USD backed Cryptos — An overview

Summary

The article provides an overview of USD-backed cryptocurrencies, known as stablecoins, which aim to address the volatility of traditional cryptocurrencies and are being considered by central banks as digital alternatives to fiat currencies.

Abstract

The increasing adoption of cryptocurrencies has prompted central banks worldwide to explore the issuance of digital versions of their fiat currencies. Concerned with the volatility of existing cryptocurrencies, which contradicts the stable store of value provided by fiat, central banks are considering stablecoins as a bridging solution. These stablecoins, such as Tether (USDT), TrueUSD, and USDCoin, are backed by the USD and offer benefits like low transaction fees and the potential for smart contracts. However, they also face scrutiny and controversy, particularly Tether, due to concerns over price manipulation and lack of transparency in auditing. The article highlights the progress of countries like Sweden in moving towards a cashless society and the potential for the Federal Reserve to introduce its own digital currency, Fedcoin. It also discusses the market's anticipation for a stable and transparent USD-backed cryptocurrency, with USDCoin, supported by Goldman Sachs and Bitmain, being the latest contender.

Opinions

The author suggests that the rapid adoption of cryptocurrencies is threatening the traditional financial system based on fiat currencies.
There is a belief that Tether's issuance has been linked to price manipulation in the cryptocurrency market, especially Bitcoin.
The article implies that the lack of transparency and unproven USD reserves behind Tether have led to an ongoing investigation by the U.S. Commodity Futures Trading Commission.
TrueCoin (TUSD) is seen as an alternative to Tether, offering transparency in its USD holdings, although it has not yet made its audits public.
USDCoin is presented as a potentially more reliable stablecoin due to its promise of financial and operational transparency, compliance with US currency laws, and the backing of established companies like Circle and Bitmain.
The author expresses a moment of concern for Bitcoin traders waiting for a market rebound, indicating a bearish sentiment at the time of writing.

USD backed Cryptos — An overview

The widespread acceptance & adoption of Cryptocurrencies has led the Central banks around the world into mulling over the advantages of issuing the digital counterparts of their fiat currencies. The main contention that the financial authorities have with the existing Cryptos is the volatile & unpredictable price movements that can’t be associated with a fiat currency which acts as a store of value.

The central banks are still mulling over issuing their own digital coins in their respective jurisdictions to replace the existing fiat currencies, but they have certainly been hastened to find other alternatives since the rapid adoption of Cryptocurrencies in the Fin-tech industry is threatening the very foundation of the financial system on which the fiat-based currencies function. So a quick alternative has been Fiat backed Cryptos while they figure out how to fully replace the fiat currencies with digital alternatives.

Developed Economies have already been moving away from fiat-based societies to cashless forms of payment like Debit/Credit cards & more recently to Apple Pay & NFC payment. Sweden is a glaring example in this regard where more than 80% of the transactions are cashless & they are the closest to issuing “e krona” — their very own digital version of their fiat currency.

Other Central banks are working on similar lines with the likes of Japan, England & Canada. The problem, however, is the biggest for the U.S. whose fiat currency the Dollar acts as the reserve currency of the world & a hedge against risk. Dollar supply/demand & its denomination is what the current financial system around the world works on, but the new players (Cryptos) in town have changed the whole ball game.

There has been some talk of the Federal Reserve (U.S Central bank) issuing their own digital currency called the Fedcoin. The logistics involved in such a move are massive & will take a major undertaking & a coordinated effort from the financial authorities around the world.

The biggest problem seen with the Cryptocurrencies is their instability with the price movements — Enter “Stablecoins”. These digital currencies work on the premise of being backed by the fiat currency which in this case is the USD. The three main coins that I am going to touch upon today are the Tether (USDT), TrueUSD & more recent addition of USDCoin. Let’s do a quick recap of these digital coins. Before that here’s a snapshot of some of the other Stablecoins existing before we do the recap of these 3 digital coins.

Tether (USDT): Oldest USD backed crypto coin or Stablecoin on the market (since 2015). Tether coins are issued on the Bitcoin blockchain via the Omni layer protocol. Currently, there is bout 2.5 billion tethers in circulation with each coin valued @ USD $1.00 (Coinmarketcap). Very low to zero transaction fees is one of the biggest features of this stable coin. Looks good so far, but then there’s ever lingering controversy around Tether.

As it turns out the company that issued Tether is owned by the same people who owned the popular Crypto Exchange Bitfinex. And it is a popular belief now that this relationship resulted in massive price manipulation of Bitcoin and other Alt.coins since Tether is used to buy these coins on the exchange.

Not only this but all the price hikes in Bitcoin prices have aligned with the company issuing tether tokens out of thin air. Now, this would be ok if there was proof that as claimed every tether coin is backed by USD reserves that the company holds. However, a fallout with their auditor (Friedman LLP) left this to be proved. All this has resulted in U.S. Commodity Futures Trading Commission sending a subpoena to Bitfinex in the ongoing investigation.

TrueCoin (TUSD): Originally known as TrustToken this digital entity started issuing its coins in Sep. 2017 as an alternative to controversy prone Tether. TrueCoin claims it is collateralized by USD secured in a bank vault thus being a stable coin. The company plans to eventually issue tokens backed by other fiats too like TrueEuro & TrueYen.

TrueCoin offers transparency in regards to its USD holdings backing their coin but so far none of the audits have been made public. They claim to offer price stability with the benefits of digital currencies like smart contracts. There are more than 41 million coins in circulation at the time of this writing.

USDCoin (USDC): This is the most recent addition to this esteemed club & perhaps the most touted one. Goldman Sachs backed company Circle (online payments processor) in partnership with Bitmain (one of the biggest cryptocurrency miners) has launched this USD pegged & backed coin based on the Ethereum network. USDC aims to settle the uncertainty surrounding other StableCoins most noticeably Tether. To address these concerns, Circle promised “detailed financial and operational transparency” and adherence to US currency laws. Let’s hope the backing of the big names, sound capital & stable platform does the trick for the StableCoin this time around.

Time for me to sign off… here’s a little ouch moment for my fellow Bitcoin traders who have been waiting for a bounce!

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Originally published at www.datadriveninvestor.com on June 1, 2018.