Bitcoin‘s quotation is considered to be one of the leading factors influencing the stability of the cryptocurrency market. However, much less often is said that the key element of the entire decentralized market are tokens centrally issued by private companies, which are allegedly to be fully covered in the US dollar. Of course, we are talking about stable-coins, and especially about the most popular of them, which has been causing a lot of controversy for years. However, Tether’s credibility has never been so much questioned.
Virtual dollar with coverage?
Last week, international auditing firm Grant Thornton published the results of Circle Internet Financial’s regular, independent financial audit commissioned by it. Circle is a co-founder of the Center consortium (along with the Coinbase), which is the operator of the second stable-coin in terms of market capitalization, which is USD Coin (USDC), while the report itself concerned the reserves and financial coverage of USDC. Circle’s financial audit revealed that as of May 28, this year, the company is fully covered in financial assets for the issued USD Coin tokens, which means that their value is at least equal to the market capitalization of USDC in circulation at the end of May. It is worth adding that at that time there were over 22.176 billion USDC tokens in the market circulation, while currently (July 21) the number of issued dollar stable-coin tokens exceeds USD 26.8 billion, which is an increase of over 20% in less than two months.
According to the Grant Thornton audit, Circle held more than 60% of its financial reserves for USDC in cash and cash equivalents (understood as securities with a maturity of less than 90 days) at the end of May, which at the time amounted to over USD 13.4 billion. 13% of security for USDC ($ 2.9 billion) came from the so-called Yankee CD’s, i.e. certificates of deposit denominated in the US dollar, issued by non-US investment banks whose credit rating according to S&P is at least A1 (above average credibility, only A1 + above), and the maturity is no longer than 13 months. Another 12% of USD Coin’s reserves ($ 2.7 billion) came from US Treasury bonds with maturities of less than three years. $ 2 billion.
The remaining part of USDC reserves is represented by assets with a noticeably lower financial credibility – 5% of collateral (USD 1.1 billion) are unsecured corporate bonds with maturities of less than three years. Their minimum S&P credit rating is BBB +, i.e. the eighth on the scale, meaning reliability in the vicinity of the lower medium grade.) And still classifying them as investment, not speculative, securities. A small portion of Circle’s financial reserves (0.2%) is held in US municipal bonds. Overall, USD Coin’s backward portfolio had an estimated S&P credit rating of a (above average) at end-May and an average maturity of the securities of less than one and a half years. By far, its greatest strength is the over 60% share of cash and its equivalents in USDC reserves and the 25% share of minimal credit risk securities (at the end of May). Circle’s financial reserves are just perfect compared to Tether, which in addition is the issuer of the leading stable-coin (USDT) with more than twice the market capitalization, whose real coverage in financial assets has been under a huge question mark for years. However, more on that later in the article.
USD Coin, which was created only less than three years ago on the initiative of Circle and Coinbase, from the very beginning ensured that each issued USDC token was fully covered in the US dollar. While the Center consortium does not have public status and does not need to publish information on its financial reserves, it has been doing so voluntarily since October 2018, reporting the results of the monthly audits performed by Grant Thornton on behalf of Circle.
It is also important that the co-founder of the Center consortium – the Coinbase cryptocurrency exchange – has been listed on the Nasdaq New York Stock Exchange since April this year, and that Circle also plans to enter the NYSE later this year. The company, existing since 2014 and providing blockchain-based financial services (including the launch of USD Coin), plans to debut as part of a reverse acquisition through a special acquisition company (SPAC), and its estimated market valuation is $ 4.5 billion. Once Circle is a publicly traded company, one of its disclosure obligations will be to publish reserve holdings for its flagship product, USD Coin, in its financial statements.
Stability is in question
It has been heard for years that one of the greatest threats to the stability of the cryptocurrency market is the largest stable-coin – Tether. The market dominance of USDT is unquestionable – Tether’s market capitalization is almost USD 62 billion, and the token itself has recently been on the last podium in the capitalization ranking, second only to Bitcoin and Ethereum in terms of market value. Tether almost from its inception (2014, initially as Realcoin) aroused numerous controversies, mainly due to its centralized and non-transparent structure – the only issuer of USDT is the private company Tether, which ensures that all tokens issued by it are secured with US dollars placed on the company’s bank accounts in a 1: 1 ratio, called the so-called Proof of Reserve. Despite this, since the inception of USDT, the company has not carried out any credible financial audit that would confirm the full security of tokens in financial assets. Tether also has controversial ties to the Bitfinex cryptocurrency exchange – the company belongs to iFinex, which is also the operator of the exchange. In April 2019, the New York State Attorney General accused iFinex of large-scale fraud – the $ 625 million Tether donated from its reserves to Bitfinex in November 2018 to maintain the liquidity of the stock exchange and ensure continuity. Withdrawals of funds ordered by clients, thus preventing panic.
In May of this year, Tether released its first report on its financial reserves and USDT coverage. In addition to a financial penalty of $ 18.5 million, this is the result of the New York prosecutor’s judgment in the above-described case of unauthorized transfer of money from Tether to Bitfinex – as part of the judgment, iFinex will publish quarterly data on the state of USDT’s financial reserves.
Data on Tether’s coverage describe the state at the end of March, when almost 41 billion USDT tokens were in circulation. At that time, 75.85% of Tether’s reserves were cash and cash equivalents. The devil, however, is in the details, because according to the data published by the company, 49% of financial reserves are unspecified “corporate securities”. However, the report does not reveal what specific securities are meant, what is their average maturity and, above all, what their credit rating is. The very general term “commercial securities” in itself tells us little and does not give us a chance to estimate the reliability of such reserves. So it can be said that almost half of the USDT reserves (at the end of March) is a huge unknown.