FDUSD: A Rising Contender or a Potential Risk for the Crypto Markets
The new entrant in the stablecoins market and the potential impact on Bitcoin ETFs
One of the recurrent themes in applications for spot Bitcoin ETFs submitted to the SEC was the concern over the risks posed by stablecoins, particularly Tether’s USDT and Circle’s USDC. This concern is due to the stablecoins’ dominant role in Bitcoin trading across exchanges. It’s logical for ETF issuers to consider how fluctuations in stablecoin values could affect Bitcoin prices, especially when it comes to the two largest stablecoins by market capitalization, USDT and USDC. However, there’s also a notable contender for the position of second-largest stablecoin, ranked based on daily transaction volumes: First Digital USD (FDUSD), that none seems to be noticing or factoring in; from a market risk point of view.
FDUSD is a relatively new fiat-backed stablecoin, pegged to the US dollar, and despite being less than a year old, it ranks third in market capitalization. On some days, its trading volume even surpasses that of Circle’s USDC. FDUSD’s trading volume often exceeds its total market capitalization by orders of magnitude and is comparable to USDC’s, even though its market cap is only 8% of USDC’s. Which should be raising some eyebrows.
FDUSD is issued by First Digital Labs (FD121 Limited), a fintech company based in Hong Kong, with First Digital Trust Limited — another Hong Kong entity — and a sister company under the First Digital Group, serving as the custodian of its reserves. All these sound similar to Tether USDT’s opaque structure, far away from the more transparent structure introduced by the likes of Circle’s for USDC’s and other US based stablecoins.
Regardless of these concerns, rating agencies like S&P Global and Bleuchip have given FDUSD a moderate rating, placing it above Tether’s USDT but below Circle’s USDC. This assessment comes before adjustments for track record, attestation transparency, and other factors. The token was launched in June 2023 amid the turbulence surrounding BUSD and quickly became Binance’s stablecoin of choice in August 2023. This partnership spurred rapid growth, reaching a market cap of $1 billion within four months and stabilized around $2.5 billion.
FDUSD’s success has eclipsed Techteryx’s TrueUSD (TUSD), potentially leading to its phasing out. Controversy arises with allegations from industry insiders linking both FDUSD and TUSD to Justin Sun, the founder of Tron and the troubled HTX exchange (formerly Huobi), who is currently under SEC investigation for various potential violations.
Furthermore, FDUSD/BTC became the most traded pair following the SEC’s approval of the 11 spot Bitcoin ETFs, as indicated by CCData, suggesting that FDUSD should be considered by issuers as a significant factor, similar to USDT and USDC.
The lack of sufficient regulation concerning digital assets like stablecoins — a fundamental component of decentralized finance — creates unnecessary uncertainty and volatility. This concerns aspects such as reserve transparency, governance, minting/redemption processes, and bankruptcy provisions. Meanwhile, the overall cryptocurrency market is moving towards greater acceptance and institutionalization, marked by the approval of Bitcoin-related products and the anticipated approval of Ethereum-based products. Thus, rigorous risk management and due diligence should take place to ensure that these types of counterparty risk are identified and contained prior to any challenges arise.
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Disclaimer: I am not a financial or tax advisor. These are personal views and do not constitute financial and/or tax advice. Do your own research prior to making any financial decision and/or using any financial product.
