Maybe you knew all along USDC wasn't actually backed by real US dollars. Apparently Coinbase and its customers didn't. And given the ongoing slow motion disaster of Tether, the actual backing of stablecoins is important to be very precise about.
A rational market would react by revaluing USDCUSD and pushing the price point to where they'd expect.
But we should look to what happened when USDT openly admitted they were backed somewhere around nine cents to the dollar: absolutely nothing, the peg held.
So has the market really priced in the risk of 39% of assets not being cash/cash equivalent? I suspect that's unlikely, but I also expect no material change to USDCUSD. Today, at least.
https://www.economist.com/leaders/2021/08/07/why-regulators-...
Also banks are highly regulated about requirements for backing assets. Triply so since the 2008 collapse.
That is what USDC did. And it turns out not to be true. Which is… concerning.
But let's do a little game theory. Say the market starts losing faith in USDC and people start selling 1 USDC for, say, 0.98 USD.
Coinbase can either let this happen, or they can start using their cash and investments to buy back USDC at a 2% discount.
If Coinbase has every reason to believe that USDC is just fine, then they have a large financial incentive to start buying USDC back. This will raise the market price back to near $1 USD.
That is how they stabilize their stablecoin.
It is game theory and market mechanics and not a government that stabilize stablecoins. If you don't trust this, then you should not hold USDC.
This scenario is not implausible. It literally happens every few years in the modern economy with different assets. Real assets that are backed by real things, not a completely synthetic currency.
The dollar assets backing USDC are the only thing that really secures it. Not "game theory". Sometimes you lose games.
What they're doing is, creating a USD bank. It's not just about bank guarantees. Game theory describes the stable outcome, it doesn't predict it.
* Crypto exchanges have the problem of collecting fees in crypto, and wanting to make a profit in USD.
* Stablecoin operator receives commercial paper (IOUs) from businesses, usually crypto exchanges. Issues tokens in return. (Note that the Stablecoin issuers are connected directly to the biggest exchanges e.g. Bitfinex/Coinbase/Binance)
* Now the crypto exchange has a debt to the Stablecoin operator, some crypto profits, and some stablecoins.
* Crypto company trading desk does the following:
* Trade crypto (e.g. Bitcoin) for USD and take profit
* Trade stablecoins for crypto on any number of exchanges
So yes… there is something very wrong.
What is amazing is how many people are blind to it.
There's about 1,000,000 BTC in cold wallets of customers of stablecoins. They prove to the stablecoin issuer that they control the wallet (send two small transactions to some address somewhere). Then the issuer loans them the stablecoin and holds the paper against that debt, denominated in dollars. This provides a service to create liquidity out of BTC cold wallets, which is why it is popular to begin with.
Since the debt is dollar denominated that means if the stablecoin falls to $.50 then they have to pay back half the debt in real USD. So that creates upwards pressure to maintain the PEG. Downwards pressure is easy and just profit taking if it exceeds $1.00
Also explains why Tether printing stops once the outstanding number of Tethers is worth roughly 1,000,000 BTC and BTC pulls back. Once the BTC price falls much lower than that, you start to see redemptions and burn. Then when it rises near that point again you start to see more issuance.
This also answers the question of "who buys Tethers with USD?" Nobody does, it is all crypto debt.
And this all creates a positive feedback cycle driven by debt, backed by crypto. What could go wrong?
This is basically a giant distributed Ponzi scheme resembling wildcat banks of the early 1800s. Customer US dollars come into the market, USD goes out into the pockets of crypto insiders, and the crypto market remains propped up by the “value” of these stablecoins.
The only thing that keeps it going is that the stablecoin issuers (same people who are running the exchanges) have no incentive to collect the debt they are owed so everyone is happy (for now).
Crypto fans like to think they are innovating but all they’ve done is found a way to circumvent regulation and try a concept that was ended in 1863 by the national bank act.
https://en.m.wikipedia.org/wiki/Wildcat_banking
If you think this ends any other way than regulation and tears I’m not sure what to tell you.
If you sell early enough, you might get most of your money back because other people aren't paying attention, or have been similarly misled.
Do you know how much money depositors lost? $0.00
And I don’t mean only up to the FDIC insured amount. Even those with WaMu deposits well in excess of FDIC coverage didn’t lose a penny. And it wasn’t thanks to the complex system of placing overnight deposits at various institutions for pass-through coverage in excess of the FDIC amount.
Because do you know how much money the FDIC insurance fund lost paying out claims to WaMu depositors? $0.00
Do you know who did lose a lot of money? WaMu investors and shareholders.
That is not even remotely close to how a stablecoin or crypto “bank run” would play out. Our banking system has built-in safety nets that work. Crypto safety nets don’t even exist.
The real solution is DAI, right?
You can. It's called a 'bank' and they're heavily regulated.
Instead, what crypto has are wildcat banks. You've never heard that term because when they existed, 150 years ago, "[b]ank closures and outright scams regularly occurred, leaving people with worthless money."[1] Sound familiar?
Not financial advice.
Crypto/defi/etc is high risk and requires you to DYOR. If that makes you uncomfortable, this space may not be a good fit for you.
Because you've promised "investors," or at least made lots of strong statements that led them to believe, that you're letting cash sit in an account?
When I invest in a fund, and it says that it does X, but then secretly does Y because they believe it's obviously better, that's something between totally untrustworthy and outright fraud.
Investing in high quality short term commercial paper or treasuries is essentially the same or less risk vs. letting $XX billion sit in some bank account.
In accounting, these instruments are actually regarded the same as cash and called “cash equivalents”.
Unfortunately, a significant part of this risk free, high quality commercial paper was issued by Lehman. And that risk free, high quality commercial paper turned out to be worthless, causing the oldest money market fund to fail and forcing it to liquidate, at well below $1.
If they take the money and invest it in ‘good’ companies, that is too much risk to the underlying assets.
Though I’m American and could see foreigners not thinking US bonds were safe enough.
Part of Coinbase's implicit strategy is to become the "too big to fail" of the crypto space. And if its collapse would threaten to destabilize the broader financial system, the US gov absolutely would bail it out.
We've not reached that point yet (and hopefully never will), but it's important to understand the play here.
How do you do this when the parties involved are not transparent about their holdings and have a history of misleading investors? Go off of rumours? Given their history, why would I believe that USDC is actually holding short term commercial paper and not higher risk, higher return equities?
It is tricky situation. Consumers want assurances, protection but the crypto true believers abhor regulation and disclosure. Trust is difficult in this space and right now many people are speculators consumed by FOMO vs. rational individuals/institutions. No one knows how this will all play out.
We don’t say that because new spacecraft have a high risk of failure vs a 747 that there is a “major problem” with space exploration.
Step 2: Print USDC equivalent
Step 3: Use USDC to buy bitcoin
Step 4: Repeat
If you tell people that they’re buying the crypto equivalent of T-bills on one side, but then turn round and lend those $ to a combination of Chinese construction companies and crypto exchanges on the other side then you’re not being straight with people - you’re exposing them to a sizable risk of loss in return for nothing.
In the trad finance world, unsophisticated investors get the benefit of Fed / BoE / ECB banking bailouts for their (relatively) small balances if the bank they put their cash in goes under & bigger players understand the risks & choose their counterparties accordingly. There’s no central bank of crypto out there to bail out USD(T|C) if they go tits up & if they’re lying about their risk exposure then you won’t know anything about it until suddenly there aren’t any $ to be had.
offtopic, but I don't believe banks will be bailed out any more. They did so, and it didn't turn out so great.
what's the difference between that and whatever tether's doing with their "commercial paper"? Are "US regulated financial institutions" prohibited from holding shady commercial paper?
Marketing language or not, the old language was very straightforward and claimed full USD backing - only the new language relates to your claim of “ open about their commercial paper backing”.
They haven't been open at all about the ISSUER of that commercial paper though. It's one thing if it's Walmart or ExxonMobil, quite another if it's Bitfinex or some other crypto-related company.
I'm confident that Facebook (and not Coinbase) will make cryptocurrency mainstream by enabling cross-border micro-transactions through e-commerce across its WhatsApp and Instagram userbase.
The new language is "Backed by fully reserved assets. Each USDC is backed by one dollar or asset with equivalent fair value, which is held in accounts with US regulated financial institutions".
They've have been open about their partial non-cash backing. Here's their latest attestation (page 4 is the relevant bit):
https://www.centre.io/hubfs/pdfs/attestation/Grant-Thorton_c...
61% as "Cash & Cash Equivalents", the rest in very low-risk investments.