IOU, 3rd party audit, escrow account and FDIC backed are some of the current methods of “guaranteeing” the financial worthiness of fiat backed stablecoins. Yawn. Does anyone really care? As users of crypto and stablecoins, our primary criteria is that a stablecoin is “stable” relative to fiat and that it’s not a fraud. Hence, the proliferation of fiat stablecoins that extend beyond Tether. Some of these recent stablecoins look great from a financial audit and regulatory point of view and include Paxos, USDC from Circle, Gemini Coin and TrueUSD.
And financial integrity is of course incredibly important. Who wants to lose all their money in a fraud? Which may explain why no one wants to hold Tether but is willing to trade it. Tether has a market cap of $2 billion USD but a daily trading volume of $3 billion USD. Although its market cap is dwarfed by Bitcoin ($62 billion USD), Bitcoin’s $4.5 billion daily trading volume is small when compared vs. its market cap.
So what are these boring yet important ways of “guaranteeing” financial solvency?
- Trust: the best example of this is Tether. The continued loss of faith in Tether stems from a well-deserved lack of trust. The company has never allowed a full audit of its books and is experiencing a slow decline in assets under management.
- Regulation: Paxos is a regulated trust company and will hold customer funds in a 1:1 ratio. The presumed strength of this model is faith in US regulators. Unfortunately, US regulators are woefully ineffective at preventing fraud but are wonderful after large investor losses have occurred.
- Third Party Audit or Attestation: USDC by Circle is a regulated money transmitter and has monthly attestations performed by Grant Thornton, LLP. This is wonderful but remember, Enron and MCI Worldcom were fully audited public companies yet failed spectacularly. Audit companies are paid by the companies being audited. I am unable to find a situation that an auditing firm detected fraud and blew the whistle before investor funds were lost.
- Third Party Guarantee: Gemini Coin offers FDIC protection for its investors. This is probably one of the safest guarantees out there and will protect an individual for up to $250,000. In periods of extreme financial duress, the FDIC can become insolvent and does not have the ability to guarantee customer deposits.
During the first stablecoin conference last year, stablecoin issuers broke out into three different working groups. Although our project falls under the algorithmic stablecoin category, I chose to attend the fiat/asset-backed stablecoin working group. This event occurred approximately 3 months ago and I was already wondering if these stablecoin issuers were worried about becoming a white label product. My suspicions were correct. All of these fiat backed issuers considered these stablecoins as serving one of the following functions:
- Superior payment rail: stablecoins offer a superior (cheaper and faster) way of transmitting money without the price volatility of bitcoin.
- Token within a specific ecosystem: Issuers spoke about using their stablecoin for users within their own ecosystem. Think about a stablecoin for a popular game (Fortnite) or auction site.
- Loss Leader: This caught me by surprise. Multiple issuers mentioned that their stablecoin would not be a revenue center but simply a cost of doing business.
For all the above-mentioned reasons, white labeling may be the ultimate destination for fiat backed stablecoins.