Censored stablecoin: USDT meets a crisis of trust again


Are stablecoins really stable? As a new round of debate about stablecoin reserves begins, Tether (USDT) The issue of a basket of reserve assets has once again aroused people’s attention.

The stablecoin market is growing exponentially. At the end of June, the President of the Federal Reserve Bank of Boston, Eric Rosengren, seemed to be the first to raise the warning flag. He emphasized when attending the official currency and financial institutions forum. Say:

“There are many reasons to believe that stablecoins—at least, many stablecoins—are not particularly stable in fact and are prone to financial crises in the future. Unless we start to regulate stablecoins, they will become a more important role in the financial market. .”

In the outflow of speech materials, Eric Rosengren mentioned Tether (USDT), which currently dominates the stablecoin market, and pointed out that Tether (USDT)’s basket of reserve assets looks very much like a “large risk fund” “More importantly, this “fund” encountered a lot of trouble last year, and there have been two recessions. But even so, we still have a lot of questions. Eric Rosengren “named” Tether (USDT) based on this issue and raised the following important concerns :

1. We know that Tether’s reserve assets include commercial paper, and the cash ratio is very low. Is it really reasonable to deploy reserves in this way?

2. Will the parabolic growth of stablecoins really undermine the stability of the short-term Crypto currency credit market?

3. Will stricter reserves and audits help serve the entire stablecoin industry?

In addition, given that Tether (USDT) is still the dominant player in the global stablecoin market so far, if it encounters “trouble”, the consequences may be more serious than many people think. Many people worry that if Tether (USDT) appears “turbulent” , It will pull down the larger Crypto currency market. As shown in the figure below (from), relative to the growth of better-managed money market mutual funds in traditional markets, the growth rate of stablecoin market value is at least 20% higher than them, so the volatility may also be higher.



Francine McKenna, an adjunct professor at American University’s Cogold School of Business, understands Eric Rosengren’s concerns very well. She believes that, in a sense, these new stablecoin funds are traditional short-term credit markets. “Intruder”, the chairman of the Boston Fed and his colleagues may realize-“How suddenly we can’t control leveraged trading in the market?!”

The key to the liquidity of the crypto market is stablecoin?

Stablecoins are now affecting short-term credit prices. Unlike the traditional financial industry, these instruments can quickly exit the market. For example, in mid-June, the “partially mortgaged” stablecoin project Iron Finance suffered a “historical bank run”, which resulted in the decoupling of the price of the IRON stablecoin, triggering the price of Iron Finance’s native token TITAN from an all-time high of $64.04 in two days It plummeted and almost returned to zero. As a result, investors such as the owner of the NBA Dallas Mavericks and billionaire Mark Cuban were severely affected.

Rohan Grey, an assistant professor at Willamette University School of Law, warned that if Tether (USDT)  collapses, it may have a terrible impact on the Crypto currency world. He explained:

“Compared to (almost) all other cryptocurrencies, Tether (USDT)  is still the most widely used asset trading pair in trading, and it provides a lot of liquidity for the Crypto currency industry. So, yes, Tether (USDT)  The crash will have a major ripple effect on other parts of the Crypto currency ecosystem.”

Rohan Grey added:

“However, now CircleAnd some other stablecoins have begun to take market share from Tether. Therefore, some other stablecoins must also have the possibility of breaking through Tether (USDT)  . In other words, even without Tether, other cryptocurrency industries should be allowed on the basis of other stable currencies that have been established. “

In fact, in the short history of Tether (USDT)  , disputes have been plagued by it-in February this year, Tether (USDT)  and its issuer, cryptocurrency trading platform Bitfinex reached a settlement with New York. The settlement agreement requires Tether (USDT) )  And Bitfinex paid $18.5 million in fines to New York State and must submit mandatory quarterly reports on Tether (USDT)  reserves to regulators . Not only that, New York Attorney General Letitia James also asked the cryptocurrency trading platforms Bitfinex and Tether (USDT) to stop trading activities in New York State to protect investors from fraudulent virtual or cryptocurrency  trading platforms.

It is worth mentioning that when Letitia James announced the settlement, he also emphasized that Tether (USDT)’s claim that its stablecoin  is fully backed by the US dollar at all times is actually a lie.

However, not everyone is at ease with Tether (USDT)  ‘s quarterly report. According to the latest report data, “commercial paper” (commercial paper) has accounted for half of its total assets, such as 49.6%, which is obviously This is a particularly striking fact.

Rohan Grey explained:

” Tether (USDT)  holds so many corporate bills and corporate bonds. This is an indisputable fact and a huge problem. No one knows what these bills and debts are. This is in line with their claims for years that they only invest in cash or Cash-like assets.”

Francine McKenna, an adjunct professor at the American University’s Cogold School of Business, explained that cash equivalents “must be particularly “liquid and not subject to market uncertainty. Commercial paper is not universal, and the market is full of various All kinds of commercial papers. Maybe in the past, GE’s commercial paper was “as good as gold,” but now, who would use GE’s commercial paper—in fact, commercial paper must depend on who is the issuer of the paper.

Sidharth Sogani, founder and CEO of market research company Crebaco, admitted that Tether (USDT) has been a big question mark since its establishment. If Tether invests assets in assets other than the U.S. dollar, then if these assets (such as precious metals or What happens if the price of corporate bonds falls? Will USDT depreciate? In addition, if the invested assets are profitable, how should they be distributed? According to Sidharth Sogani, Tether users should theoretically also have bonds and commodities that support stablecoins, so the interest earned is the user’s right.

However, not everyone has a problem with Tether (USDT)  linking its token to a basket containing commercial paper. One of them is Sean Stein Smith, assistant professor in the Department of Business Economics at Lehman College, who said:

“In my opinion, stablecoins -whether Tether (USDT) or not  -are held or backed by commercial paper, rather than 100% backed by a specific fiat currency, there is nothing inherently wrong with it.”

However, Sean Stein Smith admits that once stablecoins hold commercial paper, potential “complications” may arise-for example, the “operation” of stablecoins may destabilize certain parts of the commercial paper market. Correspondingly, if the commercial paper market “stagnates”, it may also undermine the redemption mechanism of certain stable coins.

Do stablecoins need stricter audits?

If the Big Four accounting firms conduct regular audits of Tether (USDT)  reserves, will they increase their credibility on the issue of “reserve support”? In Sean Stein Smith’s view, stricter audits will help stablecoins improve their credibility. He explained:

“Regular audits will definitely help, because reliable audits can both increase people ‘s confidence in Tether (USDT)’s reserve support, but also create specific encryption standards that can be adopted by other stablecoin  issuers.”

However, others may have different opinions. For example, the second largest stablecoin USD Coin (USDC) Grant Thornton LLP has been asked to confirm that it has enough USD reserves every month, which is generally considered a better approach, but in Francine McKenna’s view, even regular “recognition” of reserves has serious limitations He explained that what the audit is doing now—that is, verifying the issuer’s bank balance every month—is not “reliable”, because after the auditor has checked the bank statement, the stablecoin issuer can immediately Transfer funds to other places.

So, is there any other way to solve the problem of “reserve support” for stablecoins? According to Francine McKenna, yes! The answer is the escrow account, that is, the stablecoin issuer is required to set up an independent client fund account like a broker/dealer. In the words of Francine McKenna:

“In any case, there are many ways to tie up funds and make it immobile.”

Let us return to the Tether (USDT) issue. According to the data disclosed by Tether itself, only 2.9% of USDT’s reserves are currently in cash. This also leads some people to think that Tether acts like a bank—but not Restricted by strict supervision of banks.

Martin Walker, Director of Banking and Finance, Center for Evidence-Based Management, a crypto asset management company, said:

“Obviously, from the perspective of the composition of reserves-Tether (USDT)  only has a small part of the reserves in bank accounts-they operate like a bank, but they do not make normal disclosures,”

At the same time, all the questions about reserves may not help stablecoins attract new users. According to CoinMarketCap’s data, the market value of USDT has hardly changed in the past month. For USD-backed stablecoins, the market value is a good representative of the total supply, because each currency is anchored to $1.00. At the same time, Tether’s closest competitors, USD Coin and Binance, could not hear that Binance USD (BUSD) has seen a significant increase in market capitalization during this period-up by 10% and 12%, respectively, since the beginning of June.

From the data point of view, Tether/Bitfinex seems to have lost to competitors, but so far, they have not responded to this matter.

If Tether (USDT)  really “crashed”, what should the Crypto currency industry do?

At least for now, there is no indication that Tether (USDT)  is about to collapse, but given its continued dominance in the market, such incidents are usually a topic – or rather, as a speculation. 

Sidharth Sogani stated:

“Bitcoin/Crypto currency pairs will continue to exist, but there will still be the possibility of being’massured ‘. If there is a problem with Tether (USDT)  , I believe the market will lose 10% to 15% of its market value-because currently Tether ( USDT) has  a monthly circulating supply of 64 billion U.S. dollars. If it really collapses completely, it may cause a short-term plunge of up to 35% and cause panic in the entire Crypto currency market.”

However, Sean Stein Smith, assistant professor in the Department of Business Economics at Lehman College, does not believe that stablecoins —especially Tether (USDT)—will pose a major threat to financial stability or the crypto ecosystem. He explained:

 “If stablecoins do constitute a global systemic risk, then why are so many central banks experimenting and deploying central bank cryptocurrencies? This is actually a grassroots, government-issued stablecoin . If Tether (USDT)   collapses, There will definitely be some volatility and headlines heralding the’end of cryptocurrency’, but it will not crash the entire industry.”

Do we need a stablecoin bill?

In some jurisdictions, stablecoin regulation may come soon, at least if certain regulatory initiatives prove to be successful.

Sidharth Sogani analyzed:

 “The important thing is that when stablecoins linked to fiat currencies are issued, they should be regulated, otherwise it will be like creating value out of thin air, allowing people to continue to buy more cryptocurrencies, especially Bitcoin. In most cases, Since stablecoins are centralized and lack of transparency, strict regulations must be formulated.”

The stablecoin market is also very scattered around the world, because different organizations will issue their own stablecoins , and many stablecoins can be used on different blockchains . For example , Tether (USDT) can be used as an ERC-20 token on Ethereum  , TRC-20 tokens on Tron, andBinanceThe BEP-20 tokens on the smart chain can also be used through the Omni layer on the Bitcoin blockchain, which will make regulatory review more difficult.

Gary Gorton, professor of finance at Yale University, recently made his point:

“Essentially, stablecoins are a kind of free banking business where deposits are not regulated. However, even when the government needs support, free banks never seem to work. Stablecoins need reliable reserve support because they It is now possible to run and supervise them without any entities.”

Rohan Grey, an assistant professor at Willamette University School of Law, believes that the stablecoin industry can actually benefit from more regulation. In December 2020, Rohan Grey helped draft the “Stablecoin Network Sharing and Banking Permission Enforcement Act” (STABLE ACT), which has been submitted to the U.S. House of Representatives. Among other things, the Stablecoin Act will require US stablecoin issuers to obtain a bank license and obtain prior approval, consistent with the Federal Reserve, the Federal Deposit Insurance Corporation and the appropriate banking institutions within their jurisdiction.

All in all, the stablecoin market has indeed shown explosive growth recently, so it has received more attention from financial regulators. Francine McKenna said that Tether (USDT) is at the top of the stablecoin pyramid, but whether all stablecoins  can be anchored one-to-one with fiat currencies as they say, at least for now, there are still doubts. “If I need cash to cash out or pay taxes, can I redeem it at a rate of one U.S. dollar to 1 USDT?”

After all, during the 2008 financial crisis, no one would have thought that money market funds could also “bankrupt,” and these funds also invested in derivatives, commercial paper, and other illiquid support. And now, if the net asset value of the stablecoin drops below $1, what will happen?

Finally, let’s end with a sentence from Francine McKenna-“Yes, there are many reasons to worry about stablecoins, the Federal Reserve, and of course the President of the United States.”

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