According to SCMP, despite the stringent ban on cryptocurrencies in mainland China, Jeremy Allaire, the co-founder and CEO of Circle, a leading operator of the USDC stablecoin, foresees a significant role for yuan-backed stablecoins in the global crypto market.
In a recent statement at the Converge22 conference in San Francisco, Allaire acknowledged China’s reluctance to open up to cryptocurrencies. Despite this, he believes that stablecoins could be instrumental in achieving Beijing’s goal of yuan internationalisation.
Circle has expressed optimism about Hong Kong’s efforts to regulate stablecoins, considering Asia as its largest non-US market. This move could potentially pave the way for a more regulated and secure environment for stablecoin transactions, which could, in turn, boost the adoption of yuan-backed stablecoins.
While the ban in mainland China poses challenges, it also opens up opportunities for the growth of stablecoins, particularly those backed by the yuan. As China continues to assert its digital currency ambitions, the potential for yuan-backed stablecoins to contribute to the internationalisation of the yuan becomes increasingly apparent.
Allaire’s insights highlight the evolving landscape of the crypto market in Asia and the potential strategic role of yuan-backed stablecoins. As the crypto industry continues to evolve, the interplay between regulatory frameworks, market dynamics, and technological innovation will be crucial in shaping the future of digital currencies.
In a compelling testimony delivered to the House Financial Services Committee, Jeremy Allaire, CEO and Co-Founder of Circle, underlined the significant role stablecoins, such as the U.S. Dollar Coin (USDC), could play in strengthening the global position of the U.S. dollar. Allaire focused on the urgent need for the United States to lead the development of regulatory frameworks that promote growth and safety in the digital assets market.
A seasoned pioneer in the technology and financial sectors, Allaire highlighted how USDC, a leading digital currency tied to the U.S. dollar, is instrumental in advocating for a technologically superior, safe, and widely accessible U.S. dollar. He pointed out that the steps taken by the U.S. government in the near future would have profound implications on the competitiveness of the dollar for the coming decades.
The Circle CEO emphasized the rising demand for secure, internet-based dollars, asserting that with a robust regulatory framework, this market could potentially serve billions of users and handle trillions of dollars in payment activity. He also drew attention to the rapid progress of alternate payment systems and technological advancements such as 6G networks, quantum computing, and artificial intelligence, which could impact the supremacy of the U.S. dollar.
Allaire’s statement to the Committee also shed light on the importance of the stablecoin bill, a key piece of legislation he deems critical to the establishment of a vibrant and secure digital asset ecosystem. He advocated for robust supervision of stablecoin issuers, stringent requirements for asset backing of digital dollars, and measures to prevent the circulation of counterfeit digital dollars.
The Circle CEO addressed four unresolved issues, which, in his view, the Committee needs to tackle. These include clarifying the roles of state and federal banking regulators, addressing reserve requirements, determining how financial institutions should manage payment stablecoins, and establishing stringent measures to prevent the proliferation of illegitimate digital dollars.
Allaire ended his testimony with an urgent appeal to lawmakers, urging them to ensure the U.S. dollar remains competitive in an era of rapidly evolving technological innovation. Highlighting the critical crossroads facing the U.S. dollar, Allaire called for regulatory decisions that will foster a secure and thriving digital currency landscape, thereby maintaining America’s economic competitiveness and international influence.
In an exciting development for the global fintech industry, Circle Internet Financial has appointed Heath Tarbert as its new chief legal officer and head of corporate affairs, effective from July 1, 2023. Tarbert’s appointment is a significant move for Circle, which has been actively pursuing a strategy of global growth.
Tarbert steps into the shoes of Flavia Naves, Circle’s outgoing general counsel, who had announced her plans to leave the company earlier this year. Naves is known for successfully overseeing the company’s expansion and fundraising efforts, as well as establishing a world-class legal organization.
Before accepting the role at Circle, Tarbert held a significant position as the chief legal officer at Citadel Securities. His impressive career spans leadership roles across all three branches of the federal government and several key regulatory bodies. His experience includes serving as the 14th chairman and chief executive of the Commodity Futures Trading Commission (CFTC), vice chairman of the International Organization of Securities Commissions, and assistant secretary of the U.S. Treasury for international markets.
The decision to bring Tarbert onboard underscores Circle’s commitment to integrating traditional finance with Web3, the decentralized web powered by blockchain technology. Circle’s co-founder and CEO, Jeremy Allaire, lauded Tarbert’s appointment, emphasizing that his vast legal expertise and global regulatory experience would be invaluable as the company seeks to enhance the utility value of its stablecoin, USDC, on a global scale.
On his part, Tarbert expressed his excitement to join Circle and contribute to its mission of evolving the global financial system. He stressed the need for sound regulatory rules that provide clarity and protection for individuals and businesses dealing with digital assets.
Circle Internet Financial is a global fintech firm offering businesses the ability to leverage digital currencies and public blockchains for various financial applications. It is well-known as the issuer of USDC and Euro Coin, trusted and interoperable money protocols used across the internet.
Jeremy Allaire, the founder and Chief Executive Officer of USDC stablecoin issuer Circle took to Twitter recently to share updates about the firm and how it is in a better position financially despite the ongoing crypto market meltdown.
Allaire’s tweets were borne out of the need to clarify assumptions that the stablecoin is experiencing an economic turmoil, one that models what is currently being seen in the broader digital currency ecosystem. In response, Allaire said the USDC stablecoin has a very robust reserve and can easily be redeemed on a 1:1 basis with the United States Dollar.
The CEO noted that Circle has always preached transparency and accountability and that it not only has a verifiable reserve base, but he also released details about the company’s last audit which proved its assets held in reserves. The company said it has filed the audit reports for the years 2021 and 2020 with the United States Securities and Exchange Commission (SEC) as it looks to build global trust further ahead of its listing on the New York Stock Exchange.
“It’s understandable why some users would be paranoid given the history of hucksters in crypto. We have always tried to hold ourselves to the highest standards afford to us. That’s enabled us to work with regulators, top-tier assurance firms, and leading FIs,” Allaire said in the Twitter thread, adding that “Circle is in the strongest position it has ever been in financially, and we will continue to increase our transparency. FWIW, we are also encouraged by emerging regulatory frameworks for stablecoin issuers, which should help further increase confidence in issuers like Circle.”
The collapse of UST stablecoin broke investors’ trust in the crypto ecosystem even though the model upon which UST was built and USDC completely differs. While Allaire’s reassurances can act as a mild palliative, continuous operational excellence will be required to maintain trust in USDC continually.
At the time of writing, the USDC stablecoin is maintaining its pegged price of $1 atop a $55,822,273,913.87 market capitalization per data from CoinMarketCap.
Tether (USDT) now has an advantage over USD Coin (USDC). As a result, Circle’s dollar-pegged stablecoin, USDC, lost one of its largest leveraging stances to its main competitor, USDT.
Coinbase, one of the prominent players in crypto exchange, has made a crucial change on the USD Coin page. The crypto exchange placed the change on its website.
Related Reading | Vitalik Buterin Urges Ethereum To Grow Beyond DApps
5 BTC + 300 Free Spins for new players & 15 BTC + 35.000 Free Spins every month, only at mBitcasino. Play Now!
This was in response to an audit that exposed that a few USDC’s reserves were not held in cash. The audit discovery contradicts the statement that every USDC has a corresponding backing of one dollar in a bank account.
Coinbase Brings New Changes By Bringing USD Coin Into Public
From the recent change, the entry statement on the USD Coin webpage is also affected. Coinbase visitors now get a new welcome statement saying that USDC has backing by fully reserved assets.
In addition, the statement now says that every USDC is backed by one dollar or an equivalent asset with fair value. Also, it mentions that the backing is held in accounts under US-regulated financial institutions.
Get 110 USDT Futures Bonus for FREE!
USD Coin has more than $28 billion and is rated as the eighth-largest digital asset. Furthermore, it is the second-largest stablecoin, coming closing behind Tether that takes the top. Tether’s latest Consolidated Reserves Report reveals that the cryptocurrency has about $63 billion assets in its custody.
Related Reading | Government Still Sees Blockchain As “Wild West” Says Blockchain Australia
From its time of launch, USDC operates as a stablecoin fully backed by US dollars. Conversely, Tether, its major competitor, has been involved in multiple legal fights with regulators. The contributory factor is the hidden commercial paper that claims about half of its total reserves.
Nevertheless, the audit of Grant Horton, a multi-national tax advisory company, comes the discovery about the true backing for USDC. The audit reveals that only 61% of USDC’s reserves are in cash and cash equivalents. Also, some reserves that accrued to 9% are in commercial paper forms.
USD Coin thrives in the green zone as the market gets ready for a bullish run | Source: USDCUSD on TradingView.com
From the definition of the audit reports, cash consists of deposits with banks and Government Obligation Money Market Funds. It further defined cash equivalents as securities that have a 90-day original maturity period or less.
Furthermore, Yankee certificates of deposit and U.S. Treasuries were discovered to be part of USDC reserves from the audit. These included reserves have no full backing by US dollars held in a bank account. Bloomberg explained that Coinbase changed USD Coin webpage wording when the crypto exchange received the audit report.
Reacting to the recent report, Andrew Schmitt, Coinbase spokesperson, said that there’s the backing of $1 or its equivalent fair value asset for each USDC. He explained that the redemption of 1 USDC remains $1 for users. Also, he mentioned that the company has additional information on its website for a clearer understanding of USDC reserves.
On its part, the partnering company with Coinbase that oversees USDC, Circle, made a recent announcement. The company discloses its plan of becoming a full-reserve national digital currency bank in the U.S.
The company’s CEO, Jeremy Allaire, affirms the company’s readiness to comply with all regulatory and risk management requirements.
Through his announcement, Allaire expresses his expectation for USDC rising to hundreds of billions of dollars. Also, he said the stablecoin could move to support more economic activities and be a prominent tool in financial and commercial advancements.
Featured image from CoinCodex, chart from TradingView.com
Circle, a payment company and stablecoin issuer, has announced plans to go public later this year via a merger with Concord Acquisition Corp, a publicly traded special purpose acquisition corporation (SPAC).
The crypto financial services company expects to close the deal in Q4 and value the firm at $4.5 billion.
Circle is best known for co-creating USD Coin (USDC), the US-backed stablecoin. Circle CEO Jeremy Allaire said:
“We just see an incredible opportunity to grow rapidly and grow around the world, and we think that this set of transactions and becoming a public company sets us up to be a trusted platform in this digital currency industry,”
SPACs (special purpose acquisition companies) mean shell companies that raise capital through initial public offerings (IPO) to take private companies public via mergers later.
The firm plans to merge with Concord Acquisition Corporation, which former Barclays boss Bob Diamond backs, and the combined entity will be acquired by a new Irish holding firm that will trade on the New York Stock Exchange.
Circle, a Boston-based startup, said that the deal is expected to fetch $691 million in profits for the combined entity.
Institutional investors such as Daniel Loebb’s Third Point, Fidelity Management & Research Co, Marshall Wace, and accounts advised by ARK Investment Management LLC have come into agreement to offer $415 million in private investment in public equity (PIPE) financing. Last month, Circle raised $440 million in one of the largest funding rounds in cryptocurrency history. These show that Circle will have sufficient funds at its disposal if the merger deal goes through.
Circle’s effort to go public is set to put USDC’s Centre Consortium members on the public markets. USDC stablecoin, which Coinbase jointly administers, has increased its popularity in the stablecoin industry with a circulating supply of almost $26 billion.
Regulators’ Concerns Over Stablecoins
The announcement by Circle comes at a time amid rising concerns by regulators who worry that such digital money pegged to fiat currencies could be used to dupe consumers or enable money laundering.
In April, a federal court in Massachusetts allowed the Internal Revenue Service to seek information from Circle about US taxpayers who carried out transactions of at least $20,000 in crypto assets from 2016 to 2020. However, Circle has not been accused of wrongdoing.
In January, officials in the Biden administration warned stablecoin issuers that several consumers are unaware that the dollar-backed tokens are not federally insured and could lead to losses in their investments.
Regulators also are concerned that stablecoins could be used to sidestep the formal banking system and enable criminals to execute money laundering activities.
In May, Fed Governor Lael Brainard raised concerns over stablecoins by saying such coins introduce the risk that the private issuers default, which could harm consumers and destabilise the financial system.
The second biggest stablecoin by market capitalization is already a multi-blockchain project. Soon, though, USDC will live almost everywhere. According toCoindesk, it will soon be available in, “Avalanche, Celo, Flow, Hedera, Kava, Nervos, Polkadot, Stacks, Tezos, and Tron.” That will bring the total to 14; since USDC is already functional in Ethereum, Algorand, Stellar, and Solana.
The biggest stablecoin, Tether or USDT, is only available in 8 of those. Currently, the most used stablecoin is Tron’s version of USDT.
Related Reading | Is USDC’s Billion Dollar Growth A Sign Crypto Smart Money Is Ditching Tether?
5 BTC + 300 Free Spins for new players & 15 BTC + 35.000 Free Spins every month, only at mBitcasino. Play Now!
With that in mind, CENTRE said:
“We anticipate that USDC on these blockchain platforms and multichain protocols will further accelerate the use of the world’s fastest growing digital dollar currency.”
The consortium that runs USDC, CENTRE, is a joint venture between Coinbase and payments processor Circle. The information comes from, “a draft announcement from USDC administrator CENTRE obtained by CoinDesk.”
For this, we have to go back to the academy. Coinzillainforms us:
USDC is one of the fastest-growing stablecoins pegged 1 to 1 to the US Dollar.
What is more remarkable is that Circle, the company that developed the stablecoin, is actually holding the amount of money required for backing the USDC in circulation.
That’s definitely a show at USDT.Tether’s auditandlegal issueshave been a topic of contention in the cryptocurrencies community for a while now. Can they back all the Tether they’ve minted? A burning question that’s harder to answer than you’d think.
For what is worth, USDC’s independent audit ison the public recordand says:
USD Coin (“USDC”) tokens issued and outstanding less tokens allowed but not issued (218,807,037) and less blacklisted tokens = 14,697,267,257 USDC
US Dollars held in custody accounts are at least equal or greater than the USDC tokens outstanding at the Report Date and Time.
Back to Coinzilla’s academy, the stablecoin’s characteristics are:
In essence, USD Coin is an ERC-20 token that functions through the Ethereum Network. Nowadays, USDC transactions can also be settled through Algorand, Solana, and Stellar’s infrastructures.
Since the launch of USDC 2.0, the payment process is simplified, the gas fees being paid directly in USDC.
Related Reading | Circle’s Stablecoin USDC Passes Independent Audit, Fully Backed by USD
Stablecoins Are Supposed To Rule The USA in 2021
The official love affair between the US government and USDC started last January, when Jeremy Allaire from Circle announced that, “the largest US banking regulator with new guidance allowing US banks to use public blockchains and dollar stablecoins as a settlement infrastructure in the US financial system.” According to him, “Decentralized, permissionless, open source and internet mediated software is literally becoming the foundation for not just the US financial system but for the global economy.”
3/ The new interpretive letter establishes that banks can treat public chains as infrastructure similar to SWIFT, ACH and FedWire, and stablecoins like USDC as electronic stored value. The significance of this can’t be understated.
— Jeremy Allaire (@jerallaire) January 4, 2021
Recently Randal K. Quarles, the Federal Reserve’s Vice Chair for Supervision,considerably raisedthe stakes:
In my judgment, we do not need to fear stablecoins. The Federal Reserve has traditionally supported responsible private-sector innovation. Consistent with this tradition, I believe that we must take strong account of the potential benefits of stablecoins, including the possibility that a U.S. dollar stablecoin might support the role of the dollar in the global economy. For example, a global U.S. dollar stablecoin network could encourage use of the dollar by making cross-border payments faster and cheaper, and it potentially could be deployed much faster and with fewer downsides than a CBDC.
Will stablecoins like USDC and USDT substitute the Digital Dollar project? Could they be an alternative to CBDCs? We’ll have to wait and see.
Featured Images by NeONBRAND on Unsplash - Charts by TradingView
Balances of dai (DAI) and USD coin (USDC) on exchanges reached new all-time highs in the past week, according to data from Glassnode.
The increase may be a bullish indicator for the crypto market as a whole if it reflects buyers’ plans to use the two stablecoins to buy more crypto assets.
The balance of dollar-pegged USDC on exchanges reached over $915 million Friday, while the amount of decentralized stablecoin dai on exchanges went above $81 million on Sunday, according to Glassnode.
USDC on exchanges “represents almost $1 billion worth of buying power from USDC alone, poised to move into assets” such as bitcoin, according to Glassnode’s weekly newsletter dated Feb 1. “This high figure should increase investors’ confidence in any dips being quickly bought up, making it a bullish signal.”
As CoinDesk reported Tuesday, some analysts see several on-chain metrics for bitcoin’s price pointing in a bullish direction in the coming weeks. For example, a decreased amount of bitcoin held on exchange addresses indicates less pressure on the sell side.
In crypto trading, traders and investors often use stablecoins to put money into riskier cryptocurrencies; in such cases, buying stablecoins backed by government-issued currencies is seen as the first step necessary before buying other cryptocurrencies.
“The growth in on-exchange USDC reflects the increasing view among traders that USDC is a preferred base currency, as well as the fact that a lot of the new flows into crypto are starting with on-exchange activity,” Jeremy Allaire, co-founder and CEO of peer-to-peer payments company Circle, told CoinDesk through a spokesperson. He noted that USDC issuance in January saw “record levels.” Circle and crypto exchange Coinbase are behind USDC’s governing Centre consortium.
The circulating supply of USDC, which is valued 1:1 with the U.S. dollar, has grown to over 5 billion from just below 4 billion in the beginning of the month, sharp growth after slowing in October, according to data from Glassnode.
Increased exchange activity is also reflected in the significant price rise of exchanges’ utility tokens. Centralized exchanges Binance and FTX and decentralized exchanges Uniswap and SushiSwap all saw their exchange tokens hit new all-time highs in the past week.
As of press time, MakerDAO did not respond to CoinDesk’s requests for comment regarding its dai stablecoin.
Data compiled by CoinDesk shows that tether (USDT) is still the stablecoin king despite recent controversies involving its issuing company. Tether currently has over $27 billion in market capitalization but its balance on exchanges in the past two months has been more volatile.
“New flows [to crypto markets] are coming from more mainstream institutions participating [that] have a strong predisposition for transparent, trusted, regulated dollar stablecoins,” Circle’s Allaire said.
Stablecoins are a key cog in the cryptocurrency machine. The recent bull market has rekindled a long-simmering debate over whether the biggest such coin is, well, stable.
While bitcoin, ether and altcoins have seen astounding price rallies over the past four months, some of the most important growth has been in the cryptocurrencies known as stablecoins. These blockchain-based assets, usually pegged to the U.S. dollar, are a critical part of cryptocurrency trading activity and have taken in billions from investors who use them on exchanges around the world.
The biggest of them all, tether (USDT), has an eye-popping $25 billion market capitalization. However, tether’s critics charge its lack of transparency in everything from finances to the way its issuing company operates threatens the overall crypto market.
At issue is one of the most fundamental questions hanging over the cryptocurrency markets: Is the price of bitcoin and other cryptocurrencies inflated because the backing of tether may not be as strong as people think it is?
Why the market uses stablecoins
Despite hitting a $1 trillion market capitalization in January, freely floating cryptocurrencies, though more liquid than before, are still quite volatile. For example, for the past five years, bitcoin hasn’t been able to consistently maintain a 30-day volatility below 20% as gold does. This makes claims that bitcoin is “digital gold” a poor fit, which is where stablecoins come in.
Jeremy Allaire, chief executive officer of Circle, part of the CENTRE Consortium (with Coinbase) that manages USD coin (USDC), says cryptocurrency market traders need stablecoins to move quickly given constantly gyrating digital asset prices.
“If you’re active in the markets, you’re going to keep your money in a stablecoin because it’s radically faster, cheaper, better than the legacy banking system,” he told CoinDesk.
Allaire’s USDC is in many ways the sort of transparent enterprise stablecoins promise to be. A top 20 crypto asset, it has almost $5 billion in market capitalization and $2.7 billion in daily trading volume as of press time. Every month, the CENTRE Consortium publishes attestations from accounting firm Grant Thornton LLP to prove the amount of USDC in circulation matches up with the amount of dollars in a bank account, meaning the asset is fully backed by dollars. In accounting-speak, attestations are different from audits. Auditing is defined as an independent examination of data, whereas attestations evaluate and review how true data is.
Just a year ago, USDC’s market capitalization was merely $445 million. It saw a tenfold rise as the crypto markets skyrocketed amid uncertain times.
The tethered kingdom
While USDC is one of the more successful stablecoins, it’s relatively small compared to its most formidable and controversial competitor, one that is dominating the sector. The largest stablecoin – and the third largest cryptocurrency – in the entire digital asset ecosystem is tether (USDT).
In the past year, tether’s market capitalization has risen from $4.2 billion to a whopping $25 billion. In a span of four days in 2020, from March 31 to April 3, its market capitalization jumped by $2.1 billion alone.
“We’re not sure that anyone could have foreseen this level of growth and use cases of tether at the very beginning. We were confident that it was a useful token, but didn’t anticipate quite how useful it could be,” Paolo Ardoino, the chief technology officer of Tether and the cryptocurrency exchange Bitfinex, told CoinDesk
So far in January alone, Tether has plowed $3.8 billion more USDT into the crypto ecosystem.
It is true that Tether is likely an original. It is a project that started as Realcoin, founded in 2014 by entrepreneurs Brock Pierce, Craig Sellars and Reeve Collins. Nonetheless, many in the industry – and law enforcement – have questioned its legitimacy. Multiple ongoing investigations, including from the U.S. Department of Justice (DOJ) and the New York Attorney General’s office, have dogged the stablecoin company. At the center of the DOJ’s criminal investigation into Tether as an organization is whether or not USDT is used to inflate the cryptocurrency markets.
Tether General Counsel Stuart Hoegner provided this statement to CoinDesk regarding the U.S. investigations: “We work with regulators and law enforcement agencies around the world to help their investigations and help them understand our business. We always want to support law enforcement’s legitimate objectives. With respect to the New York Attorney General’s special proceeding, we believe that our discussions with their office has been constructive and we look forward to continuing the conversation.”
Like USDC, USDT is closely associated with an exchange; USDC is used on Coinbase’s exchange and USDT is utilized on Bitfinex, although both are also used on other exchanges. But the behavior of the two assets on the two exchanges is quite different, according to data analytics firm CryptoQuant.
“Compared to bitcoin, there’s no multiple stablecoin addresses for exchanges,” Ki Young Ju, chief executive officer of CryptoQuant, told CoinDesk. Because of this, Ki’s firm has been able to use data from exchanges to calculate what it calls a “stablecoin ratio.” The calculation is the bitcoin reserves from known hot wallets in U.S. dollar (USD) terms divided by the stablecoin reserve addresses exchanges. The higher the ratio, the higher the selling pressure.
“The ratio for stablecoins like USDC is like 18%-25%,” depending on the exchange, said Young Ju. “But tether is just 7%, meaning most of the demand didn’t come from exchanges.”
So where is the demand coming from? While USDT does have a transparency page on its website showing assets and liabilities, it does not appear to provide a regular attestation from any third party that the amount of USDT in circulation matches a bank account somewhere.
Tether’s backing questioned
John Griffin, a professor at the University of Texas, wrote with Amin Shams, a former student who is now a professor in the Department of Finance at Ohio State University’s Fisher College of Business, the academic peer-reviewed paper “Is Bitcoin Really Un-Tethered?”
The 2018 paper said one entity, demarcated in the paper with a single bitcoin address, exerted a remarkable amount of control over the bitcoin bull market in 2017 by minting tether that was then used to buy bitcoin. “We find that one large player is associated with more than half of the exchange of tether for bitcoin at Bitfinex, suggesting that the distribution of tether into the market is from a large player and not many different investors bringing cash to Bitfinex to purchase tether,” according to the research.
The report added that very little tether is returned to the issuer to be redeemed, suggesting the crypto market is at least somewhat inflated by the USDT used by that address to buy bitcoin during the 2017 bull market time period.
Bitfinex/Tether did not respond to specific inquiries regarding the paper, which was updated in 2019. However, in a blog post they slammed the study.
“We have now reviewed the updated Tether article by John M. Griffin and Amin Shams,” begins a Bitfinex blog post from Nov. 7, 2019. “The purported conclusions reached by the authors are built on a house of cards that suffers from the absence of a complete dataset.”
In response, Griffin and Shams disputed that a complete dataset wasn’t used and said blockchain data is easier to obtain for analysis than most realize. They also said it took them a long time to parse and verify all the data to come to the conclusions they did for peer review and publishing.
“One of the things that our paper found is that tether was being printed unbacked and being used to push up cryptocurrency,” Griffin told CoinDesk. “At the time that we printed our paper Tether rigorously denied that.”
However, Bitfinex’s general counsel, Stuart Hoegner, who also represents Tether, conceded in an affidavit filed in a case brought by the New York Attorney General that at least as of April 2019, Tether assets circulating in the crypto ecosystem were only 74% backed by cash and cash equivalents. The case alleges Bitfinex lost $850 million and subsequently used funds from Tether to secretly cover the shortfall.
When asked by CoinDesk to provide specific information regarding redemptions and issuances, Bitfinex’s Ardoino gave this answer: “Much of the information for which you’re looking is available on public blockchains. The data shows that demand for redemptions is far surpassed by the demand for issuances.”
In 2018, the DOJ’s Criminal Division awarded Griffin’s forensic data analysis firm, Integra FEC, $400,000 for “Tether Investigation,” according to a previous version of the contract’s webpage. On Dec. 27, 2020, the contract was updated to reflect completion before the end of 2021, although there is no longer any reference to Tether on the site.
Shams, Griffin’s collaborator on the paper, doesn’t have any involvement with Integra FEC and told CoinDesk he has not taken any money for his research. He says the paper was well-received in the academic community but believes, like Griffin, that it should be taken more seriously in the cryptocurrency ecosystem, especially given the rigorous peer-review process.
Shams noted the paper was published in the Journal of Finance, which according to statistics on its official website, has accepted only 4.38% of submissions since 2016. “It’s by far the best finance journal,” he said.
Tether’s surprising defender
An unlikely defender of tether is CEO Allaire. He is one example of a longtime participant in the cryptocurrency community who isn’t convinced tether has undue influence on the crypto market.
“I think what I can say is the academic theory that they have run a giant fraud to create tether out of thin air, to buy bitcoin, to drive up prices, I think that’s complete BS,” Allaire told CoinDesk. “If you want to deploy capital into the markets, you do it through stablecoins and then you go bring those dollars into the markets and you buy things and trade things.”
“In particular in Asia where, you know, these are dollar-denominated markets, they have to use a shadow banking system to do it,” Allaire said. “You can’t connect a bank account in China to Binance or Huobi. So you have to do it through shadow banking and they do it through tether. And so it just represents the aggregate demand. Investors and users in Asia – it’s a huge, huge piece of it.”
When Allaire refers to “shadow banking” he’s talking about a term created back in 2007 by an economist to refer to unregulated or lightly regulated non-bank financial institutions. The problem is, shadow banks are not backed by typical FDIC insurance to protect deposits in the U.S. Also, shadow banks were singled out as nefarious participants in the 2008 financial crisis.
When asked about how Tether helps those without proper banking, Ardoino says the liquidity component of USDT is key to the crypto exchange ecosystem. “Tether allows for a more efficient experience across exchange platforms and in digital token commerce more generally,” Ardoino said. “Tether realized early on the importance of a common asset in the crypto ecosystem that can be used seamlessly across multiple blockchains and communities to access and provide liquidity.”
However, Griffin compares problems with tether to traditional financial markets and highlights a gap the stablecoin still has to bridge.
“Having a stablecoin and using stablecoins in the space is a good idea, but you need to have a stablecoin that undergoes proper auditing and proper monitoring,” Griffin told CoinDesk. “It would be equivalent to saying, ‘Hey, let’s make an [exchange-traded fund] in the U.S. on the Russian ruble,’ and then you got the North Koreans and [Russian President] Putin manipulating the ruble,” he said. “And then you wonder, like, well, ‘I wonder why the ruble went up so much this weekend?’”
‘A partial-reserve stablecoin’
Kevin Lehtiniitty is the chief strategy officer of Prime Trust, a Nevada-based trust company that has worked extensively with stablecoins. The firm, as a financial institution, has developed a “stablecoin as a service” product for the crypto market, providing custody, payments and instructing of the minting and burning of stable tokens for exchange.
“We were the first financial institution to be a stablecoin as a service provider,” Lehtiniitty told CoinDesk. “Basically the exchange is a technology layer on top of the stablecoin.”
Prime Trust has worked with over 38 stablecoin products, the first being the venture capital-backed TrueUSD in 2018. “Now, obviously, 38 stablecoins are not going to win,” said Lehtiniitty. “It’s going to be kind of like a winner or top two or three take all kind of a market.”
Lehtiniitty did not mince words on his thoughts about stablecoins without transparent asset backing, calling tether a “partial reserve stablecoin.” “I think the general market sentiment, at least from our perspective, is that people know that – people just don’t think it’s going to crash when they are doing what they are doing.”
“What are the odds that it’s going to crash in the next few hours that I’m holding?” Lehtiniitty continued. ”And that’s that is the world’s dumbest excuse. But I hear it time and time again from OTC and trading partners, other folks, and it drives me nuts.”
Yet, it likely would take a loss of tether’s peg to the dollar for anyone to even raise any alarm because market forces appear to be keeping prices in line, according to another paper, funded by Ripple, called “What Keeps Stablecoins Stable?” by Richard K. Lyons of University of California, Berkeley and Ganesh Viswanath-Natraj University of Warwick.
That paper argues that traders are helping stabilize prices around the peg. And while tether’s peg to the U.S. dollar hasn’t dipped in quite some time, it has happened before, the paper points out.
“A lot of very well capitalized people believe that tether is better off existing than not,” Lehtiniitty said. He pointed to the May 2019 $1 billion LEO token offering Bitfinex conducted as an example. “They were willing to put their money where their mouth was to the tune of a tremendous amount of capital to keep tether propped up,” Lehtiniitty added.
Regulators making moves
In the U.S., the Office of the Comptroller of Currency (OCC) has said this month that federally regulated banks can use stablecoins for payments and other services. Also this month, the U.K. released a paper and request for commentary on the use of stablecoins in finance.
All of this, Lehtiniitty suspects, is to build a framework around stablecoins backed by banking in an effort to weed out possible systemic risks that partial-reserve stablecoins like tether may cause should a peg break.
“The only way tether kind of stops and we then go to fully backed stablecoins is regulatory pressure. And what I mean by that is basically saying banks can deal with fully reserved stablecoins, not with other types of stablecoins,” he said.
In a recent video interview, Gregory Pepin, the deputy CEO of Tether’s bank, Deltec, said, “Every tether is backed by a reserve and their reserve is more than what is in circulation.”
More trouble for Tether as an organization looms on the horizon. A federal criminal trial involving real estate investor Reggie Fowler, who was involved in allegedly providing Tether and Bitfinex with shadow banking at one point, is underway in New York. In the case brought by that state’s attorney general, key documents were supposed to be provided by Bitfinex and Tether by Jan. 15. And the DOJ’s Criminal Division investigation is ongoing with Integra’s contract running until the end of 2021.
Even USDC’s Allaire regards Tether as pretty non-transparent. “They’re very opaque about a lot of things,” he told CoinDesk.
The US Treasury Department recently proposed a new regulation, which requires banks and money service businesses such as crypto trading platforms to verify the identities of self-hosted or unhosted wallet holders for any digital asset transaction that exceed $3,000.
In an effort to address anonymous transfers of digital assets by “bad actors,” the US Treasury Department has launched a proposal to require some crypto users to offer information about their identities. The new plan targets private accounts that allow the holder of a unique digital key to store crypto assets and transact with others directly without going through a financial institution.
Any cryptocurrency transaction that exceeds $10,000 would need to be reported to the Financial Crime Enforcement Network (FinCEN) within 15 days, according to the proposed regulation.
Jeremy Allaire expressed concerns ahead of the proposal
Jeremy Allaire, the CEO of payments company Circle has previously sent a letter to the Treasury Department, calling for an improved regulation that could offer a “meaningful safe harbor” for players within the cryptocurrency ecosystem. Allaire was inspired by word getting out of the enactment of a regulatory ban over self-hosted crypto wallets prior to the proposal.
Allaire has had the opinion that the cryptocurrency industry has been working very hard to prevent the technology from being harnessed by bad actors, which is one of the biggest fears of the Treasury Department. Allaire further advocated that the Treasury Department should give industry players about a year or two to implement technologies that can ensure proper KYC policies and other transaction reporting requirements, to not hinder innovations in the blockchain industry.
Jeremy Allaire: Rule on unhosted wallets is a personal mission for Secretary Mnuchin
According to Allaire, the proposed regulation by the Treasury Department on unhosted wallets was a personal mission for Secretary Mnuchin. The Circle CEO explained that Mnuchin’s personal view is far more aggressive than the proposed rule that was put forward. Allaire further explained:
“His original plan was to just drop this as a final rule with zero notice for public comment, as a “midnight rulemaking” on his way out of office. This actually didn’t have broad support, in fact very few people were even aware of this plan. As people got word, an intense amount of work went on behind the scenes to try to at least get this for a standard notice and public review.”
Mnuchin’s excuse for not wanting a public review was due to the fact that he believed this would allow the “bad guys” to move their funds off of regulated exchanges, however, as Allaire pointed out, the reason could be the fact that Jan. 20 is the end of his term.
“The biggest issue here is first and foremost that 15 days over the holidays is totally inadequate and is just frankly a cynical ploy to jam this through no matter what feedback comes back. This violates the APA, so if it’s jammed through, expect a lawsuit for an injunction.”
New rule proposes a new level of financial surveillance
According to Allaire, the proposed rule introduces the “potential for a level of financial surveillance that goes beyond anything that exists with the existing banking system.” Allaire argued that while a large cash transaction can involve a CTR filing, however, regulators cannot track where the cash goes.
The Circle CEO advocated again for more time to work as an industry with the regulators, to prevent the hindering of creating new breakthrough innovations. He concluded:
“Key thing now is to apply as much pressure as possible, and litigate if necessary, to ensure the kind of public review, comment and iteration that this critical new economic infrastructure and innovation deserves.”