Stablecoin Risks • Types of Stablecoins • Benzinga Crypto

Around seven years have passed since the first stablecoin — Tether (USDT) — began circulating. The list of stablecoins has grown in length and utility over time — so much so that they have now come to the attention of the  Securities and Exchange Commission (SEC) and other regulators.

Regulation is on its way to the crypto world as a whole and, specifically, to stablecoins. Well-thought-out laws can be beneficial to the crypto industry, and when these standards are developed, uniformity and clarity will increase. Clarity from all regulating and enforcement authorities is critical for crypto enterprises to understand the parameters they must follow in the U.S market.

The SEC has publicly urged cryptocurrency companies to communicate with it. Unfortunately, at least one case hasn’t gone so well. Coinbase Global Inc. (NASDAQ: COIN) was just weeks away from introducing a new Coinbase Lend program in which clients could deposit USDC and earn a 4% annual percentage yield (APY).

Coinbase informed SEC in June of the program’s existence and anticipated launch date. But the company’s eagerness to cooperate with the SEC resulted in Coinbase being served with a Wells Notice, indicating that if it implemented the new program, the SEC would sue even though other similar programs already exist.

Coinbase requested information as to why it received the Wells letter, but the SEC would only say that the company’s Lend program violates securities laws. The SEC still refuses to explain how it arrived at its decision.

Following the company’s initial public offering in April, Coinbase CEO Brian Armstrong traveled to Washington, D.C., to meet with regulators and the SEC. Despite urging cryptocurrency entrepreneurs to contact it, the SEC refused to meet with him.

The SEC frequently emphasizes the importance of investor protection, but terminating a program like this only harms investors. Given the low interest rates that traditional banks are paying their customers, these programs are desperately needed. Hopefully, the SEC’s actions aren’t only attempts to safeguard traditional banks at the expense of regular investors.

Are Stablecoins Backed by the Dollar?

From USDT, issued in late 2014, the list has grown to 36 stablecoins. What maintains their stability? You may believe they must be backed by the U.S. dollar to keep their worth. However, this is not always the case as backing can vary considerably with this many stablecoins. Take a look at the top five by market capitalization.

Although it has a complex and tumultuous past, Tether is the most valuable stablecoin in terms of market capitalization. Many people have questioned or even accused Tether of being a scam or having very little collateral. If you want to learn more about Tether, here is a link to a timeline of its history.

Tether’s consolidated assets surpass its consolidated liabilities, according to a June 30 report from audit services firm Moore Cayman. The table below is a breakdown of Tether’s reserves backing. 

The second-ranked stablecoin is USD Coin (USDC), which has reserves totaling $33 billion in cash and cash equivalents, according to accounting firm Grant Thornton LLC, which publishes

monthly reports on the U.S. dollar-denominated reserves that back the USDC tokens in circulation. These cash and cash equivalents include bank deposits in U.S. dollars and short-term, highly liquid investments.

Ranking third is Binance USD (BUSD), which was created in collaboration with Paxos Trust Co. BUSD is backed by cash and monetary equivalents, according to Paxos, which also says that monthly audits are conducted.

The fourth-most popular stablecoin is TerraUSD (TUSD), the Terra blockchain’s decentralized algorithmic stablecoin. The way TUSD is backed sets it apart from the other currencies on the list. TUSD is pegged to the U.S. dollar and is backed by LUNA, the Terra blockchain’s other native coin.

TUSD is a seigniorage-style coin because it uses an algorithm to control the number of stablecoins. It’s like how central banks control the money supply by issuing and destroying money. In the instance of TUSD, LUNA tokens serve to stabilize the currency’s price. To create TUSD, you must first burn LUNA.

Dai (DAI), the fifth-ranked stablecoin, is maintained by the Maker Protocol and the MakerDAO. DAI is soft pegged to the US dollar. When DAI is minted, the Maker Protocol assures it is backed by a basket of cryptocurrencies put into smart-contract vaults. This vital feature contributes to the dollar’s soft price peg.

Volatility of Stablecoins

Now, take a look at the stability of these stablecoins. They have been highly consistent throughout the last year, fluctuating by little more than 1%. However, as illustrated in the charts below, certain stablecoins saw price volatility of up to 10% in the past.

Looking at Tether (USDT), you can see that it dropped more than 10% in April 2017. There were accusations that Bitfinex was creating Tether out of thin air. Tether then fell to approximately $0.91 on April 24 after reports that Bitfinex had lost its banking. It took around a month for Tether’s pricing to return to parity with the U.S. dollar.

Tether had a few more 5-percentage-point declines in late 2018 because of concerns about its stability and capacity to build banking ties. It has been relatively consistent since late 2019.

Stablecoin Risks

The risks associated with stablecoins can be similar to those associated with traditional payment methods. They may face counterparty risk, in which a third party is trusted to oversee the minting of new coins to keep the price stable. They are also trusted to assure complete collateralization. If it is revealed that this is not the case, there may be a run on the stablecoin, resulting in a drastic price decline.

They could also be vulnerable to centralization; the stablecoin’s custodians could embezzle cash or perform other crimes, generating instability. The custodians are also entrusted with not minting coins at will for their advantage.

Algorithmically controlled stablecoins could face risks from either an outright failure of the algorithm or manipulation. Malicious developers could introduce a bug that negatively affects the stability of the stablecoin.

What’s the Safest Stablecoin?

If you are looking for the safest stablecoin, you need to do some due diligence. Look into the price history of the coin. Have there been times when it was abnormally unstable? Occasional periods of instability are OK if they’re not too extreme. Fluctuations of around 1% are not abnormal. What backs the stablecoin is much more important; there should also be regular auditing with readily available audit reports.

What Are Stablecoins Used For?

Over the years, the use cases for stablecoins have expanded. Here are some of the more popular uses:

Where To Buy Stablecoins

Stablecoins are available for purchase on almost every major cryptocurrency exchange. The stablecoins supported by each exchange, however, will differ. A list of some crypto exchanges and the stablecoins they support is provided below:

• Coinbase: MUSD, PAX, UST, USDC, USDT,
• Crypto.com: BUSD, DAI, GUSD, TUSD, USDC, USDT
• Binance: BUSD, PAX, TUSD, USDC, USDT
• Binance.US: BUSD, DAI, USDC, USDT, 
• FTX Exchange: BUSD, DAI, USDP, TUSD, USDT, USDC
• FTX.US: BUSD, HUSD, USDP, TUSD, USDC
• Gemini: DAI, UST, GUSD, USDC, USDT
• Voyager: DAI, TUSD, USDC, USDT

These are all reputable exchanges with extensive selections of cryptocurrencies. Coinbase has a very user-friendly trading platform and is excellent for newcomers. U.S. citizens can use the Crypto.com mobile app but can’t use the desktop exchange because of regulations prohibiting the activity. 

Where To Earn Interest on Stablecoins

Depositing money into a savings account is a losing proposition. Luckily, there are a number of places you can stake both altcoins and stablecoins. The yields paid for staking altcoins and stablecoins will be hundreds or even thousands percent higher than you will get at a traditional bank. Below are some options:

BlockFi: BUSD, 9% APY; DAI, 9% APY; PAX, 9% APY;  USDC, 9% APY; and GUSD, 9% APY

Gemini: DAI, 5.40% APY;  GUSD, 8.05% APY; UST, 7.99% APY; and USDC, 7.99% APY

Are Stablecoins Safe?

Yes, stablecoins are relatively safe. It is always wise to conduct due diligence and investigate the specifics of any stablecoin you are considering holding. Examine the type of backing it has, and verify that it is audited regularly. Each investment involves some level of risk. You can decrease risk by taking the time to better understand the investment you are making.