Over the years, stablecoins have emerged as a “safer and better-regulated” way of investing in the crypto industry. The fact that they are tied to real-world assets protects them against volatility. For this reason, stablecoins are often regarded as the safest assets in the crypto industry and used as the primary asset to store funds or buy, sell, and trade other tokens.
However, this notion has been put to the test in recent months, especially since the spectacular fall of TerraUSD or UST. In a matter of days, the failure of the algorithmic stablecoin washed off $400 billion from the crypto market, making an impact that is still noticeable.
So are stablecoins as stable as they are perceived to be? Here, we will converge on an analytical overview of USDT (Tether) and USDC, two of the market-leading stablecoins, to better understand the risks associated with these tokens.
Knowing your stablecoins
Tether (USDT)
According to Tether’s latest statement released on September 2022, 82.45% of all USDT in circulation was backed up by collateralized assets. These assets include cash, cash equivalents, commercial papers, and short-term deposits. The remaining 17.55% was backed by secured loans and other investments.
However, in 2021, Tether was fined $18.5 million dollar by the New York Attorney General’s (NYAG) office for claiming that the token was fully backed by U.S. dollars and other fiat currencies. Since then, the company reached a settlement of compliance with the NYAG and has pledged to provide quarterly breakdowns of its reserves.
In terms of regulations, USDT does not hold any financial license or regulatory clearance. As Tether positions itself as a digital technology company rather than a financial services firm, it makes the company a target for regulators. Nellie Liang, U.S. Treasury Undersecretary for Domestic Finance, clearly defined that existence of such stablecoins is highly undesirable. We can’t predict next regulator’s steps, but this point imposes additional risks on Tether.
At the time of writing, USDT’s market cap is around $65 billion, and it is recognized as a legal means of payment in Lugano. The stablecoin is available on several blockchains. Ethereum and TRON are the most popular ones – the former being the oldest standard for issuing tokens, the latter due to its low transaction fees and short confirmation times.
Circle (USDC)
The USDC stablecoin is produced and operated by the financial technology company Circle. Around 61% of Circle’s USDC supply is backed up by fiat cash reserves and money market funds, 13% by Yankee Certificates of Deposit, 12% by treasury accounts, 9% by commercial paper accounts, and the rest by corporate and municipal bonds.
Unlike Tether, Circle’s USDC is a highly regulated and licensed digital asset. The stablecoin has a Money Transmitter License in the USA, and an E-Moeny Issuer license in the UK, which makes it a fully legalized medium of providing money transmitting, exchange, and remittance services. These are the same licenses held by major financial service providers such as PayPal, Apply Pay, and Stripe.
Moreover, Circle’s reserves are audited and reported every month by Grant Thornton LLP, one of the largest tax and financial advisory firms in the US. Regarding regulations and compliance, USDC is one of the most transparent digital assets in the crypto space. The market cap for USDC is currently around $43 billion. Even though Tether’s assets exceed Circle’s by almost 50%, financial and legal systems of the latter seem to be more elaborate. It is also notable that this December, cherishing its reputation, Coinbase asked customers to convert their USDT to USDC.
Circle support transactions through several major blockchain networks, including Ethereum, TRON, and the BNB Smart Chain.
Can USDT or USDC depeg?
Because of the nature of stablecoins, they are supposed to stay within their fixed or stable price (usually $1). This stability is maintained through collateralization, and pegging.
The most popular reason for a short-term depeg is trader activity, when traders start selling their stablecoin assets in bulk. In a much worse case, depegging may happen if the collateral reserved in the banks is less than the amount of circulating stablecoin in the crypto markets. If tokens are backed by volatile assets such as gold and bonds, they will also eventually lose their peg if the asset’s value drop.
Other factors can cause the tokens to lose their dollar peg. Take Terra’s UST, for example. The algorithmic stablecoin didn’t fail because of the lack of collateralization but rather because of its loss of user credibility, which ultimately broke down its operational framework.
If market sentiment for USDT or USDC drops, these collateralized stablecoins can also lose their peg. A possible solution is to hedge the risks and split the funds between a few different stablecoins.
Dirty assets: another risk for stablecoin holders?
Another risk is that the growing number of scammers use USDT and USDC to convert their illicit funds into fiat, which means that the stablecoins that end up in your wallet may be ‘dirty’, or associated with high-risk funds.
According to AMLBot statistics, every 1 in 3 stablecoin AML checks is connected with high-risk assets. It is valid for all networks, but there’s been an increase in cases with TRON-based stablecoins. During the past eight months, we’ve discovered a surge in this number and added an opportunity to check crypto based on TRON.
Even though the regulators fight with dirty crypto, trying to make the market more lucid, users should protect themselves via additional control over the incoming digital assets.
In conclusion, users must know their assets, hedge risks, and conduct checks on their transactions. It’s crucial to use verified third-party tools and solutions to check wallet addresses before transacting with them. These tactics will reduce the risks for stablecoin owners and ensure that such tokens remain a safe haven asset in the widely volatile crypto market.
The post Exploring collateral stablecoins: how to keep your assets safe? appeared first on CoinChapter.
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