Who would have thought the U.S. government would be bailing out stablecoins? Well, through sheer coincidence, this week when the U.S. Treasury Department, Federal Reserve and FDIC announced plans to backstop all deposits at two failed banks, they were also pledging to secure at least 8% of the collateral for the USDC stablecoin. Circle, the stablecoin’s issuer, said it keeps around a quarter of USDC’s reserve assets at about six banks. What are the odds?
The bailout benefited Circle, which was working overtime last weekend while USDC depegged from the U.S. dollar. In a recent "Bankless" episode Circle CEO Jeremy Allaire spoke about the emergency measures his company took, as well as the serious game theorizing Circle has played over the past two years to spread out its cash and one day essentially turn stablecoins into “straight-through government obligation money.”
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If you balk at the idea of a crypto-based tool like stablecoins essentially functioning like a “proxy” central bank digital currency (CBDC), as host Ryan Sean Adams suggested, making Allaire smile, then you’re likely not alone. Stablecoins may be the bridge between crypto and the real economy, but they should also retain some of the aspects that make crypto crypto, beyond 24-hour access and a different transaction settlement mechanism. Censorship resistance is all but impossible if crypto nuzzles close to the banking system.
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But why be so prescriptive? “Stablecoin” is an imperfect word to describe a whole host of blockchain-based assets that can have a range of attributes and completely different mechanics. Apart from the promise to have a sticky price, there is little USDC has in common with terraUSD, the stablecoin whose algorithm failed.
In fact, in the wake of the recent banking crisis, there’s been a flutter of stablecoin experimentation. Just today, a Bitcoin-based decentralized finance (DeFi) protocol Sovryn introduced the Sovryn dollar (DLLR) backed entirely by BTC. There have been similar experiments with stablecoins backed with gold.
Arthur Hayes, the former CEO of BitMEX, recently plugged the idea of nakacoin, a stablecoin that would be issued by member crypto exchanges that list the inverse bitcoin perpetual swaps that would back the asset.
I can’t vouch for any of the soundness of the ideas behind these projects, but I can say, generally, experimentation is good. USDC showed the world this weekend that the idea of issuing a dollar proxy backed by safe investments and cash stored at banks can be resilient even when a critical component fails. Tether, the company with a checkered past that issues thje USDT stablecoin, has not only grown despite being caught lying by New York State prosecutors but is thriving.
But crypto is also supposed to offer alternatives to banks and finance. There are doubtless people who would prefer to take on “protocol risk” of an all-on-chain stablecoin rather than the “platform risk” of a stablecoin with a bank account. But there I go again, being prescriptive.