Stablecoins were constructed to dampen volatility of crypto-currencies.Companies that issue one type of stablecoin do this by creating a reserve of fiat currency, a 1:1 peg to the underlying fiat.In this type of stablecoin, the volatility that should remain, is the volatility of the fiat itself.The market cap for stablecoins as of a few days ago was $20 billion.This is a three-fold increase from the start of the year.
Why Stablecoins Why should anyone put any money into stablecoins when they can hold dollars or euros or pounds? There are two reasons, one is that the stablecoins are native on public blockchains; crypto-currency traders can easily move BTC, ETH, or any other kind of crypto-currency into a stablecoin shelter during periods of high volatility in BTC, ETH or other cryptocurrency.The second reason involves lower KYC burdens during these conversions which allow the holding of a stablecoin easier for non-sovereign actors.That is, if you are in Hong Kong or Taiwan you could buy a stablecoin easier than you could USD.
A huge volume of trades in BTC and ETH are related to the on and off ramp trades into stablecoins.
Challenges Of Stablecoins The main problem with stablecoins is the custody and the certification of reserves held by the issuer.For example, the reserves backing USDC, the stablecoin issued by Circle, is audited every month.A snapshot does not prove that the reserve is always adequate to back the stablecoin 1:1, even if it is done by the most trustworthy auditor on earth.
These stablecoins are not backed by FDIC or any other forms of insurance.
During a run, that is an event where a huge percentage of stablecoin holders wish to cash out into fiat, the only protection is to have stablecoin reserves that can match that demand for fiat.If the issuer does not have this fiat available in a liquid form , the stablecoin and hence the backer of the stablecoin would crash.
USDT or Tether, whose market cap is $15 Billion or about 75% of the total of $20 Billion was under investigation when questions of the adequacy and liquidity of the reserve were raised in 2018-2019.
This was due to the fact that the reserves were not completely transparent, and probably not 100%.The utility of stablecoins for the crypto-currency traders was so great that such questions did not matter.Maybe the fact that Tether was under scrutiny even increased its cachet, in the perverse logic of the cryptoverse.
Promise Of Stablecoins The total market cap of stablecoins is small potatoes in the world of equities.It is not even the market-cap of a reasonably large unicorn.
The fact that the market-cap and utility of stablecoins have grown rapidly and has a lot more room to grow is a fact.If digital finance grows such that many more assets are available to trade, a stable stablecoin(sic) would power a payment rail.The utility and appeal of a stablecoin would increase tremendously as digital finance takes off, especially in the absence of a Central Bank Digital Currency.
The Interpretive Letter #1172 The interpretive letter from the OCC applies only to stablecoins backed by fiat.The promise of stablecoins to be general payment rails is stated up front.
The deposits from stablecoin issuers only apply to hosted wallets.
Hosted wallets are controlled by an identifiable third party, not the account holders themselves.Hosted wallets are not controlled by the ultimate account holders.The key word here is identifiable, which implies passing BSA (Banking Secrecy Act) controls, AML KYC and other regulations, including beneficial ownership checks.
This OCC letter opens up regulated banks and thrifts to cater to stablecoin issuers as long as they follow regulations.There are two other pieces of importance, one says that banks need tp monitor liquidity risks for their deposit holders.This means that the bank has to have agreements in place with the issuer that allows the monitoring on a regular basis that the issuer has adequate fiat deposits that are greater than or equal to the stablecoins issued.How this requirement will ever be fulfilled is anyone’s guess.At the very least, this will mean the bank participating in the stablecoin issuance as an observer at the very least.
What if there are multiple depositary institutions holding reserves for a single issuer? They need to co-ordinate their oversight of the total stablecoin issuance.
The second piece is the provision of deposit insurance as a pass-through beneficiary.Seeing that the amounts protected by FDIC insurance is limited, how can such a provision protect issuers like USDT which have a market cap of $15 billion?
Libra What effect does this letter have on Libra, which is also a stablecoin to be? A very large portion of Libra will be backed by USD which is the subject of this interpretive letter.At the very least, this seems to allow regulated banks to hold reserves in USD for Libra.On the whole, a net positive for the prospect of Libra and for major regulated banks to hold USD reserves for Libra.
This guidance from OCC is positive for stablecoins, strengthens the reserve requirements for fiat backed stablecoins.The guidance allows banks to welcome stablecoin issuers as clients, and makes clear the requirements to administer such reserve accounts.
Vipin Bharathan
I am the founder of dlt.nyc.My work as a technology consultant is backed by years as a developer and manager in capital markets, building solutions.Experiencing the
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I am the founder of dlt.nyc.
My work as a technology consultant is backed by years as a developer and manager in capital markets, building solutions.
Experiencing the dysfunction in Financial Markets Infrastructure first-hand, I was drawn to the blockchain.I was at the table when DAH, R3 and EEA were formed.I am also a community leader in Hyperledger.I helped create a project in Hyperledger labs to explore standards and CBDC called eThaler.
I am a firm believer in open-source technology and its many strengths.I have coded in many languages, used many different databases and network solutions.I write lyric poetry and crypto-economic analyses.I hold a holistic view of the digital transformation underway in the financial markets and the economy.
I want to explore these transformative times with my readers..
