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On 19 May, Binance customers using leverage found positions automatically liquidated as the crypto price drop wiped out all the collateral in their margin accounts before they could transfer extra funds onto the exchanges. This blog post examines another side of the story - the actual value of Binance's insurance fund and its ability to meet the potential pay-outs on 19 May, had the platform not been closed. I no longer believe the figures that Binance shows on its website for its insurance funds, nor their liquidation reports, and I maintain that a figure of only 3 million USDT for the BTC/ETH insurance fund pay-out on May 19 is grossly inconsistent with the actual number of liquidations on BTC and ETH products on that day. In fact, if the futures platform had not closed, I believe that Binance would have had to subsidise its insurance fund by a billion USDT or more.

The Centre Consortium announced that USD Coin (USDC) stablecoins will only be backed by cash and U.S. Treasury Bills. Centre oversees which entities are allowed to issue the stablecoin and use its API. In July, its parent company Circle, which issues the USDC, revealed that USDC was only 61% backed by cash (including money market funds) and cash equivalents (high-quality short-term fixed income securities). The July attestation report showed that reserves included Yankee Certificate of Deposit (13%), commercial paper (9%), corporate bonds (5%) and municipal bonds and U.S. Agencies (0.2%).

Whether a stablecoin needs dollar reserves depends on its actual or potential use in the conventional payments system. A stablecoin used only within the crypto ecosystem wouldn't need 100% dollar reserves. It would only need sufficient dollar liquidity to maintain its peg - and if exchanges are compliant and redemptions restricted, that might not be very much. However, stablecoins could replace conventional rails for international payments, potentially making them faster, cheaper and available 24/7. Stablecoins used for this purpose would need to be fully exchangeable for U.S. dollars or other fiat currencies on demand 24/7, and would therefore either need 100% dollar reserves or access to central bank liquidity. [Hence,] rather than wasting time and energy trying to regulate crypto-only stablecoins as if they are banks or money market funds, regulators should concentrate on ensuring that stablecoins that are, or show signs of becoming, payment media within the conventional financial system have 100% reserves and/or are licensed banks.

Significant market volatility this week induced by the collapse of the FTX exchange has impacted stablecoins with many of them depegging temporarily. Tether's USDT temporarily declined to $0.97 on November 10 as redemptions reportedly surpassed $600 million over the previous two days. Circle's USDC fell to $0.977 very briefly. Both rapidly regained their pegs. Yesterday I reported that USDT had spiked down and USDC spiked up, but different sources tell different stories. Yesterday's USDC graphic sourced CoinMarketCap.com whereas CoinGecko.com tells a different story (see below). with USDC also spiking down like USDT did. In any case, lots of volatility!

"Binance will no longer support competing stablecoins, including USDC, on its exchange. USDC's market cap is down 5% since the announcement."

"It's not really surprising that stablecoin issuers keep going back to essentially the same model: people have been fascinated by perpetual motion machines since time immemorial. No one, however, has ever succeeded in making one, because we live in a world of change, and perpetual motion machines only work if nothing ever changes."

The crypto market was always going to be vulnerable to the return of a positive yielding fiat environment. This is because its gains were always likely the function of an excessively cheap debt financing world. If that's true, it's entirely possible that the last 10 years or so of sky-rocketing crypto gains were largely a transfer of "cheap money" financial profiteering, which - were not for the post GFC regulatory environment - would otherwise have been captured by the banking industry in the form of sky-high bank equity valuations.

The market reactions over the past week are a reminder that stablecoins are far from homogenous and carry different reserve profiles with varying risk, not unlike banks in traditional finance. The crypto markets are still assessing the aftermath of the UST collapse but one immediate effect has been a drawdown in stablecoin liquidity within DeFi. The amount of USDC held in smart contracts on Ethereum has fallen by about $5B since its peak in March. Similarly, the supply of DAI (an over-collateralized, crypto-backed stablecoin) in smart contracts has also fallen about $2B. Most of this decline can be attributed to weakening demand for DAI on decentralized exchanges, cross-blockchain bridges, and lending protocols. Estimates of total value locked (TVL) have also come down, but these measures are often exaggerated due to rehypothecation of assets.

"Let's take a look at one of the biggest stablecoins in crypto, the USDC token. Using a few specific examples, we will show: (1) stablecoins are regularly used by dubious actors to move massive sums of money internationally with minimal oversight, (2) stablecoins are regularly used in fraudulent transactions, and (3) stablecoin issuers provide shadow banking services for other crypto entities that are unable to access traditional banking services. "

An article by Circle Chief Economist Gordon Liao distinguishes stablecoins' use in trading versus payment activities and their impact on financial stability. Payment stablecoins like Circle's USDC have lower speculation exposure than trading stablecoins like Tether's USDT, MakerDAO's DAI, and Binance's BUSD. Two measures are presented as evidence; the total crypto trading volume facilitated by the stablecoin in question versus the amount of it in circulation, and the correlation between the change in stablecoin circulation and crypto-asset returns. Dai shows the highest correlation with crypto-asset returns because it is collateralized with crypto-assets, so a decrease in the asset collateral's value can prompt the forced redemption of the stablecoin.

"In this week's issue of Coin Metrics' State of the Network, we delve into Tether's remarkable ascent, exploring its primary avenues of growth, adoption, the nature of its usage and reserve holdings to gain a holistic understanding of the stablecoin juggernaut through on-chain data."