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Stablecoins have become a dominant force in the cryptocurrency industry, with high volumes in exchanges and an extreme rise in market cap, which currently amounts to a staggering $118 billion total.
The top and most controversial stablecoin is USDT (Tether). It currently holds the 3rd position in the crypto index in market cap terms.
Stablecoin USDC is currently the 8th cryptocurrency in market cap terms, having minted 28 billion USDC tokens, and offered at a stable price of 1:1 to the US Dollar.
USDC (or USD Coin) is a stablecoin developed by Circle in partnership with Coinbase. A similar partner relation as Tether has with Bitfinex, although different people behind each of the two companies. USDC was announced and released in October 2018. The announcement stated USDC was going to be fully backed (1:1) by US dollars held at bank accounts.
The new USDC stablecoin is fully collateralized by US dollars and supported by Coinbase and Circle as co-founding members of the CENTRE Consortium
USDC had a very similar to USDT increase in issuance and soon it started rising exponentially in market cap terms since during the 2020-2021 bull run it minted 99% of its coins in circulation.
As everyone expected, though, Coinbase would not be holding 28 billion USD in bank accounts. As more USDC entered circulation, questions on the 1:1 backing by USD were increased, and eventually, Coinbase announced recently that it wasn’t fully collateralized by dollars, but is also using cash equivalents.
Coinbase removed its claim about USDC on its website:
While USDC was also a concern for crypto analysts, the regulatory framework under which Coinbase works is more strict than Bitfinex. USDC is more transparent than USDT, but it has also created doubts on the backing of its stablecoin with the latest massive minting.
The Coinbase/Circle approach has been rather better than the Tether/Bitfinex case. There are irregularities and USDC is also accused of creating artificial support terms for BTC. However, this is impossible to prove without direct access to funding mechanisms and Circle networks.
Probably the problem is that these accusations, even with the case of Tether, are impossible to prove.
This accusation is explained as follows:
USDT was minted without backing
Was used to buy BTC, creating artificial demand
Later when the price was a lot higher BTC was sold for USD
Part of this USD was used to back USDT.
This is the main accusation about Tether and the BTC market manipulation.
This looks similar to the way MtGox was trying to manage its massive losses from “hacks”, using what Karpeles was calling an “obligation exchange”. These were the two trading bots that were discovered performing purchases of BTC at standard times but with no real money deposited in the linked accounts. Analysts discovered these bots after the collapse of MtGox in 2014. Two accounts on this exchange that is now defunct were buying BTC without having the cash required in their balances.
This is what USDT is also accused of, and there are reports that many times in the past Tether did not have the collaterals to back its USDT issuances. Moreover, lately there is a lot of discussion on the new revelations about the still undisclosed commercial paper that is used to back more than half of the USDT in circulation.
Circe is also actively pursuing to acquire a banking license and become a full-reserve bank in the city of Boston. It requires providing information on liquidity and backing of USDC as the banking environment also contains stricter regulatory supervision under the requirements of Basel III regulations.
Transparency is essential for the $28 billion USDC assets. Such a move could also help create better legal terms and sustainability for this stablecoin.
Although it remains a question why the two partners were misleading the public for three years by not declaring exactly how much USD deposits were available and which are the rest assets backing USDC.
This move is very similar to Tether, suddenly announcing two years ago that USDT was not backed just by USD but a basket of assets.
The US financial authorities regulate and decide. If Circle is allowed to operate as a banking institution, this will also be positive to USDC and will create more legitimacy for this stablecoin.
The fact that Circle and Coinbase were not transparent about USDC reserves and backing is a drawback.
While Tether has so many irregularities and creates confusion with its lack of transparency, USDC, until presently, seems to have its issues but not to the same extend.
Another major important fact for both stablecoins is they are under the control of the companies issuing them.
Both Tether and Circle have ordered the freezing of funds in wallets. It is an important feature for most stablecoins, since they can censor transactions and control funds.
They are centralized and operated under the control of their executives. It is a different model of cryptocurrencies and what they represent.
Overall, USDC may still have issues, and while it expands, it will certainly have to face increased regulatory scrutiny, but it also provides clear evidence of its reserves, coming from a top auditing firm (Grant Thornton).
We should consider this a positive event for the cryptocurrency industry.