An indictment for the crypto sector

Criticism of Tether USDT is as old as the stablecoin itself. It is all the more surprising that no other US dollar stablecoin has managed to dethrone it to date. A significant first mover advantage – Tether has been around since 2015 – as well as the powerful crypto exchange Bitfinex in the background, have proven to be an extremely resilient basis for success, despite the dubious image. The fact that the Tether era is now apparently coming to an end is more than overdue.

What a stablecoin should and shouldn’t look like

The ideal US dollar stablecoin is above all one thing: boring, transparent and not very profitable for its publisher. Why: Because return always comes with a higher risk. The latter should be reduced to an absolute minimum, especially with stablecoins. The primary use case of stablecoins is not to generate profit through interest income, but to provide a trustworthy representation of an underlying asset.

At its simplest, that means you can deposit $1,000 into a bank account and then issue $1,000 in stablecoin tokens in return. You quickly realize that you can’t earn a lot of money with it. It is different, however, if you issue 1,000 US dollars in stablecoin tokens, which are only partially covered by bank balances. After all, covering it with high-yield securities, even cryptocurrencies, is significantly more worthwhile.

Subprime US Dollars

The consequence of these creative stablecoin constructions is that we receive something different than what we ordered. If we order sole in a restaurant for 38 euros and then get a cheap pangasius fillet instead, then that is comparable to many a stablecoin – fraudulent labeling or at least a daring imitation.

Of course, some stablecoin providers are also open about cover. However, as a stablecoin holder, you always have to ask yourself what you get in return for the risk you take. It can’t be price gains. Memories of the subprime loans from the 2008 financial crisis quickly come to mind. Because, similar to some stablecoins, it didn’t contain what it should have, namely receivables with a low probability of default.

Tether relies on grab bags

It is therefore particularly surprising that the top dog Tether has to be forced to be transparent again and again. One would think that it would be in the stablecoin issuer’s self-interest to show the whole world how trustworthy the backing is. Instead, the New York Supreme Court has one Lawsuit dismissed by Tether, with which the company behind the stablecoin USDT wanted to prevent the disclosure of documents regarding the cash reserves. The background was, among other things, that there were questionable credit transactions between the Bitfinex exchange and Tether in the amount of 850 million US dollars, which have not yet been fully clarified.

Tether’s argument that disclosure of the documents would damage business was particularly piquant. A statement that is very significant and sounds like an admission. In the May issue of BTC-ECHO Magazine, we thoroughly examined how ominous the interaction between Tether, Bitfinex and protagonists like Brock Pierce is.

USDC: What belongs together comes together

Against this background, it is not at all surprising that institutional investors in particular are primarily interested in the stablecoin USDC from the company Circle put. This is 100 percent secured by American government bonds.

In terms of market capitalization, it is already the 4th largest cryptocurrency – third place is taken by competitor Tether. The two stablecoins are currently separated by $20 billion in market capitalization. Looking at the relative growth of USDC versus USDT, flippening between summer and fall of this year could be a viable option. The situation is different when it comes to retail sales. This is around 10 times higher for Tether than for USDC.

Wall Street takes over

So far, the crypto sector has failed to establish a trustworthy stablecoin. With USDC there is now a candidate who can fall back on Wall Street’s backing. This is how the company behind USDC is made by Goldman Sachs and Blackrock funded. For some crypto enthusiasts, that might be a slap in the face. After all, it is the old financial players who are gaining more influence in the crypto sector.

On the other hand, one has to ask oneself who is more likely to be trusted to cover a stablecoin. Highly regulated Wall Street players with a decade-long track record or opaque tether offshore constructions? Should a regulation then also prevail, as is currently being discussed in the MiCA trilogue of the EU, then more daring stablecoin constructions would have a problem anyway.

self-criticism appropriate

The crypto community should be self-critical about the stablecoins cause. A possible stablecoin overregulation, as threatened in the EU, is also not the right answer. On the other hand, it is also naïve to believe that stablecoins can be very safe and at the same time super profitable – see Terra Luna. Sometimes you have to be able to make a decision.

The attempt to transform fiat currencies into creative token derivatives sometimes leads to unnecessarily high risks. Crypto enthusiasts in particular with a critical attitude towards fiat currencies and central banks should think twice about holding stablecoins as well. Criticizing the state monetary system and the high inflation on the one hand and then keeping high volumes in fiat stablecoins on the other does not quite go together. Anyone who is so convinced of Bitcoin and “real” cryptocurrencies does not need stablecoins and has to be able to live with the large fluctuations.

Should there be digital central bank money in the future that is compatible with the token infrastructures, then much of what is discussed here is likely to be obsolete anyway. Most investors should then rely on the state version, the original. But who knows, by the time that happens in the US and the eurozone, Bitcoin may be so low in volatility that it won’t need stablecoins anymore.