The State of Stablecoins
M&A PR Studio
Stablecoins are cryptocurrencies designed to minimize the volatility of their price to act as a reliable means of money transfer. You’ve all heard stories about people buying a pizza for a couple of BTC only to learn about its tremendous growth in price a few years later.
In order to be useful as for everyday payments coins must have a predictable and steady price and here’s when stablecoins come into play. They are crypto tokens based built on the existing blockchains, including Bitcoin, Ethereum and others, and either backed by fiat currencies or algorithmic trading to supply their intrinsic value.
With the recent rise of decentralized finances, stablecoins are posed to play a far greater role.
Just this September SEC and OCC issued the first regulatory clarifications for stablecoins providing some guidance for the market players, banks, and exchanges. The OCC detailed how banks and other financial institutions should operate stablecoin reserves.
“National banks and federal savings associations currently engage in stablecoin related activities involving billions of dollars each day. This opinion provides greater regulatory certainty for banks within the federal banking system to provide those client services in a safe and sound manner,” Acting Comptroller of the Currency Brian Brooks said in a statement
The OCC has taken a number of steps to integrate the crypto space with the existing financial system under Brooks, who is Coinbase’s former general counsel. In recent months, the OCC has told banks they can provide services to crypto startups and floated a national payment charter for exchanges and other fintech firms.
Further, the SEC said certain stablecoins might not be securities under federal law, but advised issuers to work with the agency and legal counsel to ensure this is the case. According to the statement, the SEC is willing to publish a “no-action” letter, which would assure the recipient that the regulator would not bring an enforcement action against the company.
The regulations and suggestions outlines refer only to stablecoins backed by fiat currencies such as the US dollar. Algorithimically-backed stablecoins haven’t been cleared yet. Basis, a stablecoin startup which raised $133 million in 2018, shut down after its legal counsel concluded that its mechanics would be treated as securities under U.S. law.
Tether, launched in 2014, was the first mainstream stablecoin ever adopted. It survived a lot of controversies
Right now Tether and affiliate exchange group iFinex are being sued for market manipulation, where plaintiffs say the group issued $3 billion worth of unbacked stablecoins into the market. It is not entirely clear how fully reserved Tether is and the reports the organization produced haven’t satisfied the market.
In early 2018 Tether accounted for about 10% of the trading volume of bitcoin, but during the summer of 2018 it accounted for up to 80% of bitcoin volume. There was a research indicating that a price manipulation scheme involving tether accounted for about half of the price increase in bitcoin in late 2017. On 15 October 2018 the Tether price even briefly fell to $0.88 due to the perceived risk.
Despite all of that it’s still the most widely used stablecoin with $15Bn in market capitalization, making it the third most valuable crypto asset after Bitcoin and Ethereum – even though a number of more transparent alternatives have emerged.
One of the main alternatives is USDC, a stablecoin launched by an open source consortium of Circle and the CENTRE. The token is natively supported by Coinbase as well, meaning its customers can convert fiat USD into USDC instantly with no fees, drastically reducing the barriers for entry even for non-affluent users.
As of this moment, USDC has a market cap of almost $3Bn and it’s been growing faster than Tether. All of that is backed 1:1 by fiat USD and the token is regularly audited. For most consumers and even businesses there’s no discernible difference in the real-life usage of these two stablecoins.
There’s a question why would anyone want to exchange their fiat US dollar for the same one on the blockchain?
“Well for one, crypto dollars, like other crypto assets, ride on crypto rails. I can send my crypto dollars from my Coinbase wallet to your Coinbase wallet, your Ledger wallet, or many other crypto wallets”, wrote Fred Wilson, co-founder of Union Square Ventures. “But more than all of that, USDC are programmable dollars. This is a big deal. Kind of like the difference between an MP3 file and song on a cassette tape. Once an asset is natively digital, without any strings attached, and can be programmed and routed digitally, interesting things happen.”
That’s where we enter into decentralized finance: developers can build next-gen financial infrastructure that would use the familiar denominators with predictable value, drastically increasing the exposure it would have.
Even despite the increased transparency by simply looking at the pricing chart nominated in USD you are unlikely to distinguish USDC and Tether – both tend to fluctuate by around 2-4 cents. With USDC, residents of the US have an added benefit from Coinbase integration since their price is pegged 100% (and they might lose money on certain conversions).
In fact, if you looked just at the price fluctuations for the last year, it’d be quite difficult to figure out what stablecoin you’re looking at.
Dai is an algorithmic cryptocurrency – it’s pegged to the value of the US dollar but isn’t directly backed by it to ensure decentralization. Instead it uses margin trading to react to the dynamic markets and preserve its value against. Unlike other popular stablecoins whose value is backed directly by USD, it’s backed by crypto collaterals that can be viewed publicly on the Ethereum blockchain, ensuring maximum transparency.
Borrowers create dai by placing another crypto asset into a smart contract as collateral. The protocol charges a stability fee, acting as an interest rate that the borrowers must pay for their debt. On the other side of this are the dai holders, who get paid a dai savings rate for locking their money in a smart contract, rewarding holders for their staking.
Dai is an essential choice for the decentralized finance ecosystem, so the growing demand for yield farming is putting an enormous pressure on Dai and its $1 peg – on some occasions in September it grew to almost $1.10.
Based on the data from DeFi Pulse, over $354 million worth of Dai is locked in liquidity pools across multiple protocols, including Uniswap, Yearn, Compound, Curve, Balancer and SushiSwap. This is over ¾ of Dai’s total circulating supply. MakerDAO’s community is now debating potential tweaks to its monetary policy to restore the peg. The stability fee on most Maker vaults has been 0% since March 12, 2020, when dai rose above its $1.00 peg. The 0% rate wasn’t enough and it was raised back to 2%.
In June 2018, Facebook announced Libra, a cryptocurrency which would let people buy things or send money to others with nearly zero fees. While Libra was supposed to be run by a nonprofit association supported by a range of companies and organizations, Facebook supported Calibra, a digital wallet for storing and exchanging the digital coin.
The project faced a lot of pressure from governments and regulators, resulting in multiple members of the Libra Association leaving (including Visa, MasterCard, Visa, eBay, and Stripe).
European Union members announced a ban on the launch of global stablecoins such as Facebook Libra in the region until they find a common approach to regulation. The European Council and Commission wrote that “no global ‘stablecoin’ arrangement should begin operation in the European Union until the legal, regulatory and oversight challenges and risks have been adequately identified and addressed.”
Eventually, Facebook abandoned its idea of launching a new currency backed by a basket of fiat currencies and instead opted in to digitize existing currencies, much like other stablecoins. In March 2020, Facebook renamed its service for transferring Libra digital currency from Calibra to Novi. The project hasn’t been launched and just recently Facebook's Libra and Novi wallet Co-Founder Morgan Beller left the company.