Thoughts on Stable Coins and Tether - Crush Crypto

Thoughts on Stable Coins and Tether

On October 22, 2018, Crush Crypto was invited in the discussion hosted on the Binance Info Telegram channel about stable coin and Tether in particular. Below is what we posted:

Just to give some background, recently there’s a lot of discussions around stable coins and specifically Tether (USDT). Tether is closely related to Bitfinex as it was reported that they share the same management team.

The recent change in Bitfinex’s bank caused FUD surrounding Tether. Kucoin stopped USDT deposits and withdrawals. Binance also paused USDT withdrawals for a brief moment. At one point, USDT dropped to as low as $0.9.

Because each USDT is backed by $1 in the bank, investors were redeeming USDT for cash to arbitrage the price discrepancy. As a result, the circulating supply of USDT dropped by $700 million over the past 2 week. The FUD had subsided and USDT is now trading at 98.5 cents or only 1.5% discount.

Tether received a lot of criticisms for their lack of disclosure and communication. In June 2018, Tether hired a law firm to certify that it has enough bank deposits to cover the market cap of USDT.

As for concerns with Bitfinex, I know that there are large OTC traders and miners using Bitfinex and they deal with fiat often. Bitfinex survived through the 2016 hack when the cryptocurrency market was much smaller. So I don’t think Bitfinex is currently in trouble.

Because of the above, I don’t think USDT is insolvent, but I agree the Tether team should increase the level and frequency of disclosure, especially when more and more competitors are stepping in with better disclosure.

As for other stable coins, there are mainly 3 types: fiat-backed, crypto-backed, or non-collateralized. Out of the 3, fiat-backed coins currently provide the strongest guarantee in my opinion, especially if it is regulated with periodic attestation, such as Gemini Dollar or USDCoin issued by Circle. GUSD is doing what Tether should really be doing – providing monthly attestation by a professional firm.

I think this type of stable coin provides the highest guarantee at the moment. If these coins dip below $1, investors could buy them, redeem for $1 and pocket the difference as profit, so as to maintain a price floor of $1.

This belief that regulated coins work the best goes against the decentralization philosophy of blockchain and cryptocurrency, but because this space is still so early, stability is more important at this stage in my opinion.

Decentralized solutions are promising but they are still experimental. For example, DAI’s upcoming multi-currency collateral is very interesting and I’ll keep a close eye on it. It has so far been successful in maintaining its peg during the entire 2018 bear market.

Because stable coin plays an important role in the cryptocurrency ecosystem, there have been more and more stable coins coming in the market in recent months. The two most notable ones being Gemini Dollar (GUSD, backed by Gemini) and USDCoin (USDC, backed by Circle). Gemini and Circle are both well-capitalized and fully compliant with US regulation.

The USDT drama also encouraged exchanges to list alternatives. OKEx and Huobi announced that they will list more stable coins other than USDT. This allows investors to diversify their stable coin exposure and not rely on one solution. This is an encouraging development that shows the market is maturing.

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