What assets are in your stable?
Here is our pick of the 3 most important Stablecoin news stories during the week.
This week rather than news on what new coin was being planned where, we got some introspection and clarity on just what is backing the most important stablecoins.
Although Facebook still has not launched it’s coin, this week we had their decampment from not only Switzerland to the US but also clarity on their move away from a basket to a simple US pegged coin.
“Digital currency group Diem Association, formerly known as Facebook Inc (FB.O)‘s Libra project, plans to launch a U.S. dollar stablecoin as it scales back its global ambitions to focus on the United States.
The association, which comprises 26 financial firms and non-profits, said it was relocating its main operations from Switzerland to the United States and withdrawing its payment system license application with the Swiss financial regulator.
Diem Networks U.S., will run a blockchain-based payment system that allows real-time transfer of Diem stablecoins and will register as a money services business with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network, the group said.”
Tether, which is the market leader (by a wide margin) released a report on its Reserve breakdown showing the Token is 49% Backed by Unspecified Commercial Paper. The new composition report is part of Tether’s efforts to stay in compliance with a settlement with the New York Attorney General.
What we don’t know is the quality and entities who hold this Commercial Paper. If they are fellow participants in the Crypto industry like Exchanges (likely as they already have commercial relationships with them and those Exchanges have had difficulty accessing Banking services such as loans) we have a significant systemic risk within the Crypto ecosystem. If things get ugly in the house it will be a horrible rush to very few and small exits.
Then we come to the world of DeFi and algorithmic stablecoins. This is a new type of stablecoin that tries to achieve stability in a hands off manner.
“Terra is a three-year-old project from the South Korean developer Terraform Labs, built to support a basket of decentralized stablecoins. Demand has surged in cryptocurrency markets for Terra’s LUNA token, which works as part of an automatic balancing system that helps to keep prices for the stablecoins, well, stable.
The LUNA price has climbed a flabbergasting 25-fold this year, outpacing the already-impressive sevenfold gain for larger rival MakerDAO’s maker tokens. LUNA’s market capitalization has jumped to about $6 billion from $300 million in less than five months, overtaking MKR (-2.47%) at $4.7 billion.
Mirror protocol, which allows users to create tokens that track the price of real-world assets like stocks, and Anchor protocol, a lending and saving platform. Both protocols make use of Terra’s own stablecoins such as TerraUSD (UST), which is pegged to U.S. dollars, and TerraKRW (KRT), which is pegged to the Korean won.
LUNA serves as a governance token and is used as part of an algorithmic balancing system that helps the stablecoins maintain their pegs. For example, when TerraUSD trades above $1, users can send $1 worth of LUNA to the system and receive 1 UST in return – a trade that helps to bring the stablecoin’s price back in line.
The combination of Anchor and Mirror creates “a flywheel that effectively retains and grows monetary inflows,” Messari analyst Phang Jun Yu wrote May 6 in a report.
“When the market is bullish, users will turn to equities and start using Mirror,” he wrote. “When the market is bearish and people are wary of investments, they turn their assets back into cash and deposit it into Anchor.””
So in summary we have Facebook retreating to a USD stablecoin and regulation, Tether at least in part because of US regulators becoming a little more transparent about what backs it’s USD stablecoin, both essentially leaning on the US Fed for stability. Then we had the DeFi ecosystem building whole new approaches to stability that don’t lean on or rely upon any regulator.
Alan Scott is an expert in the FX market and has been working in the domain of stablecoins for many years.
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