Fully Regulated Stablecoins from Circle (USDC), Gemini (GUSD) and Paxos (PAX) can Oust Tether
We Need Regulated Stablecoins from Circle, Gemini, and Paxos, Not Unregulated Stablecoins Like Tether, Suggests New Report
It’s been said that stablecoins are the ICOs of 2018. As more stablecoins launch, however, they’re ending up on unregulated exchanges – and that could be a problem.
The problem was discussed by Larry Cermak, head analyst at The Block, in a recent blog post. Cermak (@lawmaster on Twitter) described how we need more regulated stablecoins – like the ones offered by Circle and Gemini – and fewer unregulated stablecoins – like the controversial USD Tethers offered by Tether.
Cermak also discussed how regulated stablecoins are not censorship resistant, and that a growing number of unregulated exchanges are using stablecoins to offload legal and compliance responsibilities.
Cermak mentioned three specific stablecoins in his post, including the stablecoins launched by Circle, Gemini, and Paxos. All three crypto companies are highly-regulated and well-respected. As Cermak explains, they also have strict KYC requirements:
“…unlike bitcoin, whose most important value proposition is arguably censorship resistance, regulated stablecoins released by Circle, Gemini and Paxos are actually quite the opposite. If a user fails to pass know-your-customer requirements or if the stablecoins are simply suspected of being involved in illegal activity, they can be frozen, seized, forfeited or destroyed — by the very governments bitcoin was built to work around.”
Stablecoins do not have the decentralization of bitcoin and other cryptocurrencies. Stablecoins issued by the companies above remain in the control of those companies. If the companies suspect their stablecoins are being used for illegitimate purposes, then they have the power to seize or destroy those coins.
Despite this centralization, stablecoins remain practical for traders who want to hedge against volatility or avoid temporary price fluctuations. Stablecoins that track the US Dollar, for example, can give investors a safe haven during times of uncertainty in bitcoin and other crypto markets.
98% of Stablecoin Volume Belongs to Tether
So far, everything we’ve said is all good: Circle, Gemini, and Paxos are regulated and well-respected companies with strict KYC requirements and strong control over their currencies. These three exchanges are launching stablecoins that give investors a safe, regulated haven.
The problem isn’t with these stablecoins. The problem is with stablecoins with a more dubious reputation – including Tether.
As reported by Larry Cermak, the vast majority of stablecoin trading volume belongs to Tether:
“Even now, Tether records about 98% of all the stablecoin volumes and accounts for approximately 92% of all stablecoins in circulation.”
Tether does not have the same security or regulatory support as the stablecoins from Gemini, Circle, and Paxos. In fact, Tether continues to refuse to perform a financial audit, leading many people to question whether or not Tether has sufficient US Dollars to back its Tether reserves.
Tether’s lack of transparency and auditing is continuing to become a problem:
“But as volatility of cryptocurrencies soared and Tether continued to raise doubts whether it actually holds the corresponding reserves, a whole bunch of new stablecoins started popping up. In fact, according to The Block’s findings, companies planning to launch a stablecoin raised more than $330M in venture capital.”
How can the world’s largest stablecoin refuse to perform audits? Well, Tether’s auditing history is confusing and mixed. First, the company does officially perform audits. Unfortunately, the people auditing the company also seem to have a significant stake in the company. Furthermore, the law firm that performed the audit did not perform a financial audit – they just performed a general audit. Here’s how Cermak sums up the situation:
“On its website, Tether claims that the USD reserves are “subject to frequent professional audits.” But details are mixed. In January, Tether dissolved its relationship with audit firm Friedman LLP and in July, Tether released a report by a law firm Freeh, Sporkin & Sullivan LLP attesting to USD reserves held on just a single day. Stuart Hoegner, Tether’s general counsel told Bloomberg: “The bottom line is an audit cannot be obtained. The big four firms are anathema to that level of risk.”
Ultimately, Tether claims that it performs audits, but it’s auditing history is alarming. At best, Tether only has sufficient reserves on certain days. At worst, Tether is deliberately engaging in financial fraud at the highest levels.
Regulated Stablecoins Are the Best Way Forward
Meanwhile, the three stablecoins offered by Circle, Circle, and Paxos have all already been audited after raising a total of $330 million in capital. All three stablecoins plan to have regular audits performed by major, trusted auditing agencies, with the results of those audits posted online for anyone to see.
These companies are all also regulated and licensed. Circle is a registered Money Services Business with the Financial Crimes Enforcement Network (FinCEN), for example, and holds money transmission license. In September, New York granted the green light to Geminin and Paxos to begin offering fiat-backed stablecoins.
Under the terms of the agreement, New York regulators want the stablecoin to abide by the following requirements:
- The stablecoin must be fully exchangeable for USD
- The stablecoin must abide by the Bank Secrecy Act, anti-money laundering, and Office of Foreign Assets Control controls to prevent criminal activity and terrorist financing
- The stablecoin must have risk-based controls to prevent illegal activity and market manipulation
- The stablecoin must have transaction monitoring and compliance with cybersecurity regulations
In addition, the New York Department of Financial Services requires Paxos and Gemini to warn customers that their stablecoins may be frozen, seized, forfeited, or destroyed if:
- The stablecoin has been or is being used for illegal activity
- There is a legal order or other legal process from a law enforcement agency
The stablecoins from Gemini, Circle, and Paxos aren’t the only promising ones in the space. Stronghold USD is launching its own stablecoin in collaboration with IBM, for example. StableUSD is another promising project that will be available on both Ethereum and Stellar’s blockchains to start.
Conclusion: We Need More Regulated Stablecoins and Fewer Unregulated Stablecoins
Ultimately, all of this boils down to a simple conclusion: we need fewer stablecoins like Tether and more stablecoins like the ones offered by Gemini, Paxos, and Circle.
Tether has a dubious auditing history and a shady background. There’s limited transparency over how Tether operates and how much cash it really has. Despite these issues, Tether is responsible for 98% of stablecoin trading volume today.
If the crypto industry wants to move forward in a regulated environment, we need stablecoins like the ones offered by Gemini, Circle, and Paxos.