When the U.S. dollar-pegged Gemini dollar soars to as high at $1.18 on October 17th, one wonders how stable the so-called stablecoins are. Days earlier, Tether (USDT) plunged to lows of around 87 cents, per Coinbillboard (with some exchanges seeing USDT trade at 85 cents).
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Tether Slumps? Gemini Dollar Soars? Aren’t These Things Supposed to Be Pegged?
Stablecoins are pegged. In the case of Tether, the Gemini dollar (GUSD) and Circle USD, they are pegged on a 1:1 basis with the U.S. dollar. On fluidly trading exchanges, of course, they will waver slightly from that, but rarely by more than a percentage point or so away from their 1:1 theoretical value.
This week’s drama with Bitfinex’s banking woes and ongoing concerns over its solvency caused a flight from Tether to quality–both to bitcoin and, it appears, to the GUSD.
As doubts continue to linger around the USD reserves Bitfinex claims to have to back its digital currency, the flight to crypto and to alternative stablecoins appears intuitive.
Without a guaranteed exit from Bitfinex to U.S. dollar reserves of an unknown quantity in at least their third bank account in under a month, those seeking shelter from the potential pitfalls of holding USDT are rationally trading into bitcoin and stablealts.
Ironically, there is a USDT market on Poloniex for Circle’s stablecoin (USDC), but not the other way round. While exchange bugginess is one explanation for these trade requests, it is worth speculating: is Poloniex refusing to take your Tether for USDC?
Do these screenshots tell a story?
The Purpose of Tether Is Different From the Purpose of Stablealts
The troubled USDT did offer the cryptoeconomy a great deal of utility. It provided an intuitive onramp from fiat to cryptocurrencies and an off ramp in the other direction. It gave crypto traders and hodlers alike shelter from market turbulence.
It promised to help deliver cryptocurrencies to main street by affording merchants and shoppers a seamless way to receive and spend crypto, respectively. (The practice of exchanges creating “native” cryptocurrencies doesn’t, in and of itself, create any utility.)
But the stablealts that followed Tether, while offering the same utility properties, also had another motive. With doubts about Tether and Bitfinex failing to dissipate as the exchange cut ties with auditors and ran afoul of their revolving door of banking partners, fears that the greenback reserves that supposedly backed USDT did not exist–at least not to the extent of Tether’s market cap–liberated the stablecoin of the very utility it was designed to offer.
Calls for Audits of All Stablecoins Mocked by Cameron Winklevoss
On the back on those arrivals, perhaps doubts surrounding Tether have spread to doubts surrounding its stable mates. Twitter identity @whalepool pointed out that neither the Gemini dollar, Circle USD, True USD, nor Paxos have been subjected to audits.
W/ that said @whalepool thank you for continuing the long-standing tradition in crypto where the default position is to go out half-cocked w/out any expertise or knowledge in an area and pretend to know what you are talking about.
— Cameron Winklevoss (@winklevoss) October 17, 2018
Cameron Winklevoss took umbrage at the implications, pointing out that one cannot audit stablecoins:
Again, you/they don't understand what an audit actually is — you/they are loosely using the term without understanding that one can't perform an "audit" on a stablecoin. You must use an "attestation." Sophisticated market participants understand this and get it. Full stop.
— Cameron Winklevoss (@winklevoss) October 17, 2018
Winklevoss is correct, of course. Stablecoins cannot be audited, and, in fact, they don’t need to be. Their supply is publicly known. Gemini’s Management Assertion was examined by BPM LLP in accordance with attestation standards established by the American Institute of Certified Public Accountants. The salient aspect of the September 28th Management Assertion of Gemini Trust was that it held the same amount of U.S. dollars in its bank accounts as it had issued Gemini dollars.
Nevertheless, Whalepool wasn’t done doubling down on the unaudited status of the Winklevii Buck:
This is hilarious, Winklevoss thinks GUSD is special because it is "licensed" (Tether is FinCEN registered btw).
Twinkle: newsflash, you copypasted Tethers whitepaper and got some stupid New York state approval.
Your memecoin is just not that interesting https://t.co/R0cKkl66Xi
— Whalepool (@whalepool) October 18, 2018
Audits, Attestations, Accusations, Assumptions
An audit is a subset of an attestation. The latter is simply a third party’s opinion of the accuracy of an assertion, whereas an audit’s purpose is to systematically assess an entity’s data, statements, records, operations, and performance. Limited Liability Companies (LLCs) do not need to be audited in the U.S. That applies to Gemini Trust Company, LLC, Paxos Trust Company, LLC, and TrueCoin, LLC.
Circle Internet Financial Limited is also a privately owned company, though CENTRE–which it is in the process of birthing–has created a set of requirements for any future issuers of USDC (of which Circle is currently the only one.) CENTRE plans to create a broader landscape of additional USDC issuers, and require them to have applicable licenses, provide monthly attestations, hold reserves on a 1:1 basis, and meet any other future requirements CENTRE deems warranted. (Circle appears likely to seek a public listing, at which point its reporting requirements will change.)
Private companies are subject to generally accepted accounting principles (GAAP), but they are not required to release GAAP-compliant audited financial statements. Gemini is regulated by the NYDFS and is subject to capital reserve requirements, cybersecurity requirements, and banking compliance standards.
Detractors Restless as the Gemini Dollar Soars
If the Gemini dollar soars while Tether slumps, it may be because the Gemini dollar is a genuinely regulated stablecoin that people trust. The implication that Gemini doesn’t treat those regulatory responsibilities with appropriate gravity would suggest a decidedly un-Winklevossian foolhardiness.
The Whalepool-Winklevoss slinging match was a matter of people talking past each other unnecessarily. A passing jab was met with a bristling response and it was on for young and old. Cameron Winklevoss merely had to remind Whalepool that as a privately held company, Gemini does not have to host or publish audits. He failed to do that.
Whalepool’s original assertion risked tarring all stablecoins with the Bitfinex brush. That was unfair. It should be remembered that iFinex Inc. (BVI) is a British Virgin Islands registered company operating out of Hong Kong that is also privately owned.
Bitfinex’s reluctance to subject itself to an audit was never a matter of evading regulatory requirements. Concerns surrounding Bitfinex’s audit allergy related strictly to allegations of malfeasance and their clumsy endeavors to assuage the community pointing fingers at them.
Stablecoins are likely to be subject to market peculiarities over the forthcoming months as the Bitfinex saga continues. It will surprise nobody if the Gemini dollar soars again. Unnecessary pseudo-accusations and evasive counter arguments on Twitter are not likely to soothe anyone’s nerves. Put the gloves down, boys.
Have your say. As Tether tumbles and the Gemini dollar soars, are stablecoins in for a bumpy ride? Was Whalepool right to point out that no stablecoins have been audited? And if technically correct, was it worth bringing attention to?
Images via Pixabay, Poloniex
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