The Biggest Trend in the Stablecoin Industry in 2019? Solvency.


It’s a new year, and the whole world is getting a fresh start: new gym memberships, new budgets, and new packs of nicotine gum are surging.

But your dieting aunt isn’t the only one who’s turned over a new leaf. The growing stablecoin industry appears to be reaching toward a new transparency standard, one that has been hallmarked by the regular publishing of audits by some of the more popular newer stablecoins.

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The Stablecoin Industry is Changing for the Better–And Fast

Take, for example, USDC. USDC is the stablecoin created by the combined forces of payments company Circle and cryptocurrency exchange Coinbase, two very reputable businesses within their respective industries. Since its launch in October of last year, the USDC has successfully published the monthly audits that it promised to its users–two so far, and counting.

Also on the up-and-up, TrustToken published the third audit of TrueUSD this December after being launched less than a year ago. Cryptocurrency firm Paxos and crypto exchange Gemini received regulatory approval for their stablecoins from the New York Department of Financial Services in September.

The increase of stablecoins eager to prove their solvency is having a positive effect on the industry. A year ago, there were only a few stablecoins in existence, some of them with rather shady and controversial reputations.

Now, there are dozens–and with heavyweight companies stepping further and further into the stablecoin game, competition is getting fierce: stablecoin companies can’t afford to cut corners anymore when it comes to being transparent and secure. This is perhaps most acutely felt by one stablecoin in particular: Tether, the largest and most widely-used stablecoin on the market.

But before we go there, let’s back up for a moment.

What Are Stablecoins? (A TL;DR)

Stablecoins are cryptocurrencies that are designed to maintain a steady value; they are digital assets that claim to act as stable, un-volatile stores of value.

There are a variety of methods through which various stablecoins achieve this. Some are ‘fiat-pegged’ coins that are allegedly backed by real-world assets, like fiat currency. Others are ‘crypto-pegged’, meaning that they are algorithmically tied to another cryptocurrency. Still other stablecoins use algorithms that automatically adjust their circulating supply so that a stable value is maintained.

Stablecoins that use algorithms are easily able to prove their solvency with mathematics. Much like the Bitcoin network and other decentralized cryptocurrency networks, they do not rely on any singular party to maintain or prove their value; the mathematics on which these stablecoins are based offer an easy source of proof of solvency in their source code.

Stablecoins that are pegged to fiat currencies, however, are a different story. Typically, users have to rely solely on a company’s good word that it has the fiat currency (or other asset) to back up its stablecoin’s value. Because stablecoins are such a new invention, there isn’t really any government regulation enforcing these companies’ responsibility to prove the solvency of their coins.

Proof-of-Solvency Has Long Been an Issue for Tether

In the past, this has proved to be a major source of concern for users as certain stablecoin companies have failed to produce adequate proof that they have the money that they say they do.

Take Tether, the most widely-used (and most controversial) stablecoin on the market.

For years, the company failed to produce a financial audit of its accounts, in spite of a promise on its website that regular audits would be conducted and published. There were several documents that resembled audits, sure, but users were unsatisfied and concerned about their assets.

And rightfully so. Early last year, reports began to emerge that Tether Dollars (USDT) were being “printed” without the fiat currency to back them up and that these unbacked USDT were being used to artificially inflate the price of Bitcoin. Eventually, the rumors were affirmed in an academic study by researchers at the University of Texas, the results of which were published in the New York Times in June.

Still, the company did not produce an audit. The media surrounding the issue eventually quieted, but controversy was stirred once again in October when Tether suddenly began to lose its value. The value of a single Tether dollar, which is supposed to maintain a steady value of ~$1.00, sank as low as $0.90 on some exchanges. Analysts have since suggested that the dramatic decrease in the price of USDT was caused by a sort of “crypto bank-run.”

However, there is no doubt that Tether’s competition will gain more footing overtime. So, in this long-term sense–is Tether up to the challenge?

Maybe. If the company can manage to get its act together quickly and begin pumping out monthly (or even bi- or tri-monthly) audits, it will truly be a force to be reckoned with (although it still may have to answer for its years without an audit.)

“If Tether can win or survive depends on a few factors,” said Ricky Li, Cofounder of Altonomy, a crypto asset management firm based in New York City, to Finance Magnates. “1. Exchange adoption for more stablecoin denominated trading pairs; 2. Fast contribution and redemption process for price stability; and 3. Accounting transparency.”

But there’s a lot of skepticism for the long-term future of Tether. “Tether, while having a massive market cap, is simply not used for anything other than trading, because other stablecoins…are much faster, safer and cheaper to use for payments use cases. And in the trading use case, no one wants to hold Tether over exchange coins like TrueUSD and USDC which have become much more popular,” White told Finance Magnates.

Weinstein echoed her sentiments. “Long term, I don’t believe Tether will be able to compete,” he said.

“That said, we’ve counted them out before and they are still the clear leader.”

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