‘Stable in Name Only’: Stablecoin Issuers Speak Out as UST Craters

Asset-backed projects want regulators to know that not all stablecoins are created equal.

May 13, 2022 at 7:00 p.m. UTC
Updated May 13, 2022 at 7:30 p.m. UTC

Ian Allison is an award-winning senior reporter at CoinDesk. He holds ETH.

As the cryptocurrency industry takes stock of the dramatic unraveling of the UST project, those that build and maintain stablecoins are at pains to point out that these instruments aren't created equal.

That message needs repeating, says Dante Disparte, chief strategy officer and head of global policy at Circle, creator of the USDC stablecoin, because it’s not obvious to people outside of crypto and that may include regulators and politicians whose attention will now be focused on the industry.

“I do think there’s a conversation around disassociation; that the term of art ‘stablecoin’ has probably run its course,” Disparte said in an interview.

“It does warrant a discussion around, do algorithmic stablecoins even belong in the class of instruments that are subject to existing regulations? Do they belong inside the perimeter that touches real consumers and real payments?" he added.

Circle’s USDC, which counts BNY Mellon as a custodian and which recently received investment from BlackRock, the world's largest asset manager, has a circulation of $49 billion, according to CoinMarketCap.

Tether, the largest asset-backed stablecoin with a $79.3 billion market cap at the time of this writing, generally held its peg over the course of this week, confirming on Thursday that it was continuing to honor redemptions.

Speaking about the Terra debacle during a Twitter Spaces discussion, Tether Chief Technology Officer Paolo Ardoino echoed Disparte’s call for clearer classification of stablecoins.

“We would like to see a categorization of stablecoins, where there are of course the centralized stablecoins, and Tether is the biggest one, and there are algorithmic stablecoins,” Ardoino said. “I believe that it is really important for customer protection to have some sort of guidelines.”

Disparte said that while regulators have so far placed a lot of attention on asset-backed stablecoins such as USDC, algorithmic stablecoins have so far been a bureaucratic “blind spot.”

“Those are the ones that are blowing up, and so I think it’s an association problem,” Disparte said. “It’s a ‘stable-in-name-only’ problem. But the risk that has manifested itself is exactly why the policy conversation about these types of issues matters.”

To be clear, there are generally thought to be three varieties of stablecoin: fiat collateralized (USDT, USDC), crypto collateralized (DAI, sUSD) and algorithmic (UST, IRON).

Despite a blurring of classifications, some lawmakers are making distinctions, as Republican Sen. Pat Toomey of Pennsylvania did earlier this week as UST catapulted its way into congressional testimony.

Spectrum of stability

As for algorithmic stablecoins, there’s a spectrum within that category, said Fernando Martinelli, CEO at Balancer Labs, an automated market maker in the decentralized finance (DeFi) sector.

“There has always been a question mark within that third category of algorithmic stablecoins,” Martinelli said. “You can’t tell if an algorithmic stablecoin has no substance or is not well designed. There are some that are algorithmic that are collateralized to a high degree, but not over-collateralized.”

Since Terra began blowing up, DAI, a five-year-old overcollateralized stablecoin overseen by the MakerDAO community, has held its peg and carried out liquidations of collateral in an orderly fashion, which has been “a great test of the system,” said Luca Prosperi, a leader on lending oversight at MakerDAO.

MakerDAO’s DAI is stable because it’s conservative and is overcollateralized, Prosperi said. The current collateral ratio is 175.59%, meaning each DAI is backed by $1.7558 worth of collateral; notably, the USDC stablecoin currently accounts for 41% of collateral used to mint DAI, according to on-chain data compiled by Dai Stats.

Maker’s automated liquidation mechanism starts liquidating collateral to protect itself and has shrunk accordingly, down to a $6.4 billion market cap.

“Maker did exactly what it was supposed to do,” Prosperi said in an interview.

“It shrank because the economy is shrinking and the currency base is shrinking," he added.

"The system has been stable because it’s been built in a very conservative way, and that took a lot of effort from core team members because this community is very impatient. So when Terra was growing, a lot of people were accusing us of being too conservative. But we’re running a currency.”

Concerning Circle’s point about terminology and how this will play in the eyes of regulators, Prosperi said calling something a “stablecoin” is a great marketing tool. But he cautioned against a straightforward recategorization since there is a “continuum.”

At one end of the spectrum is USDC, “a plain vanilla coin that is very safe, is not very innovative but is a great bridge,” Prosperi said. The other extreme is UST, and DAI is somewhere in the middle, he said.

“I think we will see more and more and more diversification of this term into sub-terms that reflect much better what are the single-use cases for each of these projects, and I guess that some of the best projects will work together,” Prosperi said. “I think USDC can be a great collateral for Maker that can create an overlay of leverage that is conservative through DAI.”

On the subject of regulatory scrutiny of algorithmic stablecoins after UST’s demise, Prosperi said MakerDAO is a “weird animal” in that it’s a decentralized community rather than a legal entity and a permissionless protocol that can’t be switched off.

“I think there will be some pressure from the regulators, for sure. But I think Maker is probably not in the frontline,” he said. “I think USDT, USDC, these ramps are the frontline, and other services that allow liquidity to come on-chain will be scrutinized.”

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Ian Allison is an award-winning senior reporter at CoinDesk. He holds ETH.

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Ian Allison is an award-winning senior reporter at CoinDesk. He holds ETH.

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