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Can we rely on the guarantees of stable currencies?


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Germán López Espinosa

Full Professor of Accounting

Antonio Moreno Ibáñez

Full Professor of Macroeconomics

The three most important stable currencies, according to market capitalization, in the crypto world are Tether, USD Coin and Binance USD. They are called stable because, in theory, they guarantee 1:1 parity with fiat currencies. The reserves that guarantee that parity in the case of Tether are held by Tether Holdings Limited, in USD Coin by Circle Internet Financial, LLC and by Paxos Trust Company, LLC for Binance USD. Let's move on to analyze these reserves that guarantee the parity of the issued tokens. 

The largest stable coin by market capitalization is Tether with an issued token level of 66.057 million, according to the latest quarterly report dated December 31, 2022, stated on its website. Its website states that such stable coin is collateralized 1:1 with fiat currency. The latest quarterly report lists the assets backing those tokens. It is very surprising that of the $67.044 billion in assets, only $39.230 billion are U.S. Treasury bills with a maturity of less than 60 days. The rest of the assets are made up of money market funds (7,373), collateralized loans (5,853), deposits (5,318), corporate bonds, funds and precious metals (3,444), repos (3,046), other investments (2,686) and foreign treasury bills (94). It is important to note that these other assets, which account for 41.49% of the total, have lower ratings than U.S. treasuries, so these assets have a higher risk and the collateral is far from being of the same credit quality as U.S. dollars.

The second most important stable currency is USD Coin. We have monthly reports on this currency. In the last one, with data as of December 31, it can be seen that the level of USD Coin amounts to 44,554 million backed by assets worth 44,694 million dollars that are invested in a money market fund called Circle Reserve Fund Assets (23,664) with assets with maturities between 10 and 82 days and the rest is in US treasury bills (10,524) and liquidity (10,506). However, it should be noted that the assets invested in the money market fund are valued at amortized cost and not at fair value, which would be logical if we are talking about a currency with a 1:1 parity with the US dollar. It should be noted that the policy of valuing these assets at amortized cost, for the purpose of valuing collateral, is not appropriate, especially in a year in which there have been 7 interest rate hikes in the United States. Although the assets have a short maturity deadline, between 10 and 82 days, their fair value is affected when interest rates rise.

The third most important stable coin is Binance USD. At report in January 2023 the issue of tokens outstanding amounted to 16,094 million when in November 2022 the issue of tokens amounted to 22,262 million. Assets backing the stable currency are U.S. Treasury bills in the amount of $3.344 billion, 1-day loans collateralized with Treasury debt in the amount of $12.439 billion and $636 million in deposits. The 1-day loans are said to be with reputable financial institutions, but there is no specific explanation of which institutions these are and the purpose of these transactions for these institutions. 

It is curious to note the different distribution of collateral offered by the three stable currencies when they all seek the same purpose. In addition, it should be noted that none of the companies that hold them have public financial statements, nor do they disclose the level of losses they have incurred during the year 2022, when interest rate hikes have occurred in the United States. This is a cost, which may be relevant depending on the selection of assets they make, and for which no information is available.