The Stablecoin Model is Breaking — It’s Time For Stablecoin 2.0
The stablecoin model, by design, is simple. We intuitively understand a fiat dollar. We get paid in it, we buy stuff with it; sometimes its value fluctuates compared to some other fiat, but it’s not super relevant to us day to day. We also understand (on some level) the limitations of fiat in its current form. Banking can be annoying, the fees are nuts, the SWIFT network shutting down globally at 4pm on Friday is 1950s chic, sending money across borders is… lol. We get it.
So the stablecoin model at its core is simple: grab the good bits of fiat and use blockchain technology to improve the bad bits.
By and large the way that this has been accomplished to date is also simple. A technology company puts a bunch of fiat in a bank and issues one digital asset for each dollar in the bank. The good ones then post periodic reports from the bank or an auditor saying, “we confirm that this amount of dollars is indeed in this account”, the less credible ones say, “trust us, the money is in the bank!”.
The business model of stablecoins has been similarly simple: stick a bunch of money in the bank and collect interest on it. If you can earn 1% on a billion dollars of float then the economics are not that dissimilar from an asset manager with $1bn in AUM. Super scalable, marginal cost is almost zero, great business. Intentionally ignoring algorithmic stablecoins and some more esoteric models, this model has effectively gotten us to a $127bn Stablecoin industry, but one that is largely restricted to crypto use cases (trading and DeFi) without the widespread revolutionary adoption we’ve been promised.
This model is breaking and it’s time to evolve.
The stablecoin model relies on two assumptions:
1) that the stablecoin can be redeemed for that underlying fiat at any time, in any amount, with no friction and
2) that I am still fundamentally transacting a dollar of fiat and not an unregistered security that happens to be valued at 1 dollar of fiat
Both of these assumptions are showing major holes.
The existing model has always had a somewhat tenuous link between the stablecoin and the underlying fiat dollar. There’s a range of concerns revolving around what’s actually backing the stablecoin itself (varying from the unnerving to the more understandable…. but still unnerving). They ultimately show that in a continuing low interest rate environment, stablecoin issuers have moved reserves away from strictly a pile of cash, in a bank, into riskier assets like treasuries and corporate paper, in order to chase higher yields.
Can you truly redeem your stablecoin for fiat at any time, in any amount with no friction, if only 61% of reserves are held in cash or equivalents?
A more nuanced, but systemically even more important point is that the latest BIS guidance treats stablecoins as “Group 1 Cryptoassets”, which if the peg to the underlying asset is properly constructed, can be eligible for the same regulatory capital treatment as the underlying asset. In non-banker language, if you build a fiat backed stablecoin right, banks can hold it on their balance sheet as fiat. If you build it wrong, it gets treated as an unsecured loan to a random tech company.
Even more troubling is that if the value of these stablecoins are linked to a basket of securities instead of a basket of fiat, then they are at real risk of being deemed securities themselves. If a stablecoin is deemed a security, then its utility as a currency or medium of exchange is basically assassinated as almost no platforms can transact it. In fact, Ontario has already banned its first two registered exchanges from listing USDT on their platforms. The “fix the bad bits of fiat” thesis falls apart If the asset is not easily accessible.
It’s time for Stablecoin 2.0 and we’re building VCAD to fill that need
We’re building VCAD specifically to address these shortcomings in the existing model.
By issuing VCAD through VersaBank, we are adding the auditability and transparency required by a Schedule 1 Canadian bank. There will be no opacity and never any doubt as to what, or where, the reserve fiat is that backs VCAD 1:1. The full capital of a well-regulated Bank, coupled with VersaBank’s A credit rating, stand tall behind each VCAD.
By issuing VCAD as a “Digital Deposit Receipt”, it is truly a digital fiat equivalent that is outside of securities regulations. An asset like this can reliably be a medium of exchange across all venues where fiat is used today from trading to FX to payment to remittances and beyond.
The existing stablecoin model has gotten us off the ground and catalyzed a massive industry, but it has hit its peak and the model is breaking. Stablecoins need to evolve to reach the next step function of scale and adoption.
VCAD is tailor made to be at the vanguard of Stablecoin 2.0 as the next generation of stablecoins dawns.
