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As ether’s price has crashed spectacularly over the last couple months, a lot of people have been talking about ICOs. And for good reason: it’s no secret that ether’s rise to over $1,200 earlier this year was due in large part to the ICO frenzy happening at the same time. Instead of pursuing traditional financing routes, companies were raising millions of dollars worth of crypto, often from ordinary people who could never get in on a traditional investment round. Many of these startups were building ERC-20 tokens and were raising funds in ether, which in turn drove up the price of the token.
As the ICO boom has subsided, ether has lost a major source of demand. Furthermore, startups that raised funds in crypto but need fiat money to pay their expenses have been selling their ether for U.S. dollars or other fiat currencies. This sell-off is pushing down the price of ether, and has the potential to push it down even further. Meanwhile, everyone is suffering the consequences of a volatile market.
This close relationship between ether and the ICO market isn’t good for anyone. The most obvious risk is to startups who face enormous uncertainty about how much funding they actually have. A sustained bear market like the one we’ve been in for the past couple months could all but wipe out their funding. Of course, projects that raise funds in ether and then see the price increase could end up with more funding than they anticipated, but I’d argue that these gains aren’t worth the uncertainty that comes with them. How can you possibly follow a product roadmap when you can’t even create a reliable budget?
What’s not talked about as much is the fact that this situation is also bad for investors. The primary measure of success for these people is return on investment, but it’s much harder to predict or measure ROI when you’re not actually sure how much you’re investing. What was intended to be an investment worth $1,000 could be worth $500 or $2000 two months later. If you’re trying to measure ROI in fiat terms, this is a problem. Furthermore, if the price of ether is expected to increase, the expected return to make an investment worthwhile will have to be higher than the expected return of simply holding ether, potentially disincentivizing investment and making it more difficult for companies to raise funds.
In order for ICOs to be solidified as a legitimate and useful fundraising scheme, they need a stable unit of account. This will give certainly to both startups and investors about how much funds are being raised, how much the company is worth, and how much return investors are making down the road.
One possibility is for blockchain startups to simply raise funds in fiat. This type of ICO would have one foot on the blockchain and one foot off, with investors providing fiat investment in return for the startup’s tokens. However, this sort of solution seems to go against the spirit of ICOs as a new, on-chain fundraising method. It could also introduce new layers of friction, where crypto investors who want to invest in a blockchain startup, potentially with their profits from the cryptocurrency market, have to take their wealth off the blockchain, just to put it right back on when they acquire the ICO tokens.
A much better option would be for startups to raise ICO funding using stable coins, such as EURS for European companies or TrueUSD for their American counterparts. These tokens provide a stable unit of account, giving clarity to both startups and investors about the amount of capital invested. They also allow the entire process to happen on the blockchain, removing unnecessary friction and promoting cryptocurrency markets as a robust financial ecosystem.
Of course, these days you can’t talk about ICOs without mentioning fraud. After so many scammy projects, the perception of ICOs has gotten so bad that even legitimate projects are associated with fraud. Stablecoins can help with this as well. Having a stable unit of account gives both investors and regulators clarity about how much money a startup actually has, making it easier to demand transparency about how they spend that money. If a startup raises funds in ether, and you’re not sure how much cash they actually have, then it’s more difficult to infer whether they’re spending that cash responsibly or appropriately. There are plenty of other issues with fraudulent ICOs that using stablecoins won’t solve, but it’s a move in the right direction.
It’s time for the ICO market to move out of infancy and start to mature, allowing more accountability and providing more protection to investors, hopefully without cutting off access for everyday people. There are projects, such as Civil’s upcoming ICO, that are guiding us in the right direction. Using stablecoins to establish a reliable unit of account and bring clarity to ICOs would be a significant step toward a safer, more legitimate ICO market.
In August, STASIS celebrated its one year anniversary. And what a year it’s been! In the past twelve months, we’ve worked with two government organizations on major initiatives, seen Malta introduce pioneering legislation around the blockchain ecosystem, and launched our own stable coin, to name a few developments. As we pass the one-year milestone, it seems like a good time to share an overview of what we’ve accomplished so far.
Establishing government partnerships
STASIS began with the initial goal of helping regulatory bodies streamline legislation around blockchain technology in order to foster innovation-friendly local ecosystems and prevent regulatory arbitrage. Our first such partnership was with the Maltese government, which in July passed pioneering blockchain legislation. We offered guidance and advice to the government throughout the process of researching and drafting this legislation. We also had the honor of welcoming both the President and the Prime Minister of Malta to our EURS launch press conference in a show of support for the local blockchain ecosystem.
We’ve also partnered with the Astana International Financial Centre (AIFC) in Kazakhstan to offer guidance on their new blockchain legislation and to help the nation launch a stable digital currency. The AIFC’s goal is to develop financial markets within Kazakhstan, and we’re excited to see them recognize the benefits of digital assets.
Developing our own stable coin
Regulatory risk isn’t the only thing keeping institutional investors from entering the cryptocurrency market. Extreme price volatility significantly enhances the risk associated with any crypto-based investment. That’s why in July we decided to enter the stable coin space with our own token, EURS. EURS is a fully collateralized, fiat-backed stable coin that will allow investors to hold a digital asset without exposing themselves to the price volatility generally associated with cryptocurrencies. Anyone can check our on-chain asset balance on the home page of our website.
In July we also onboarded our first institutional client. Furthermore, EURS is already trading publicly on multiple exchanges, including Bancor, and is a supported currency on ePayments.
Ensuring versatility for any blockchain
As various blockchains continue to develop, we want to make sure we’re on the best one. That’s why we’ve developed a backend that will work on any blockchain. EURS currently operates on the Ethereum blockchain, because Ethereum offers the highest level of security available right now. Our wallet is also integrated with the bitcoin blockchain, allowing it to support BTC balances and transfers. And our team has already tested integration with the Stellar blockchain, which enables lower transaction fees. We’re ready for a smooth transition to whichever blockchain offers the most value for our partners moving forward.
Creating the wallet our users need
There are tons of cryptocurrency wallets out there, but even though we searched for one, we couldn’t find a wallet to meet our needs—one that would allow users to transact between various currencies with a simple and easy-to-use interface. So we made our own.
In May, we launched the STASIS wallet app. Originally, it only supported EURS and ether, but in August we added support for bitcoin as well. Now users can hold their EURS, ETH and BTC balances all in the same place. Users can also exchange between supported tokens in-app, and can of course send or receive those tokens with their ETH and BTC addresses. We’re planning to add more supported tokens soon.
Providing the legal framework to make it all safe
In addition to creating EURS, we’ve established a legal framework to make acquiring the token safe and easy for our partners. Our legal documents were prepared by Ganado Advocates, who were involved in the creation of Malta’s cryptocurrency regulation, and Tiang&Co, a PwC-associated firm and one of the world’s most progressive legal firms in the crypto space.
We’ve also developed four streams for institutional investors to enter the cryptocurrency market. They can acquire EURS via a bank wire transfer, a payment institution, a cryptocurrency trade, or a brokerage account using securities, bonds or other financial instruments. We’re the only platform in the stable coin market that offers all four options.
Moving Forward
We’re proud of everything we’ve accomplished this past year, but we’re also just getting started. The next year will see EURS trading on even more exchanges, the STASIS wallet supporting more tokens and, perhaps most importantly, the entrance of more institutional partners into the EURS ecosystem. We also know that the market will change, and we’ll have to adapt in ways we can’t necessarily plan out in advance. But whatever happens, we’ll continue to work on the cutting edge of blockchain regulation and stable coin technology, making the benefits of digital assets as accessible as possible for institutional investment.
Intro
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.
USD Coin
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.
TrueUSD
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
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.
Basis
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.