealed it had 8.25% of its USDC reserves in Silicon Valley Bank. Meanwhile, concerns persist exist around USDT over its underlying reserves.

Societe Generale subsidiary SocGen Forge unveiled the EUR-pegged EURCV stablecoin (EUR CoinVertible), which is initially being issued on the Ethereum public blockchain with plans for other blockchains as well. This is the first public blockchain stablecoin issued by a subsidiary of a global systemically important bank (G-SIB). Access to the fully-backed stablecoin is restricted to investors that have been through SocGen KYC and AML procedures. The motivation for the issuance includes using it as a robust settlement asset for on-chain transactions, corporate treasury, on-chain liquidity funding and an asset for margin calls.

"I think banks should be able to issue dollar IOUs on whatever digital substrate they see fit, whether that be an Azure SQL database, an Oracle database, or a blockchain. And they should be allowed to get deposit insurance for any of those dollars, regardless of the substrate on which those dollars are recorded. The medium should be irrelevant."

"Your own personal estimation for whether to go with a traditional remittance or stablecoins will differ from mine, of course, depending on how cheap your local cryptocurrency exchange is (as well as that of your counterparty), and the availability and price of options like Wise or Western Union. Just make sure you include all stablecoin-related fees so that you're not mistakenly comparing apples to oranges. Stablecoins don't work for me, but they might for you."

A paper by Yiming Ma, Yao Zeng, and Anthony Lee Zhang analyzes the run risk of USD-backed stablecoins and uncover a dilemma between stablecoins’ price stability and financial stability. They show that panic runs exist even though general investors only trade stablecoins in secondary markets with flexible prices. Run incentives are reinstated by stablecoin issuers’ liquidity transformation and the fixed $1 at which arbitrageurs redeem stablecoins for cash in the primary market. The authors discover that more efficient arbitrage amplifies run risk. This explains why stablecoin issuers only authorize a small set of arbitragers even though it comes at the expense of maintaining a stable secondary price. In other words, the centralization of arbitrage embeds an inherent tradeoff between run risk and price stability. The paper's findings are based on a model and a novel dataset on stablecoin redemptions, trading, and reserve assets. Calibrating the model, the authors find a higher run risk for USDT, the largest stablecoin, compared to USDC, the second-largest stablecoin. However, even USDC bears significant run risk due to its less concentrated arbitrage and more concentrated deposit holdings.

"How does stablecoin design affect market behavior during turbulent periods? Stablecoins attempt to maintain a “stable” peg to the US dollar, but do so with widely varying structural designs. The spectacular collapse of the TerraUSD (UST) stablecoin and the linked Terra (LUNA) token in May 2022 precipitated a series of reactions across major stablecoins, with some experiencing a fall in value and others gaining value. Using a Baba, Engle, Kraft and Kroner (1990) (BEKK) model, we examine the reaction to this exogenous shock and find significant contagion effects from the UST collapse, likely partially due to herding behavior among traders. We test the varying reactions among stablecoins and find that stablecoin design differences affect the direction, magnitude, and duration of the response to shocks. We discuss the implications for stablecoin developers, exchanges, traders, and regulators."

"Whatever the reason for the Fed’s reluctance to permit TNB to get off the ground, it is sad to see financial policy makers turn down such an obvious boon to financial stability and efficiency, and slow walk it to regulatory death, despite what appear to be clear legal rights of TNB to serve its customers and the economy."

"The Fed has raised several concerns about narrow banks. The main one is that in times of stress they’d be too attractive as a haven. Money could pour out of Treasury bills, high-quality bonds or even accounts at conventional banks, amplifying risks to the broader financial system. Narrow banks could also make it harder for the central bank to manage short-term interest rates. And because conventional banks could end up holding few deposits, they might do less lending, making loans more expensive and credit harder to get."

Circle launched its Euro Coin on Avalanche, the first in a series of expected multi-chain launches, following the initial launch on Ethereum last year (2022). Circle currently maintains two fiat-based stablecoins, USD Coin (with a market capitalization of about $29 billion), and Euro Coin ($48 million).

The IMF published a paper that considers stablecoin tax treatment and associated challenges, and the challenges of achieving neutrality. Without greater tax certainty and tax neutrality than what is currently available, stablecoins will not be able to properly fulfill their promise as an alternative means of payment. Gaps and mismatches in tax treatment between tax jurisdictions may create distortions and opportunities for abuse.

Mitsubishi UFJ Financial Group (MUFG) plans to deploy and distribute bank-backed stablecoins on different public blockchains. The Japanese bank has partnered with Datachain, a blockchain interoperability company, and Toki, a cross-chain bridge, to allow the interoperation of these licensed stablecoins along several blockchains using its Progmat Coin protocol. The announcement comes after Japan's revised funds’ settlement law passed in 2022 came into take effect to allow financial institutions to issue stablecoins. Stablecoin issuance on public blockchains doesn't seem to be explicitly covered in the legislation as summarized in a slide deck from Japan's Financial Services Agency (FSA) and this document, although a white paper published by the country's Liberal Democratic Party implies that clarity on this issue would be forthcoming, which I suppose has indeed arrived.

"The new stablecoin using the Bitcoin blockchain was created by Stably, a Delaware-based startup. The dollar-pegged stablecoin is called #USD, and it takes the most fundamental unit of Bitcoin, called a ‘satoshi’ or ‘sat’ for short, and turns those smaller units into tokens that represent a claim against US dollars held by a custodian. It is the first stablecoin that is native to the Bitcoin blockchain, whereas others, like Rootstock or Sovryn, offer Bitcoin-collateralized stablecoins on layer two architectures."

Circle's Singapore affiliate received its Monetary Authority of Singapore (MAS) Major Payment Institution (MPI) license for digital payment token services in Singapore, after having obtained in-principle approval last November. It allows Circle Singapore to offer digital payment token services, cross-border money transfer services and domestic money transfer services in the city-state. Circle is the issuer of USDC stablecoin.

"Many types of so-called stablecoins have tried to meet the market’s demands for digital money, only to go wobbly. Instead, the future of online payments lies in commercial bank deposit tokens, which can and should be issued within the current two-tiered monetary system and work in tandem with central bank digital currencies."

Tether once backed its USDT stablecoin with commercial paper issued by Chinese firms, according to documents released by New York’s Attorney General (NYAG). However, Tether says that all of those securities were rated A2 or better, for what that's worth. The NYAG released the documents in response to a freedom of information request from Bloomberg News, following an earlier unsuccessful request by CoinDesk. [The whole Bloomberg article is worth a read, as it details a number of other questionable USDT reserves management practices.]

"Starting today, you can get a first impression on this new approach for cross-border payments as SAP is launching a pre-view of the SAP Digital Currency Hub that showcases how easy cross-border payments with Digital Money will become in the future. (Rather than using traditional payment rails, business partners agree on settling a cross-border transaction with USDC or EUROC.)

JPM Coin, which JP Morgan launched in 2019 to move dollars, has gone live with euro transactions. Germany’s Siemens AG conducted the first euro payment on the platform. JPM Coin can only move money between JPM branches or to other JP Morgan clients. Hence the bank refers to the solution as blockchain-based bank accounts. JPM Coin is a tiny part of JPMorgan’s payments business. The bank has used it to process about $300 billion of transactions since its launch, versus the nearly $10 trillion of payments it processes overall on a daily basis.

Dollar-pegged stablecoin TrueUSD (TUSD) is trading at a discount relative to Tether (USDT), hitting a low of 80 cents on June 28, 2023. TUSD is the #5 stablecoin in terms of market capitalization ($3.1 billion versus Tether's $83.4 billion and USD Coin's (USDC's) $28.2 billion on June 28, according to CoinGecko.com). The spike is being attributed to questions around TUSD's reserves, some of which is purportedly being held and/or managed by troubled Prime Trust Bank, and rumors regarding holders' inability to redeem TUSD.