Fiat stablecoins all share these fatal flaws
Fiat stablecoins have been touted as the solution to the volatility of cryptocurrencies. But they have fatal flaws.
Problem #1 | Not truly 1:1 backed
The issuers of fiat stablecoins typically claim that their cryptocurrency is backed by fiat currency at a 1:1 ratio, this is not always true. The stablecoin issuer might place cash reserves in other assets, such as corporate bonds, secured loans, or investments.
Such has been the case with Tether (USDT) and USD Coin (USDC), the most popular USD-backed stablecoins. Both have stirred controversy in recent years as their claims of a 1:1 stablecoin-to-fiat ratio have come under scrutiny.
An investigation by the CFTC found that from 2016 to 2019, Tether falsely claimed to have held an equivalent amount of fiat currency for every single USDT. In October 2021, the CFTC ordered Tether to pay a fine of $41M. Tether’s attestation report shows that only 10% of its reserves were in cash and bank deposits at that time — a far cry from a 1:1 ratio.
Tethers Reserves Breakdown
Even today, Tether currently holds roughly 80% of its cash in non-cash equivalents. Still not truly 1:1 redeemable for fiat. With its current market cap at 68B, this means that 13.6B of that backing is not cash.
A similar controversy surrounds USDC. In July 2021, Circle revealed that only 61% of USDC reserves were in cash and cash equivalents. The following month, Circle announced that USDC reserves going forward would comprise only cash and US Treasury bonds.
Problem #2 | Lack of Transparency
Even if Tether or USDC were to switch to only cash and cash equivalents there is still a glaring issue. How does the public know how much fiat is actually backing the stablecoins in circulation? How do people actually know if their stablecoins are actually collateralized? The solution is that Tether and USDC provide audits on a regular basis. But how can we fully trust the auditors?
On September 23, 2022, Tether’s former auditor, Friedman LLP, was fined $1M by SEC for “serial violations of the federal securities laws” and numerous instances of “improper professional conduct”.
Problem #3 | Hard to convert to Fiat
The whole point of a stablecoin is to be 1:1 redeemable for fiat. This should be the same case regardless of the number of coins you have. With some of the existing stablecoins, this is not necessarily the case. Tether requires a minimum of $100,000 in tokens in order to withdraw back into fiat. Therefore the common man will never be able to actually redeem their Tethers for USD.
Stablecoins are supposed to be a product. Not a fund for issuers.
We need a fiat-stablecoin that is TRUSTLESS. One in which anyone can be 100% guaranteed backing at any moment. A stablecoin that fits the decentralization ideologies of the blockchain while also enabling blockchain use cases for traditional finance to adopt fully.
At Gypsy, we are developing a trustless fiat-stablecoin called USDG. USDG will be:
100% backed by cash and cash equivalents
End-to-end transparent
Instantly redeemable for fiat
These features of USDG radically improve the confidence of token holders and bring back confidence in fiat-stablecoins. The gained trust will aid in the adoption of the blockchain for monetary transactions and will help support the growth of the DeFi ecosystem.
About Gypsy
Gypsy enables digital nomads & remote workers to gain home ownership while exploring the world. We transition humanity into global citizens through real estate and cryptocurrency.
date published
Nov 20, 2022
reading time
3 min
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