While stable coins aren’t an entirely new idea, the last year has seen a significant boom in new projects. These projects have a surprising amount of versatility, covering the three main categories (for now, at least) of stable coin: fiat-backed, crypto-backed, and algorithm-backed digital assets. Even within these categories, companies are taking different approaches to the same idea: some fiat-backed tokens, such as EURS, are backed by a single currency, while some are backed by a basket of currencies; some algorithmic mechanisms involve issuing bonds, some involve freezing tokens; etc.
The proliferation of these different approaches underscores the fact that so far no one has developed a proven method for maintaining price stability over time. To an extent, everyone is still experimenting. But the level of innovation needed to develop these different approaches should also give us confidence. It’s unlikely that we’ll ever achieve total price stability (and unclear whether we would even want to); even fiat currency doesn’t do this. But with each legitimate, high-quality project that enters the stablecoin market, we get a little closer to refining both the technology and the methodology necessary to provide the financial system with a reliable, predictable digital asset.
Of course, there’s another major issue for companies trying to create price-stable digital assets: regulation. If we were to try and put stable coins under an existing regulatory framework, we would have two options. The first is to consider stable coins as bearer puttable bonds with no specified maturity date—a debt instrument where the token can at any time be returned to the issues for the principal, and where the right to redeem them as such goes to whoever holds the tokens, regardless of whether he or she was the original purchaser.
The main issue here is that bonds are classified as a security, putting them under close regulatory scrutiny. While a certain amount of regulation would bring clarity to cryptocurrency markets and benefit the industry, a securities classification could drastically limit what can be done with cryptocurrencies, which would be especially problematic considering that, unlike stocks and bonds, many cryptocurrencies are intended to function as an everyday means of exchange. Another issue is that the U.S. government has banned the issuance of new bearer bonds. This could be a damaging precedent for stable coins, if they end up being considered similar to or the same as bearer bonds.
The second possibility, under existing regulation, is to consider cryptocurrencies as e-money. This would bring them under a body of legislation regulating the likes of both PayPal and notorious former e-money service Liberty Reserve. On the surface, this may seem like a good fit; cryptocurrencies are, after all, a digital asset used to make electronic transfers. However, there are some fundamental differences between cryptocurrencies and past e-money products that make the existing regulation unhelpful. Most significantly, e-money platforms in the past have operated using centralized databases, meaning that consumers had to place significant trust in the platform not to misuse or steal their money. Cryptocurrencies, on the other hand, operate on a decentralized ledger. This doesn’t necessarily mean that there are no centralization risks within the cryptocurrency market, but it still holds that e-money regulations aren’t written to address this new technological reality.
When it comes to stable coin regulation, there really isn’t a good regulatory framework available right now. As you evaluate different projects, it’s important to keep this challenge in mind.
In this post, I’ll discuss a few projects that we at STASIS find particularly interesting (though not always promising), and then discuss what makes the EURS stable coin unique among so many projects.
Circle has been making waves in crypto finance—and FinTech in general—for years. So it shouldn’t be surprising that the payments company would want to try its hand at stable coins. Enter USD Coin, or USDC. USDC is being created by CENTRE, an open-source project that was founded by Circle but is seeking to expand to include more members in the future. As a fiat-backed stable coin, USDC is intended to maintain a value equal to one U.S. dollar. This parity is achieved through a transparent reserve system, where each USDC is backed by one fiat USD held by Circle or another member of CENTRE. Of course, this only works if investors and other crypto-users can reliably verify that the reserves really do equal USDC in circulation. To this end, all CENTRE members will be required to provide publicly audited financial statements annually and every quarter.
Like USDC, TrueUSD is a fiat-backed stable coin. It’s value is backed by a 1-1 collateral reserve held in fiat dollars. What make TrueUSD slightly different is that reserves are held in an escrow account, and TrustToken, the organization behind the token, never has to handle any of that money. Allegedly, this helps resolve a major trust issue, because token holders don’t have to worry about a central organization mishandling the reserves or lying about their bank balance. On the surface, escrow accounts may seem like a promising solution, but they raise questions about the company’s business model. If TrustToken can’t use the reserves to conduct money market operations, their options for generating revenue are limited. They can still generate fees for subscription and redemption of tokens, but there’s no way to guarantee consistency of these activities. If there is no subscription or redemption activity for a period of time—even if TrueUSD is still being actively traded on secondary markets, then TrustToken won’t make any money to cover their operating costs.
Dai, the token from blockchain startup MakerDAO, is primarily a crypto-collateralized stable coin, though the company also claims to use interest rates to stabilize the price. Unlike TrueUSD, which is fiat backed with a 1-1 collateral ratio, Dai is overcollateralized, with investors having to put up the equivalent of $1.50 worth of ether in order to create one Dai, supposedly worth about $1. This overcollateralization is supposed to protect the price of Dai from volatility in the underlying collateral.
Unfortunately, with the dramatic volatility of general cryptocurrency markets, $1.50 worth of ether can lose its value about as easily as $1’s worth. Because of the recent slide in the value of ether, the MakerDAO team was forced to deposit more ETH as collateral to avoid Dai liquidation. As long as the market for the underlying collateral remains volatile, MakerDAO will have a hard time maintaining sufficient reserves, and the price stability of Dai will be tentative at best.
We’ll let Basis be the representative for algorithmically-backed stable coins here, though obviously not all algo-backed coins work exactly the same way. The idea behind Basis is fairly simple: algorithms can respond to the price of the coin by buying/selling the coin in order to restrict/expand supply and stabilize the price.
This sound great in theory; it’s the execution that will likely be the problem. Having an artificial intelligence program identify how much supply should be added to or taken out of the market is one thing, but having a program that can actually perform these actions is much harder. In addition to monitoring supply and demand, the program will have to execute the creation and destruction of tokens, and handle and regulatory compliance processes involved. Even with the significant development of AI technology in recent years, that’s a lot to ask.
How does EURs fit into all this?
Again, these are just a few examples from a robust area of cryptocurrency development. For a more expansive list, you can go here or here.
The question for us here at STASIS is how the EURS stable coin fits into all of this. What makes EURS different? What do developments in the broader market teach us about how to provide institutional investors with an accessible, reliable digital asset?
One of the first insights the STASIS team had was that the primary bottleneck for stable coin creation will be the regulatory framework. The technological innovations happening in cryptocurrency, as exciting as they are, only mean so much if there’s no clear regulatory framework or, worse, governing bodies implement regulation that is unfriendly to cryptocurrency markets. To this end, STASIS began by working with regulatory bodies to help them develop blockchain regulations that reduce uncertainty for companies while protecting consumers and investors. This is still a major part of what we do.
After this, the team moved on to the tech component and built our own stable coin. EURS is pegged 1-1 to the euro, and is fully collateralized. Our three verification streams—daily statements, quarterly verifications by a Big Four auditing company, and on-demand verifications by a Big Four company for institutional partners—allow us to bridge the gap between current financial reporting practices and the new world of on-demand audits made possible by the blockchain. Our primary revenue stream will come from managing the fiat reserves as a money market fund with a conservative strategy.
There is an abundance of stable coin projects in the market, many of them experimenting with different approaches. It’s still unclear what the best path is toward a stable, widely adopted digital asset. But as the technology and the market continues to develop and mature, we’re excited to be on the front lines, helping to drive progress forward.