USDC to Increase Cash Reserves as Stablecoins Battle for Transparency
As stablecoins continue their path to maturity, many projects are increasing their transparency to appeal to institutional investors. Just recently, Circle, part of the consortium behind USDC, announced it will build its stablecoin reserves entirely of cash and short-duration US treasuries. This comes just months after Circle and Tether were accused by Paxos of essentially being unregulated and opaque in their practices.
Questionable Stablecoin Reserve Compositions
Transparency has become the most sought-after metric within the stablecoin industry. Investors, both institutional and retail, are increasingly interested in knowing how exactly these currencies work, and how each builds their own reserves.
This is, in part, because the composition of a reserve helps to evaluate how safe and reliable a coin will be in the future. As a result, stablecoins have been racing to offer as much transparency as possible. However, in doing so, Circle has come under fire in recent months in terms of the reserves behind USDC.
In July, the company published a report, aiming to prove to the corporate banking world it is a secure and legitimate stablecoin. But this quickly backfired after Paxos examined the report and highlighted Circle’s reserves as being built largely of corporate debt obligations, with insufficient fiat cash backing.
Paxos also highlighted the same issues with Tether, a stablecoin that was notoriously investigated for suspicious business practices. At the time of Paxos’ claims, Tether’s reserve were made of 2.9% cash, USDC’s reserve held 61% cash and cash equivalents, whereas PAX and USDB (Binance’s stablecoin) had reserves of 96% cash.
Perhaps Paxos’ most damaging claim was that USDC and Tether were unregulated projects, as they are not overseen by the New York State Department of Financial Services. This has been a hot topic lately, with Treasury Secretary Janet Yellen calling for swift regulatory action for stablecoins.
Circle has since tried to remedy their reserve issues by reorganizing to contain exclusively cash and short-duration US Treasuries. Tether has also responded by releasing a new attestation report in August, offering more detailed breakdowns than usual. However, neither company has truly solved all the problems raised by Paxos, as their regulatory status—largely because of a lack of regulatory framework in the first place—remains murky.
Transparency as a Marketing Strategy for Stablecoins
In recent years, companies have been trying to use transparency as a marketing tool. Wesley Mathew, Head of Marketing at Meltwater, a media intelligence company, has been a proponent of using radical marketing to attract customers. In his own words:
“[R]adical transparency across the board means your company can’t choose when it wants to be transparent and when it doesn’t. If your brand is evolved in a significant blunder, you’ll need to be just as open and accommodating as you are with a minor faux pas, which means greater risk management planning and resource expenditure. But all told, for the sake of authenticity, you need to be consistent with this across the board”.
Customers and corporations favor transparency. This is especially true of the stablecoin industry, as it acts as a bridge between fiat and crypto. In essence, this means that if stablecoins fail, it could be detrimental to the digital asset industry as a whole. Investors know how significant stablecoins are in the crypto ecosystem. Offering as much information as possible can be attractive.
This might be why the stablecoin company, TrueCurrency, added functionality for constant real-time reserve attestation. This level of transparency is far deeper than what USDC, Tether, or even PAX currently offer.
Ultimately, the battle for transparency is beneficial for everybody, as it makes information wide open and available. Considering Circle’s upcoming plans for going public, adopting a radically transparent strategy could help ensure a strong performance in the long run.
How do you see the stablecoin industry’s battle for transparency playing out? Let us know in the comments below.