🟪 Crypto’s Growing Box of Stablecoins

“My mom always said life was like a box of chocolates. You never know what you're going to get.”

— Forrest Gump on life (and stablecoins)

Crypto’s Growing Box of Stablecoins

This morning, Tether said it would begin allocating as much as 15% of its ongoing stablecoin profits to purchasing bitcoin.

And tomorrow, we take another step toward regulating stablecoins with the House subcommittee on digital assets holding its latest hearing on the subject.

The two events nicely bookend the current state of the market: Tether is raking in profits as it continues to play by its own set of rules, and Circle is losing share to Tether as it plays by its best guess of what the actual rules will be.

Despite the ongoing wrangling in DC, that guess is likely pretty accurate: Legislation, however long it takes, will officially anoint “payment stablecoins” as the federally-approved form of digital dollars.

Payment stablecoins, by definition, will be regulated by the Fed and backed 1:1 by a shortlist of approved assets including bank deposits, Treasurys and repos — plus maybe even Fed bank reserves.

USDC will qualify. USDT will not.

That’s not a knock on USDT: Tether will self-disqualify themselves from payment-stablecoin status simply by holding things other than the approved deposits, Treasurys and repos.

By their own attestation, USDT is backed by corporate bonds, secured loans, bitcoin, precious metals, and other investments. All of which are disclosed in little to no detail. 

As amusing as “other investments” is, the key word is “attestation,” which is not, as they would have you believe, interchangeable with the word “audit.” Considering we still don’t really know exactly what backs USDT.

So, when legislation on payment stablecoins is finally passed, we will need a new category/descriptor for Tether.

Let’s call it a mystery-box stablecoin instead: As in life, you never know what you’re going to get.

The spicy variety of stablecoins

Payment stablecoins have an ongoing mystery of their own: Will issuers be given access to Fed master accounts?

Early indicators were positive: The initial draft of the McHenry-Waters bill listed “central bank reserve deposits” as eligible collateral, implying Fed-printed, risk-free money would be available to stablecoin issuers.

But that draft was written before the FTX debacle, and lawmakers on one side of the aisle have since had a rethink: Maxine Waters’ new draft bill reportedly rescinds the offer of access to bank reserves — we should find out more on that tomorrow. 

But, either way, this is only a House bill: It seems unlikely a provision giving stablecoins issuers direct access to the Fed would get passed Elizabeth Warren and Sherrod Brown in the Senate.

So, legislation may not change the status-quo much: “Payment stablecoins” will simply be USDC, more formally regulated.

That, of course, is good news for USDC, which stands to be the only major payment stablecoin. 

But that doesn’t mean it will be the only major stablecoin: The stablecoin market is not likely to be a winner-takes-most. 

In fact, it would cause problems if it were to become one: If DeFi goes mainstream, there wouldn't be enough safe collateral for all stablecoins to be backed by deposits, Treasurys, and repos.

With ultra-safe assets already in limited supply, issuers of payment stablecoins could corner the market in T-bills, making the world’s safest asset dangerously subject to the vagaries of the world’s least-safest asset (crypto).

And we’ve just recently learned that banks holding flighty, uninsured crypto deposits are more prone to being taken down by a run.

The easy solution, of course, would be to give stablecoin issuers access to Fed master accounts. 

But that seems unlikely to happen at this point — stablecoins would probably have to force the Fed’s hand by becoming systemically risky first.

Another solution would be to tokenize bank deposits, which is already being worked on. I’m guessing, however, that, too, will struggle for regulatory approval.

But perhaps that’s for the best?

It may be that the lack of a government-guaranteed stablecoin (be it an explicit guarantee with bank reserves or an implicit one with on-chain bank deposits) will leave time and space for a crypto-native solution to come.

We haven’t had much luck with that so far: Decentralized stablecoins like DAI and FRAX have proven unable to scale. Protocol stablecoins seem likely to be more of the same. And the less mention of equity-backed stablecoins (e.g., Terra Luna), the better.

But the space remains rife with experimentation: There are property-backed stablecoins (USDR, HOME), privacy stablecoins (zkBob), all-new takes on algo stablecoins (crvUSD), inflation-pegged stablecoins (FPI), stablecoins backed by delta-neutral collateral (UXD), and even a hopeful-looking OHM-fork stablecoin (DINERO).

And there are some fun not-so-crypto-native possibilities, too, like a stablecoin issued by the state of Wyoming, or a gold-backed one issued by the Republic of Texas, or an institutions-only one issued by Société Générale.

I can’t see an obvious winner in any of those, but I’m glad they’re all happening: Life is more interesting when it’s a box of chocolates.

(And, anyway, why should Tether make all the money???)

— Byron Gilliam

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