This isn't really news, it's just better marketing language.
The new language is "Backed by fully reserved assets. Each USDC is backed by one dollar or asset with equivalent fair value, which is held in accounts with US regulated financial institutions".
They've have been open about their partial non-cash backing. Here's their latest attestation (page 4 is the relevant bit):
You understand "asset with equivalent fair value" is not the same as actual dollars? Every other asset has a risk of its price changing. It may be worth $1 today but it may or may not be worth $1 tomorrow.
Maybe you knew all along USDC wasn't actually backed by real US dollars. Apparently Coinbase and its customers didn't. And given the ongoing slow motion disaster of Tether, the actual backing of stablecoins is important to be very precise about.
> Every other asset has a risk of its price changing. It may be worth $1 today but it may or may not be worth $1 tomorrow.
A rational market would react by revaluing USDCUSD and pushing the price point to where they'd expect.
But we should look to what happened when USDT openly admitted they were backed somewhere around nine cents to the dollar: absolutely nothing, the peg held.
So has the market really priced in the risk of 39% of assets not being cash/cash equivalent? I suspect that's unlikely, but I also expect no material change to USDCUSD. Today, at least.
The Economist this week has a really eye-opening article about the state of Tether. "With estimated leverage of 383-to-1, Tether would be unable to honour all its tokens after losses of just 0.26%". The moment we have a major adjustment in the bond market this not-actually-stable coin seems likely to explode.
Regular banks undergo real audits and have specific regulations around how much real cash reserves they have to have on hand. My bank can't go overvalue a bunch of junk bonds to meet their capital requirements.
What's not normal is misleading your customers about it. I confess I'm mostly thinking about Tether here, since it's the largest example of a coin that pretended to be backed by dollars and actually isn't. But this case doesn't seem much different.
Also banks are highly regulated about requirements for backing assets. Triply so since the 2008 collapse.
Yeah, but banks don’t create a market for themselves in a notoriously unstable ecosystem by explicitly promising that their deposits are backed by 100% cash.
That is what USDC did. And it turns out not to be true. Which is… concerning.
I agree, but I also think that reserves are only part of the game. A lot of the story resides in Coinbase' market transactions. How do they stabilize their stablecoin, precisely?
It is not guaranteed. You should not treat is as FDIC insured funds.
But let's do a little game theory. Say the market starts losing faith in USDC and people start selling 1 USDC for, say, 0.98 USD.
Coinbase can either let this happen, or they can start using their cash and investments to buy back USDC at a 2% discount.
If Coinbase has every reason to believe that USDC is just fine, then they have a large financial incentive to start buying USDC back. This will raise the market price back to near $1 USD.
That is how they stabilize their stablecoin.
It is game theory and market mechanics and not a government that stabilize stablecoins. If you don't trust this, then you should not hold USDC.
That's the optimistic scenario. The pessimistic is USDC goes down to $0.98 and then people panic and sell and it goes down to $0.97, $0.96, ... Meanwhile Coinbase tries to borrow a whole lot of cash to try to prop up the currency. The amount they have to borrow keeps going up though and at some point they stop being able to cover the promise.
This scenario is not implausible. It literally happens every few years in the modern economy with different assets. Real assets that are backed by real things, not a completely synthetic currency.
The dollar assets backing USDC are the only thing that really secures it. Not "game theory". Sometimes you lose games.
It was news to me. I hold USDC because I thought every USDC was backed by a US dollar. That's what all their statements said. I don't even know what commercial paper is. Why did they find the need to back some USDC with that? Is something wrong? The lack of communication is troubling.
It’s actually not very complicated how all of this works:
* Crypto exchanges have the problem of collecting fees in crypto, and wanting to make a profit in USD.
* Stablecoin operator receives commercial paper (IOUs) from businesses, usually crypto exchanges. Issues tokens in return. (Note that the Stablecoin issuers are connected directly to the biggest exchanges e.g. Bitfinex/Coinbase/Binance)
* Now the crypto exchange has a debt to the Stablecoin operator, some crypto profits, and some stablecoins.
* Crypto company trading desk does the following:
* Trade crypto (e.g. Bitcoin) for USD and take profit
* Trade stablecoins for crypto on any number of exchanges
The Stablecoin allows them to take profit without trading against themselves, and it allows them to remove USD from the system while adding debt in the form of an IOU. It also spreads liquidity risk across the entire ecosystem and allows the movement of vast sums without banking regulations getting in the way.
So yes… there is something very wrong.
What is amazing is how many people are blind to it.
I think you're basically correct, but I think the "commercial paper" or "cash equivalents" or whatever they want to call it is loans that originate from the stablecoin issuer, that are against crypto cold wallets of the customer.
There's about 1,000,000 BTC in cold wallets of customers of stablecoins. They prove to the stablecoin issuer that they control the wallet (send two small transactions to some address somewhere). Then the issuer loans them the stablecoin and holds the paper against that debt, denominated in dollars. This provides a service to create liquidity out of BTC cold wallets, which is why it is popular to begin with.
Since the debt is dollar denominated that means if the stablecoin falls to $.50 then they have to pay back half the debt in real USD. So that creates upwards pressure to maintain the PEG. Downwards pressure is easy and just profit taking if it exceeds $1.00
Also explains why Tether printing stops once the outstanding number of Tethers is worth roughly 1,000,000 BTC and BTC pulls back. Once the BTC price falls much lower than that, you start to see redemptions and burn. Then when it rises near that point again you start to see more issuance.
This also answers the question of "who buys Tethers with USD?" Nobody does, it is all crypto debt.
And this all creates a positive feedback cycle driven by debt, backed by crypto. What could go wrong?
The “corporate paper” backing the now nearly $100 BILLION of issued stablecoins relies largely on crypto exchanges to continue making money in order to have any value whatsoever.
This is basically a giant distributed Ponzi scheme resembling wildcat banks of the early 1800s. Customer US dollars come into the market, USD goes out into the pockets of crypto insiders, and the crypto market remains propped up by the “value” of these stablecoins.
The only thing that keeps it going is that the stablecoin issuers (same people who are running the exchanges) have no incentive to collect the debt they are owed so everyone is happy (for now).
Crypto fans like to think they are innovating but all they’ve done is found a way to circumvent regulation and try a concept that was ended in 1863 by the national bank act.
It most certainly is not the same. Take WaMu, for example. I think it was the largest bank failure in the history of the United States and it was largely due to a bank run.
Do you know how much money depositors lost? $0.00
And I don’t mean only up to the FDIC insured amount. Even those with WaMu deposits well in excess of FDIC coverage didn’t lose a penny. And it wasn’t thanks to the complex system of placing overnight deposits at various institutions for pass-through coverage in excess of the FDIC amount.
Because do you know how much money the FDIC insurance fund lost paying out claims to WaMu depositors? $0.00
Do you know who did lose a lot of money? WaMu investors and shareholders.
That is not even remotely close to how a stablecoin or crypto “bank run” would play out. Our banking system has built-in safety nets that work. Crypto safety nets don’t even exist.
>We really can't have centralized entities issuing stable coins, can we.
You can. It's called a 'bank' and they're heavily regulated.
Instead, what crypto has are wildcat banks. You've never heard that term because when they existed, 150 years ago, "[b]ank closures and outright scams regularly occurred, leaving people with worthless money."[1] Sound familiar?
That’s an absolutely fascinating Wikipedia rabbit hole. I would pay good money to read a Neal Stephenson book set among Michigan wildcat bankers and railroad venture capitalists in the 1830s…
Unfortunately DAI is also now collateralised by USDC, I read somewhere is up to 30% (haven't been able to verify) but I'm not sure what effect it'll have on DAI if USDC collapses. More here: https://www.reddit.com/r/MakerDAO/comments/nwydtj/what_is_th...
The reason the crypto world uses dollar-pegged tokens in the first place is for their relatively stable value. The downside is that obviously this stability is not perfect, and it's managed by a centralized entity, which as monstrously big and powerful it may be, is still a single point of failure with its own interests. The real ultimate solution is to detach from the US dollar and get value stability from somewhere else, e.g. RAI[1].
Why would you think USD is safe? It's been dropping precipitously over the past 18 months as the Federal Reserve just increases the money supply exponentially. Just check the USD/CHF pair for an example.
BUSD's risk is a superset of USD's, no? It's just USD but you subtract the part where the world's most powerful military cares about it and then you add in a part where random crypto people can add their own fraud.
A simple Google search will answer your question about commercial paper. As for why they would do this: cash management 101. Why let cash sit in an account when you can make interest on low or no risk, short term debt?
Crypto/defi/etc is high risk and requires you to DYOR. If that makes you uncomfortable, this space may not be a good fit for you.
> Why let cash sit in an account when you can make interest on low or no risk, short term debt?
Because you've promised "investors," or at least made lots of strong statements that led them to believe, that you're letting cash sit in an account?
When I invest in a fund, and it says that it does X, but then secretly does Y because they believe it's obviously better, that's something between totally untrustworthy and outright fraud.
Investing in high quality short term commercial paper or treasuries is essentially the same or less risk vs. letting $XX billion sit in some bank account.
In accounting, these instruments are actually regarded the same as cash and called “cash equivalents”.
In 2006, the original money market fund, the Reserve Primary Fund, decided to purchase risk-free commercial paper, and by 2008 over half its assets were in this risk free, high quality commercial paper.
Unfortunately, a significant part of this risk free, high quality commercial paper was issued by Lehman. And that risk free, high quality commercial paper turned out to be worthless, causing the oldest money market fund to fail and forcing it to liquidate, at well below $1.
If it’s the same risk then why does it pay more than T bills? Regardless, the issue is the misrepresentation, not the actual assets (which most people don’t believe add up to the total anyway, right?)
I have no crypto investments, but this is basically where the line is for me. If they took the 1 USD backing the coin and invested it in US government bonds so that only a fraction is immediately available (but a large enough fraction to cover the most likely withdrawal rates) then it would be fine with me though they should advertise that more clearly.
If they take the money and invest it in ‘good’ companies, that is too much risk to the underlying assets.
Though I’m American and could see foreigners not thinking US bonds were safe enough.
It's important to remember commercial paper tanked and almost took the global economy with it only 13 years ago. The only reason it's regarded as low risk, if you're AIG or Bank of America, is the US government has shown an extreme willingness to bail you out by buying them at face value even when they become worthless on the open market. The US government is extremely unlikely to bail out Coinbase.
> The US government is extremely unlikely to bail out Coinbase.
Part of Coinbase's implicit strategy is to become the "too big to fail" of the crypto space. And if its collapse would threaten to destabilize the broader financial system, the US gov absolutely would bail it out.
We've not reached that point yet (and hopefully never will), but it's important to understand the play here.
How do you do this when the parties involved are not transparent about their holdings and have a history of misleading investors? Go off of rumours? Given their history, why would I believe that USDC is actually holding short term commercial paper and not higher risk, higher return equities?
I’m not saying you should trust USDC is backed by anything at all.
It is tricky situation. Consumers want assurances, protection but the crypto true believers abhor regulation and disclosure. Trust is difficult in this space and right now many people are speculators consumed by FOMO vs. rational individuals/institutions. No one knows how this will all play out.
Sure, but USDT / USDC are pretending not to be wildcat banks, when that’s probably exactly what they are.
If you tell people that they’re buying the crypto equivalent of T-bills on one side, but then turn round and lend those $ to a combination of Chinese construction companies and crypto exchanges on the other side then you’re not being straight with people - you’re exposing them to a sizable risk of loss in return for nothing.
In the trad finance world, unsophisticated investors get the benefit of Fed / BoE / ECB banking bailouts for their (relatively) small balances if the bank they put their cash in goes under & bigger players understand the risks & choose their counterparties accordingly. There’s no central bank of crypto out there to bail out USD(T|C) if they go tits up & if they’re lying about their risk exposure then you won’t know anything about it until suddenly there aren’t any $ to be had.
Yeah, up to 100k per bank here in europe. Anything over that is simply gone. In return you're paying negative interest, or some custody fee of around -1%.
offtopic, but I don't believe banks will be bailed out any more. They did so, and it didn't turn out so great.
what's the difference between that and whatever tether's doing with their "commercial paper"? Are "US regulated financial institutions" prohibited from holding shady commercial paper?
Marketing language or not, the old language was very straightforward and claimed full USD backing - only the new language relates to your claim of “ open about their commercial paper backing”.
>They've have been open about their commercial paper backing.
They haven't been open at all about the ISSUER of that commercial paper though. It's one thing if it's Walmart or ExxonMobil, quite another if it's Bitfinex or some other crypto-related company.
Interesting then Facebook chose to build the Libra/Diem alt-coin (and network?) with similar guarantees (backed by equivalent assets), instead of relying on USDC.
I'm confident that Facebook (and not Coinbase) will make cryptocurrency mainstream by enabling cross-border micro-transactions through e-commerce across its WhatsApp and Instagram userbase.
The new language is "Backed by fully reserved assets. Each USDC is backed by one dollar or asset with equivalent fair value, which is held in accounts with US regulated financial institutions".
They've have been open about their partial non-cash backing. Here's their latest attestation (page 4 is the relevant bit):
https://www.centre.io/hubfs/pdfs/attestation/Grant-Thorton_c...
61% as "Cash & Cash Equivalents", the rest in very low-risk investments.