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Kc  · 09/01/22

Follow the money: Who's banking on IOU stablecoins?

04/08/22 · Reports · This is not a financial advice
Altcoin Trading Blog

Note: This report was written in 2018 and remains published for reference purposes.


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Coinrule

While some of the marketing speak surrounding stablecoins revolves around creating a fully independent crypto ecosystem without the greedy banks, banks are the ones capitalizing here.

Adopted from the Weekly Market Commentary from TradeBlock, October 15, 2018:

Circle recently launched its own IOU stablecoin, USDC, backed by USD reserves. Circle has built out a separate entity, CENTRE, to act as a governance structure and networking entity that financial institutions opt into in order to mint new USDC stable coins. CENTRE is not the issuer of the stablecoin, the member institutions are.

According to CENTRE white paper, these member institutions are then responsible for issuing the coins and are audited by CENTRE to make sure the reserve is there.

This process works in a similar way for all IOU stablecoins: Verified customer sends a cash deposit to a member of CENTRE, the member then mints the stablecoin equivalent and sends the amount to the customer.

The issuing member now holds the cash deposit, the customer holds the stablecoin.

The issuing member is a money business or a bank: In the case of CENTRE, the only issuer (for now) is Circle. In other IOU stablecoin solutions, as well as with USDC in the future, the deposit may go to a regular bank. Circle itself is actively looking to become a federally licensed bank in the US.

But unlike with a regular customer deposit, in this case the bank is not paying interest to the depositor.

TradeBlock suggests that for USDC these banking institutions would hold the cash deposit with the Federal Reserve Bank: “As the FED raises interest rates (another rate hike is expected in 2018 and three rate hikes for 2019) these banking institutions could stand to benefit as greater interest is paid on these cash holdings.”

In other words, according to TradeBlock banks lucky enough to partner with an IOU stablecoin might stand to earn more money on customer deposits than they would if you simply held your fiat with them, because then they’d have to pay you interest.

Tether is in a vulnerable position

This fact suggests that banks would now want to compete for depositors. Decreasing trust in a vulnerable competing stablecoin solution is probably very good news everyone else in the same line of business.

The CENTRE whitepaper mentions the problems we have seen Tether have, albeit without naming any names. It simply states that they created a separate governance structure with independent stablecoin issuers to increase transparency and minimize adverse effects should issues arise (although it seems dubious to have a single, supposedly fungible token issued and backed by different independent institutions).

Tether seems to be too inter-related with Bitfinex to salvage any transparency for now: The executive members of both organizations are the same people, both companies are BVI entities, most information is tied up in non-disclosure agreements and on top of it, due to banking problems it appears that Bitfinex is now the actual issuer/de-issuer of Tether. Which is fine, if the USD reserve is there, but that is an information that is not to be publicly disclosed.

It cannot be said convincingly whether Tether is solvent or not but given the current situation it would be strange if nobody attempted to profit from this vulnerable position that Tether and Bitfinex are in.

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