The stable coin industry is falling into a transparency battle of kinds, with stable coin issuers stumbling over each other to deliver the public with ever more financial information.
The company behind the world’s biggest stable coin by market cap, Tether started to publish verified numbers on the make-up of its reserves, earlier this month. Tether is doing so by reacting to last month’s move by Circle, which is the issuer of the second-largest stable to publish its own info about the composition of USDC’s investments. This article has been carried out from the information available on CoinDesk.
A race to the pinnacle
When it reaches transparency, an industry standard has developed whereby the issuer discloses normal attestation summaries. In these attestation reports, the stable coin issuer seals to its auditor how many reserves it has, and the auditor evaluates this claim for validity. The auditor’s conclusions then get released for the public to see.
Up till presently, attestation summaries did not publish much about the types of investments carried to back stable coins. And so the composition of stable coin reserves has ever been primarily a topic of assumption and rumor. With Tether and Circle now delivering verified information about the composition of their assets, and not just amount, consumers eventually know what that something is.
If we talk about Tether, its biggest reserve asset is commercial paper, most of it valued A-1 or A-2. With the big allocation of Yankee’s certificates of deposit, USDC’s preferred backing assets are Cash and Cash equivalent.
It has been suspected that the new transparency will create profitable knock-on impacts on consumers. Readied with better information, customers can better shop around for the safest coins. To persuade them, stable coin issuers will have to ascertain their backing assets are sound. That implies the whole sector will be pressured to clean itself of dreck collateral.
This procedure may even convince regulatory hawks, who have started to circle the stable coin category with questions about the probability of stable coin runs and contagion impacts. Tether has already seen an improvement in the quality of assets. Tether was obliged to deliver a quarterly breakdown of its investments to the public as one of the many conditions of a legal settlement with the New York Attorney General, in February.
To comply, Tether created its now-notorious pie chart, an information-lite representation that put up more questions than it answered. The pie chart indicated, for example, that 24% of Tether’s investments (as of March 31) were carried in the form of a scary-looking mixture of assets that comprised corporate bonds, secured loans, funds and precious metals, and additional investments.
Tether’s recent attestation (dated June 30) indicates this alarming grouping had plunged to just 15% of assets. Meanwhile, Tether’s allocation to Treasury bills, a safe short-term form of government debt, has surged from 3% to 24%. With considerable transparency comes more pressure to invest customers’ funds prudently, it would appear.
If tether stable coins are safer than before, there’s a bunch of work to do. The tether should be advising users more about its corporate bond portfolio.
It’s brought harder to be a stable coin
Stablecoin consumers are better off presently than a few months ago. But what about stable coin issuers?
The transparency wars will only make stuff more difficult for Circle, Tether, and the others. To begin with, normal attestations aren’t free. Auditors require to be paid. And the further complex the auditing prerequisites, the higher an auditors’ fee.
Even worse, a transparency-induced race to safety standards lowers earnings for issuers. A huge portion of stable coin earnings accrues from the interest income diverted by stable coin backing investments, which issuers maintain for themselves instead of paying out to their consumers. A 5-year corporate bond presently gains around 1.2% per year. With raised transparency, juicier assets such as these will be increasingly out of bounds for issuers. But the choice, safe assets like Treasury bills and bank deposits, don’t produce much. These days they offer a minuscule 0.05% or so.
Stablecoin monetary health has already been harmed by low interest rates. When the COVID-19 strike in March 2020, global interest ratios fell over and have kept up low ever since.