Are stablecoins still stable?

Stablecoins have been around for about 7 years, but discussions about it have never been as heated as in recent weeks, not only in the cryptocurrency field, but also among regulators and traditional market investors.

What is a stable currency?

A stablecoin is a cryptocurrency, and its value is usually anchored to another asset, whether it is a government-issued currency (such as the US dollar), or a precious metal (such as gold), or even another cryptocurrency.

The issuers of stablecoins have been trying different methods to achieve and maintain the link between stablecoins and their underlying asset prices. Some stablecoins are pegged to the U.S. dollar, such as USDT, USDC, BUSD, and GUSD. The dollar value of the reserves supporting them should match their circulating supply; other stablecoins are supported by physical commodities, such as each  Tether  Gold ( The value token of XAUT represents 1 ounce of gold eligible for delivery in London.

In addition, there are decentralized stablecoins such as DAI and FEI, which are driven by algorithms.


How are stablecoins used?

Before the rise of stablecoins, most people used cryptocurrencies to trade with fiat currencies and other cryptocurrencies. Pankaj Balani, CEO of the crypto derivatives exchange Delta exchange, pointed out: “Starting in 2017, spot transactions for stablecoins have begun to take a larger share of trading activities.”

Compared to trading cryptocurrencies with fiat currencies, stablecoins provide a faster and cheaper option, allowing more liquidity. In theory, they are also less susceptible to market price fluctuations of other cryptocurrencies.

Stablecoins are also used for cryptocurrency lending. For example, you can deposit USDC into Coinbase’s savings account and get an annual interest rate of 4%. Coinbase is one of the companies behind the stablecoin. Depending on the platform, the interest rate for depositing USDT is between 1.66% and 13.5%.

There has been a lot of discussion about stablecoins recently, some of which may be overwhelming. Here are the three major events that are currently happening:

Tether is questioned

As the most traded cryptocurrency in the market, USDT has become the backbone of the entire cryptocurrency ecosystem. The USDT currently in circulation is worth about 62 billion U.S. dollars, supporting more than half of Bitcoin transactions.

1627469535912957Above: The market value of several mainstream stablecoins. Source: CoinMarketCap

However, the Tether company behind USDT has been plagued by regulatory issues.

On Monday, Bloomberg reported that the U.S. Department of Justice is investigating whether Tether had concealed cryptocurrency-related transactions from banks in the early days . A feature of Tether (USDT) is that its issuing company claims that every USDT token is backed by assets worth one U.S. dollar. These assets are either actual currency or include commercial paper, corporate bonds, and precious metals. assets. This raises concerns that if many traders sell USDT at the same time, there may be a run on the assets supporting the token.

Tether posted a response on its website, stating that Bloomberg’s article was based on “accusations made many years ago, apparently to generate clicks.” However, the company did not explicitly deny these accusations.


Tether (USDT) was first released in 2014 to solve a problem that plagued the cryptocurrency market at the time: banks did not want to open accounts for virtual currency exchanges because they were worried about access to funds related to drug smuggling, cyber attacks, and terrorism. By accepting Tether (USDT), exchanges are able to allow traders to hold assets without being affected by Bitcoin price fluctuations, and funds can be transferred from one exchange to another in an instant.

However, as mentioned earlier, some investors are uncomfortable with the reserves underpinning the Tether (USDT) issuance and doubt the company’s ability to redeem tokens in the worst case scenario. In May of this year, as part of a settlement with the New York Attorney General’s office, the company disclosed details of its reserves. According to Tether, about 50% of the reserves are invested in “commercial paper” (usually short-term corporate bonds), 13% in secured loans, and 10% in corporate bonds and precious metals.

Economist Frances Coppola said that commercial paper, loans and corporate bonds held by Tether face market risks, maturity risks and credit risks. “If the value of the commercial paper or corporate bonds they hold drops,” Coppla said, “then the value of their issued tokens will not be $1, but lower.”

Regulatory pressure

According to data from CoinMarketCap, as of July 26, the total market value of stablecoins was $116 billion, which has increased nearly four times since the beginning of this year . With this growth, the attention of the United States and other regulators to stablecoins has also increased.

Alex Svanevik, CEO of crypto analysis company Nansen, said: “Regulators pay attention to stablecoins because they are closer to the existing banking system than other types of cryptocurrencies. Stablecoins are likely to disrupt traditional finance.”

A month ago, Eric Rosengren, president of the Federal Reserve Bank of Boston, regarded Tether and other tokens with stable value as a financial system risk, and expressed concern that short-term credit markets might be disrupted.

In addition, U.S. Treasury Secretary Janet Yellen said that regulators must “act quickly” to consider new regulations for stablecoins. She will serve as a member of the president’s advisory group to study the regulation and risks of stablecoins. Shortly thereafter, officials from the Department of the Treasury, the Federal Reserve, the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation met to discuss this issue “in light of the rapid growth of digital assets.”

In addition, SEC Chairman Gary Gensler suggested last week that some stablecoins should be considered securities and regulated by the SEC.

In China, Fan Yifei, the deputy governor of the People’s Bank of China, reportedly stated that the digital currency linked to legal tender made banks “very worried” and “may bring risks and challenges to the international monetary system.”

Circle plans to go public, other stablecoin issuers will disclose more information

Circle  , the issuer of the second largest stable currency  USDC ,   has also received attention. Circle plans to go public through a merger with Concord Acquisition, a special purpose acquisition company (SPAC). The transaction valued the crypto financial services company at $4.5 billion.

After Circle CEO Jeremy Allaire promised to improve company transparency, Circle announced for the first time the asset classification supporting USDC in its latest certification on July 16. The company reports that approximately 61% of its USDC tokens are backed by “cash and cash equivalents,” namely cash and money market funds; Yankee certificates of deposit (that is, certificates of deposit issued by foreign (non-US) banks) account for 13%, and U.S. Treasuries Accounted for 12%, commercial paper accounted for 9%, and the remaining tokens were backed by municipal bonds and corporate bonds.

Paxos, another stablecoin issuer,   also released the  reserve details of its stablecoins PAX  and  BUSD for the first time  . As of June 30, 96% of the reserves were held in the form of cash and cash equivalents, and 4% was invested in U.S. Treasury bonds.

1627469535922817Source: Paxos

The systemic role and risks of stablecoins

The systematic role of stablecoins in cryptocurrency transactions and lending has caused some investors to worry about the worst-case scenario, such as what will happen if stablecoin issuers face large-scale redemption requests .

This risk may also spread to traditional markets. Fitch Ratings, a credit rating company, said in a report earlier this month that the risks faced by stablecoins could be “contagious.” According to Fitch’s data, as of March 31, Tether’s commercial paper (CP) totaled US$20.3 billion, which means that its CP holdings may exceed most outstanding currencies in the United States, Europe, the Middle East and Africa Market funds .

The rating company said: “If the sudden large-scale redemption of USDT occurs during the period of broader selling pressure in the CP market, especially if it is related to the broader redemption of other stablecoins with similar asset reserves, it may affect short-term credit. The stability of the market.”

David Grider, head of digital asset research at Fundstrat Global Advisors, said that stablecoins may also affect the money supply. The actual reserve of U.S. dollars (that is, the U.S. dollars in the reserve fund supporting the stablecoin) can be lent in the real economy to earn interest, and the issued stablecoin may be lent again in the encrypted economy and earn interest. As Grider wrote in an analysis report, this “actually borrowed the same dollar twice.”

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