This article will focus on a topics that all crypto enthusiasts have seen time and time again this year. It’s a fair point to argue that 2017 was the year where we saw the boom of ICO investing and ERC20 tokens flood the market resulting in some hefty profits for certain investors reinforcing one of Ethers many use cases. However, the most of 2018 we have witnessed a bear market since Bitcoin hitting all time highs of around $19,500 on most exchanges around the world and the overall market cap hitting unbelievable heights of $800 billion. 2018 will be known as the year of the great bear market that has birthed a new craze that some may argue will be necessary to see the overall crypto space grow and mature. Due to the lack of transparency from a well known stablecoin in the market known as USD Tether, 3 claims have been made: 1) Its 100% backed: ’Every tether is always backed 1-to-1, by traditional currency held in their reserves’. 2) Stable currency: ‘Tether converts cash into digital currency; to anchor or tether the value to the price of national currencies like the US dollar’. 3) Lastly to be Transparent: ‘Our reserve holdings are published daily and subject to frequent professional audits. All tethers in circulation always match our reserves’. More retail investors took a keen interest in the crypto space, whilst entering the market at all time highs towards the end of 2017. We have seen many financial institutions take notice of the lack of transparency from USD Tether, which has led them to creating their own fiat backed ‘stablecoins’. They have been well aware of the need for a stablecoin for years now and the financial incentive to create the winning stablecoin has been immensely evident this year. This could potentially be very lucrative in the future if they were to create the winning stablecoin.
So What Is A Stablecoin?
Money should serve 3 main principles: be a medium of exchange, a unit of account, and a store of value. Cryptocurrencies excel at the first, but as a store of value or unit of account, they are not as good at the time of writing this article. You cannot be an effective store of value if your price fluctuates by 10% – 20% on a day to day basis. Now this is were the idea of stablecoins come into play. The purpose of a stablecoin is to peg its price to an asset like gold or the US dollar for every stablecoin issued. You pay a dollar to buy a dollar-tracking stablecoin e.g. for that dollar to get held in a reserve. When you sell the stablecoin, its price is equal to the US dollar as this is the reserve currency of the world. By holding one-to-one reserves, many people argue that the price should in fact remain stable. A lot of countries often peg their currencies to more prominent ones like the US dollar and this is to maintain a stable purchasing power; ultimately stablecoins are just an old technology being transferred to a new market. Cryptocurrencies such as Bitcoin and Ethereum have been disruptive and a game changer with their potential use cases and value of being medium of exchanges. However given their day to day volatility of the cryptocurrencies and of the entire crypto market in general, this presents a problem for many users. One of the primary factors driving merchants away from accepting cryptocurrencies, is the volatile price coupled with rising transaction fees. With the clear definition of a stablecoin, its apparent they could effectively serve as the backbone of financial applications on the blockchain; keeping in mind that some of them are compatible with smart contracts.
So Why Has USD Tether Come Under Fire In The Crypto World?
USD Tether formerly known as Realcoin was created back in 2014, which has come under a lot of scrutiny for a very long period of time. After being hacked last year for roughly around $30,000,000, many people in the crypto community have speculated whether or not USDT is fully backed by US dollars as they claim to be. Due to Tether’s lack of a banking partner, its split from its auditor and the close relationship ties with the centralised exchange Bitfinex are all valid reasons to investigate USD Tether a little further. The purpose of USDT is to facilitate transactions between cryptocurrency exchanges with a rate pegged to the US dollar, which allows high speed capital transfers without resorting to slow bank wires. This has been very appealing for crypto exchanges as they tend to find it hard securing banking relationships. As their website states, Tether Limited has claimed that all their coins in circulation are fully backed by fiat currency assets held in reserve accounts. Reports claimed this year that USD Tethers relationship with Friedman LLP (who were working alongside them to perform an audit) have dissolved. A report conducted by Griffin and Shams this year on June 13th, investigated the interaction between Bitcoin and USDT. The report had suggested that USDT had been used to artificially manipulate the price of Bitcoin, by being over printed and transacted between many different centralised exchanges. Using algorithms to analyse both Bitcoins and USDT blockchains, they concluded that their findings supported that price manipulation was in fact used to distort the Cryptocurrency eco-system. A week after this report was released to the public, USDT had given a transparency update with the approval of law firm – Freeh Sporkin and Sullivan LLP suggesting that they do in fact hold reserves fully backing every USDT coin with US dollars. Most recently, the value of USDT dropped below $1 in October which again raised a few eyebrows as its price is supposed to be stable. Since each coin is backed by this exact amount of USD, many started doubting if Tether can truly back all of its coins. As a result, large amounts of USDT have been returned to the Tether treasury, as investors started giving up on the stablecoin. In fact, most of this happened just after USDT’s value dropped to $0.85 on October 14th. As a result, we have seen large amount of Tether’s circulating supply removed from the market, the removal was made permanent due to the company’s USDT redemption. In their statement they claim that Tether has redeemed a large number of tokens which had been burnt, this process is outlined in Tether’s whitepaper, with redemptions and issuances transparent, that can be observed on Tether’s treasury balance.
Which Other Stablecoins Could Replace USD Tether ?
Three main categories of stablecoins exist, however for the purpose if this article we will only focus on fiat collateralised and centralised stablecoins backed by fiat currencies. Fundamentally, the Circle, Gemini, Paxos and TrustToken stablecoins are similar to Tether, they are all centralised entities which hold their assets in a banking account issuing corresponding tokens that represent a 1:1 claim to the underlying assets. What differentiates these stablecoins from USDT is that they are substantially more transparent with disclosures of their holding entities, bank accounts and regulatory compliance.
List Of Stablecoins Backed By Real World Assets:
- Gemini Dollar: The New York Department of Financial Services (NYDFS) will directly supervise the operations of Gemini dollar and be the regulatory authority of the projects. It is designed to provide liquidity options for users wanting to send US dollar back and forth via the Ethereum blockchain. The Gemini team indicated that the new digital asset would be strictly pegged to the US dollar, with the Gemini trust company holding USD deposits corresponding one for one with Gemini dollars in circulation. A major distinguishing factor, and selling point for the Gemini Dollar is its regulatory robustness.
- Paxos Coin: Paxos is a Trust company, regulated by the New York State Department of Financial Services, with deep experience as an intermediary between fiat and digital assets. Paxos Standard is supposedly one of the first digital asset issued by a financial institution and is fully collateralised by US dollars.
- TrueUSD: TrueUSD is the first asset token built on the TrustToken platform. It is a USD-backed ERC20 stablecoin that is supposedly fully collateralised, legally protected and transparently verified by third-party auditor. It uses multiple escrow accounts to reduce counter-party risk and to provide token-holders with legal protections against misappropriation.
- USD Coin: Crypto financial company Circle, the parent company of the Poloniex exchange, announced its own dollar-based stablecoin in May 2018. The Wall Street backed company will hold full dollar reserves and provide transparent audits of its holdings. Through its subsidiary Centre, Circle will create stablecoins based on other fiat currencies. Even though these stablecoins are issued on a blockchain and can be sent peer-to-peer, they are not censorship-resistant in the same way that a Bitcoin is. We saw most recently Coinbase announce that their customers in supported jurisdictions can now buy, sell, send and receive the USDC stablecoin.
Final Thoughts On Stablecoins
- Although, all these new stablecoins present more transparency than USD Tether does by offering more regulatory frameworks and regular audits, stablecoins still present some challenges in the space. Many crypto advocates criticise asset backed stablecoins because of their inherently centralised nature. Having a single point of failure goes against why cryptocurrencies were created in the first place. Volatility does in fact remain a issue for adoption of blockchain technologies and cryptocurrencies in general, however the number of projects working on solving that issue confirms this fact. Reaching stability has been the key theme of 2018; as we have seen this year with the new flood of stablecoins hitting the crypto markets. If stablecoins were to fulfil the initial role of money, we can think of a decentralised world with efficient crypto-economic mechanisms, feeding unstoppable applications. To some extent, it would bridge the gap between the web 2.0 – monetised by fiat currencies and the web 3.0 – fuelled by crypto-assets.
- One of the biggest arguments against stablecoins is that that these currencies are quite risky as they are fully dependent upon the underlying asset. Pegging a cryptocurrency to a fiat currency can be even more volatile than pegging a fiat currency to another. This is because when inflation or deflation hits, the prices of the fiat currency can be unstable too. The US Dollar is still a safe currency. However, if a crypto is pegged to an unstable currency, inflation/deflation and other economic variables can cause a major damage to the holders. If the price or the value of the underlying asset decreases like for example the US dollar, the tokens and all their holders would suffer. As the global economy is potentially on the brink of collapse, we could see the weakening of the US dollar which will in return directly affect the stablecoin that is backed by this reserve fiat currency. In that type of situation traditional safe havens such as physical gold will likely rise in value and repeat itself as a good store of value instead of the US dollar and the stablecoin in times of economic uncertainty.