TUSD Stablecoin Reserve ‘Misuse’ Exposes Proof-Of-Reserve Flaw

TUSD Stablecoin Reserve ‘Misuse’ Exposes Proof-Of-Reserve Flaw

The U.S. Securities and Exchanges Commission (SEC) has charged stablecoin issuers TrueCoin LLC and TrustToken with defrauding cryptocurrency investors and making misleading statements regarding the TrueUSD (TUSD) stablecoin reserves.

SEC’s investigation alleged that, by September 2024, 99% of the reserves backing TUSD were invested in an “illiquid” commodity investment fund.

TrueCoin and TrustToken neither admitted nor denied the allegations and agreed to settle the charges.

The revelation served as a stark reminder about the lack of transparency about stablecoin reserves and questioned the effectiveness of stablecoin collateral verification methods such as proof-of-reserve.

Proof-of-Reserve Reports “Falsely Assured” TUSD users, says SEC

On its official website, TUSD claims to be a “trustworthy” stablecoin that makes daily audit reports available to anyone to monitor its reserves using Chainlink‘s proof-of-reserve technology.

However, according to the SEC, since 2020, TUSD reserves have been invested in an offshore commodity fund with exposure to trade finance, structured trade, export and import finance, supply chain financing, and project financing.

“Potential purchasers were falsely assured by these reports that the TUSD reserves exceeded the TUSD outstanding.

“It was undisclosed in the holdings reports that a significant portion of the TUSD reserves were invested in the risky Commodity Fund, which the attestation reports were valuing at cost without considering any adjustments,” said the SEC in the court filing.

Proof-of-Reserve Technology for Stablecoin Reserves

Techopedia asked Anndy Lian, an intergovernmental blockchain expert and author of Blockchain Revolution 2030for his views on the matter, to which he said:

“This situation underscores the potential for misrepresentation and the limitations of existing proof of reserve mechanisms.”

The biggest weakness of stablecoin proof-of-reserves seems to lie in the quality of the off-chain data provided by the third party to oracles like Chainlink.

Stablecoin reserves are typically held in cash, and short-term U.S. treasuries cannot be tracked on-chain. Chainlink’s proof-of-reserve technology is completely dependent on the quality of data provided by third parties.

Lian added:

“While on-chain attestations can verify the presence of reserves at a given moment, they may not account for off-chain activities or the quality and liquidity of the assets backing the stablecoin. The TUSD case illustrates how reserves can be mismanaged or misrepresented, even with real-time attestations in place,”

In the case of TUSD, a Hong Kong-based accounting firm named Moore Hong Kong is responsible for providing blockchain oracles with daily attestation services and stablecoin reserve balance data.

Disclaimers on Moore Hong Kong-owned VeriNumus’ website do not alleviate doubts on whether proof-of-reserves technology can be trusted to verify stablecoin reserves.

“The Balance Data is sourced entirely from third parties, and neither Moore Hong Kong nor any Chainlink service provider has knowledge of its accuracy,” stated the disclaimer.

Techopedia reached out to Chainlink Labs for a comment. At the time of writing, there had been no response.

Do All Stablecoins Use Chainlink’s Proof-of-Reserve Technology?

Not all stablecoins use Chainlink’s proof-of-reserve technology to showcase their reserve balances.

Tether (USDT), the largest stablecoin by market cap, publishes quarterly reserve reports audited by BDO Italia, a third-party accounting firm.

USDT has courted its fair share of controversy and legal action over the years. In October 2021, the Commodity Futures Trading Commission (CFTC) fined Tether $41 million for misleading customers that it had sufficient U.S. dollar reserves to back every circulating USDT stablecoin.

Rival USDC – which brands itself as a regulatory-first and compliant stablecoin – provides monthly stablecoin reserve reports. USDC reserve reports are audited by Deloitte & Touche LLP.

At the time of writing, over 87% of USDC reserves were held in an SEC-registered government money market fund called the Circle Reserve Fund, managed by BlackRock. The rest was held in cash in banks.

Rating agency S&P Global rated USDC’s ability to maintain its peg to the U.S. dollar as “strong.” The agency rated USDT as “constrained” and TUSD as “weak.”

“We have no information on the nature of the assets in the reserve or the creditworthiness of institutions holding these assets,” said S&P Global on TUSD.

Techopedia’s View: Proof-of-Reserve is Not Foolproof

The lack of trustlessness when sourcing off-chain data is the Achilles heel of proof-of-reserve technology.

Oracles have to rely on the trustworthiness of the third parties providing off-chain data and auditing reserve reports. This need for trust requires the end consumer to review the quality of the data feed.

Proof-of-reserve technology works well when tracking the on-chain reserve balances of centralized crypto exchanges, but depending on it to track off-chain stablecoin reserves seems like a leap of faith.

In the future, stablecoin issuers could include tokenized cash, U.S. treasury bills, and notes issued by regulated issuers in their reserves. Such on-chain assets can be accurately tracked by proof-of-reserve solutions.

The Bottom Line: Stablecoin Regulation is Inevitable

On September 24, 2024, the SEC took the chance to advocate for crypto regulations following the charge on TUSD issuer TrueCoin LLC.

“This case is a prime example of why registration matters, as investors in these products continue to be deprived of the key information needed to make fully informed decisions,” said Jorge G. Tenreiro, acting chief of SEC’s Crypto Assets & Cyber Unit.

In June 2023, the European Union passed a comprehensive crypto regulatory framework called the Markets in Crypto Assets Regulation (MiCA).

The U.S. looks to follow suit, having introduced crypto bills such as the Lummis-Gillibrand Payment Stablecoin Act and Financial Innovation and Technology for the 21st Century Act (FIT21) in 2024.

 

Source: https://www.techopedia.com/news/tusd-stablecoin-reserve-misuse-exposes-proof-of-reserve-flaw

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

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Ripple’s Stablecoin: The ‘Death of $XRP’ or Its Perfect Companion?

Ripple’s Stablecoin: The ‘Death of $XRP’ or Its Perfect Companion?

In early April 2024, blockchain company Ripple (XRP) announced plans to launch a US dollar-pegged stablecoin to support the growth of its public blockchain XRP Ledger (XRPL).

While Ripple CEO Brad Garlinghouse called the stablecoin launch a “natural step for Ripple,” the company will find itself in an overcrowded yet lucrative $150 billion stablecoin market that is often in the crosshairs of lawmakers and regulators.

What does Ripple’s stablecoin mean for XRP? Will it rival Tether (USDT), USD Coin (USDC), and other key stablecoin market players?

Key Takeaways

  • Ripple will launch a stablecoin on the XRP Ledger and Ethereum.
  • Ripple aims to launch a “compliance-first” stablecoin aimed at institutional clients.
  • Critics fear that a Ripple stablecoin will make the XRP token obsolete.
  • Meanwhile, Anndy Lian, an intergovernmental blockchain expert, said Ripple’s dual-asset approach could improve the overall payment experience for customers.
  • Tether’s early-mover advantage has made USDT the most popular stablecoin in the world, accounting for 72% of stablecoins’ daily trade volume.

Why Is Ripple Launching a Stablecoin?

Stablecoins are unique digital assets that offer the best of traditional and decentralized finance (DeFi). Crypto investors use these fiat-pegged tokens to facilitate trade, provide liquidity for currency hedging, and protect their portfolio against crypto market volatility. Another area in which stablecoins have shown immense promise is international remittances and inflation hedging.

Therefore, it is no surprise that Ripple, a company that provides cross-border payment, custody, crypto liquidity, and central bank digital currency (CBDC) solutions, is entering the stablecoin market.

The company said:

“Ripple will leverage both XRP and the stablecoin in its payment solution to further improve the customer experience and serve as the first enterprise use-case of the asset at scale. There is demand from Ripple’s customers in emerging markets to enable stablecoin payouts.”

According to Ripple’s statement, the company will issue US dollar-pegged stablecoins that will be 100% backed by US dollar deposits, short-term US government treasuries, and other cash equivalents. The stablecoin will be available on XRP Ledger and Ethereum (ETH).

In order to catch up to market leaders Tether’s USDT and Circle’s USDC, Ripple is prioritizing the issuance of a “compliance-first” and trustworthy stablecoin. Having a compliant stablecoin will be key for Ripple to keep hold of its primary clientele composed of institutions and governments.

What Does a Ripple Stablecoin Mean for XRP?

A burning question on every XRP investor’s mind is whether the upcoming Ripple stablecoin will complement the XRP token or render it obsolete.

Some think the Ripple stablecoin will bring the “death of XRP.” At the moment, XRP is primarily used as a bridging asset to facilitate cross-border payments on the XRP Ledger. For example, when a user converts Turkish Lira (TRY) to USD, the XRP Ledger first converts TRY to XRP and then converts XRP to USD. XRP is the bridging currency as it is the native token and, therefore, the most liquid asset on the XRP Ledger.

Now, the entry of a Ripple stablecoin threatens XRP’s position as the bridging currency. Not only will a stablecoin offer a non-volatile alternative for currency swaps, but the compliance-first nature of the asset will help calm the nerves of Ripple’s risk-averse institutional clients.

Back in 2021, money transfer services company MoneyGram International canceled its partnership with Ripple after the US SEC labeled XRP as an “unregistered security.” The case that began in December 2020 is still ongoing as of April 9, 2024.

Contrary to the lingering pessimism, Anndy Lian, an intergovernmental blockchain expert, was optimistic about Ripple’s “dual-asset approach” to creating blockchain-based enterprise-grade solutions that financial institutions need.

Lian told Techopedia:

“Ripple’s approach to leveraging both XRP and its stablecoin could offer the best of both worlds: the speed and technology of XRP with the stability and reliability of a stablecoin. Ripple’s USD-backed stablecoin is designed to be used alongside XRP in Ripple Payments to support greater liquidity and enable global on/off ramps to service cross-border payments demand at scale. This dual-asset approach could improve the overall payment experience for customers worldwide.”

The expert believes that while XRP serves as a bridge currency facilitating quick conversions between different fiat currencies, the introduction of a stablecoin could provide a less volatile option for the actual store and transfer of value, which might be particularly appealing in emerging markets where there’s demand for stablecoin payouts.

“The combination of XRP and a stablecoin in Ripple’s ecosystem is aimed at enhancing the efficiency and stability of cross-border payments,” he said.

Lian added that some analysts expect a 17% increase in XRP price following the stablecoin launch. He said:

“This is based on early on-chain movements that suggest investors are positioning for a positive price impact. Long-term predictions for XRP’s price remain optimistic, with some analysts suggesting the formation of a pennant structure over the past four years, indicating potential for significant price movements.”

Will the New Ripple Stablecoin Rival Tether and USDC?

Ripple will find it an uphill task to overtake market leaders Tether and Circle in the stablecoin market.

Despite clashes with regulators, Tether’s USDT continues to dominate the stablecoin industry. As of April 9, 2024, USDT’s market cap stood at over $107 billion, accounting for more than 71% of the total stablecoin industry market cap, CoinMarketCap data showed.

Tether’s early-mover advantage has made USDT the most popular stablecoin in the world. At the time of writing, USDT accounted for 72% of stablecoin daily trade volume.

Meanwhile, Circle’s USDC, which launched in September 2018, has eaten into USDT’s market share over the years due to its branding as the safest stablecoin in the market.

Circle’s close affiliation with influential crypto companies like Coinbase has also helped the USDC brand. As of April 9, 2024, USDC was the second largest stablecoin with a market cap of $32.6 billion (21% of cumulative stablecoin industry market cap) and a 24-hour trade volume of $7.8 billion (8% of total stablecoin daily trade volume at the time of writing).

Furthermore, Ripple’s plans to launch its stablecoin on the Ethereum blockchain means that its stablecoin will have to compete with innovative DeFi products such as MakerDAO’s multi-collateralized stablecoin DAI, Frax Protocol’s algorithmic stablecoin FRAX and Ethena Labs’ synthetic dollar USDe.

Ripple will find competition in the compliance-first stablecoin space as well. In the same week as Ripple’s stablecoin launch announcement, Agora announced the launch of its fully collateralized stablecoin, the reserve fund of which will be managed by global investment powerhouse Van Eck.

 

The Bottom Line

If there is one crypto product that has a product-market fit, it is stablecoins. Ripple’s venture into stablecoin could mark a new chapter for the XRP community.

For too long, Ripple has been associated with its fight against the US SEC. Maybe a stablecoin launch will bring back the spotlight on its blockchain products.

Source: https://www.techopedia.com/is-ripple-stablecoin-launch-bearish-for-xrp

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

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USDT Hits $100 Billion Milestone as Tether Plans Stablecoin Recovery Tools

USDT Hits $100 Billion Milestone as Tether Plans Stablecoin Recovery Tools

On the day USDT reached a milestone $100 billion market cap, the company behind the stablecoin, Tether, announced recovery plans for holders if a blockchain was ever disrupted.

The $100bn market cap is a testament to the value of stablecoins in both the cryptocurrency realm and across TradFi, but it, at times, has been a rocky road to reach such widespread adoption.

On March 4, Tether released a recovery process to protect users’ funds if a blockchain is disrupted, as it attempts to allay concerns about the risk of using USDT.

USDT is now the third largest cryptocurrency by market cap, behind Bitcoin and Ethereum — with BTC itself narrowing in on its own ATH.

 

 

Key Takeaways

  • Tether, the stablecoin behind USDT, has hit a $100 billion market cap milestone.
  • With its widespread adoption on 14 blockchains, especially on the Tron network, Tether has become the third-largest cryptocurrency, trailing only Bitcoin and Ethereum.
  • In response to concerns about blockchain disruptions, Tether has introduced a recovery plan to safeguard users’ funds.
  • Users will be able to validate a transaction to another chain if disruption occurs.
  • Concerns about Tether’s backing have persisted since its inception, but the company seems to be shaking the reputation off through closer scrutiny of its reserves.

Tether tokens are available on 14 blockchains and have become especially popular on the Tron network, where low transaction fees are encouraging users in certain countries to buy and sell USDT as an alternative to devalued local currencies.

Tron has overtaken the Ethereum chain for the largest share of USDT in circulation, accounting for $50.4 billion compared with $40.6 billion on Ethereum, according to DeFi Llama data.

USDT Protection if a Blockchain Goes Offline

The new recovery tool aims to enable users to maintain access to their Tether stablecoins if the blockchain they are hosted on goes down.

The company said:

“In the event that any blockchain on which USDT is available becomes disrupted, Tether has developed and will implement its proactive measures to ensure uninterrupted accessibility for our holders, and safeguarding users’ accessibility to their USDT.”

Users would be able to migrate their USDT tokens to another blockchain through a web interface or command-line tools by cryptographically signing a migration request to verify ownership.

The web-based option supports popular browser extension wallets and hardware wallets, while the command-line interface allows users to enter their private key directly, enabling them to sign the request using an open-source script on their local machine.

Why USDT is Surging

Interest in crypto has surged since the approval of several bitcoin exchange-traded funds (ETFs) by the US Securities and Exchange Commission in January, in turn increasing demand for USDT as an on-ramp and off-ramp to convert funds to and from cryptocurrencies such as bitcoin.

Trading volumes in investment products reached a record of over $30 billion last week, driven by ETF demand, according to digital asset manager CoinShares, at times representing 50% of global Bitcoin daily trading volumes on trusted exchanges.

Total assets under management (AUM) reached $82.6 billion, approaching the all-time high of $86 billion at the peak of the market in early November 2021.

Fiat currency-pegged stablecoins such as Tether typically mint (or create) new tokens when users submit a transaction to convert their fiat at a value of 1:1.

So if a user requests to buy $100 worth of a stablecoin, 100 tokens are minted.

But Tether recently authorized a mint of $1 billion in USDT on the Ethereum blockchain to replenish inventory in preparation for an increase in issuance requests and swaps between blockchains, according to a post on X, formerly Twitter, by Tether’s chief executive officer, Paolo Ardoino.

 

Ardoino expects crypto demand to increase as more funds and companies invest in Bitcoin now that the ETFs give them the legitimacy that they need to convince accountants and auditors they should hold some on their balance sheets.

Ardoino said in a panel discussion last week:

“We are going to see a wide range of hedge funds and pension funds that will start to add Bitcoin to their portfolio now that the Bitcoin ETF is out there.

“More and more fund managers are interested in starting to add up to 5% of their portfolio into Bitcoin.

“But ultimately one of the most interesting things is companies more and more will start keeping part of their unused balance sheet in Bitcoin… and that will grow over time.”

Stablecoins are also at the forefront of retail interest in crypto.

Intergovernmental blockchain expert Anndy Lian, speaking to Techopedia about Tether, said:

“Tether is a remarkable achievement in the cryptocurrency space, as it provides a stable and convenient way to use fiat currencies on the blockchain.

“USDT as stablecoins that are pegged 1-to-1 with a matching fiat currency are widely adopted across major exchanges, OTC desks, and wallets, and have surpassed Bitcoin in terms of trading volume.

“USDT is a sign of how useful stablecoins are in the world, as they bridge the gap between the traditional and the digital financial systems.

“They offer the benefits of both worlds: the stability and familiarity of fiat currencies, and the speed and transparency of the blockchain. It also reduces the volatility and complexity that are often associated with cryptocurrencies, making them more accessible and appealing to a wider audience.

Tether’s reliance on a “trust me” status has raised doubts and suspicions among some investors and observers, who question the legitimacy and sustainability of Tether’s operations.

“Fast forward to today, Tether has refined its operations and is the widely used stablecoin in the world now. In my humble opinion, doubts about them have gone down a lot.”

“Stablecoins are becoming increasingly important,” according to Dina White, General Counsel at Zodia Markets, a digital asset brokerage and exchange platform.

“We are seeing this at Zodia Markets, particularly due to cross-border payment efficiencies and cost-savings. And they could become a widespread means of retail payment.”

Tether Strives for Legitimacy Amid Controversy

Tether’s growing popularity among crypto users extends to criminal groups, which are increasingly using USDT to transfer and launder money.

A recent United Nations Office on Drugs and Crime (UNODC) report on organized crime in East and Southeast Asia (PDF) found that “USDT on the TRON155 blockchain has become a preferred choice for regional cyberfraud operations and money launderers alike due to its stability and the ease, anonymity, and low fees of its transactions.”

The report added: “Between September 2022 and September 2023, a recent fund audit of USDT-based transactions by one independent blockchain data analysis company found transactions totaling 17.07 billion USDT connected to underground currency exchanges, illegal commodity trades, unlawful collection and payment processes, and various criminal activities.

“Law enforcement and financial intelligence authorities in East and Southeast Asia have also reported USDT among the most popular cryptocurrencies used by organized crime groups, demonstrated by a surging volume of cyber fraud, money laundering, and underground banking-related cases.”

Tether responded to the report with criticism that “the UN’s analysis ignores the traceability of Tether tokens and the proven record Tether has of collaborating with law enforcement.

“We are disappointed in the UN’s assessment that singles out USDT highlighting its involvement in illicit activity while ignoring its role in helping developing economies in emerging markets, completely neglected by the global financial world simply because servicing such communities would be unprofitable for them.

“Rather than focusing solely on risks, the UN should also discuss how centralized stablecoins can improve anti-financial crime efforts.”

Tether stated that it collaborates with the US Department of Justice (DoJ), the Federal Bureau of Investigations (FBI), and the US Secret Service (USSS) to monitor USDT tokens, ensuring that traceability surpasses “traditional banking systems that for decades have been the vessel for laundering substantial sums proven by the fines that have been levied on them.”

Tether has also developed a tool to monitor secondary markets with blockchain analysis firm Chainalysis.

“Tether tokens, using public blockchains, make it possible to meticulously track every transaction, making it an impractical choice for illicit activities. This is evident in our freezing of more than US$300 million within the last few months, showcasing our commitment to combating the criminal use of cryptocurrencies,” the statement added.

Is Growing Tether Usage Supported by Real Value?

Launched in 2014, Tether has long been controversial because of speculation about whether the full value of USDT in circulation is backed by real collateral.

In 2021, Tether paid fines of $41 million to the Commodity Futures Trading Commission (CFTC) and $18.5 million to the New York Attorney General’s Office for falsely claiming that USDT was backed by US dollars on a 1:1 basis between 2016 and 2019.

The company now publishes daily reserve data, monthly reports, and quarterly reviews breaking down its reserves, which it says are independently audited.

Its most recent report for December 2023 showed total cash holdings of $82.1 billion, $3.5 billion in precious metals, $2.8 billion in Bitcoin, $3.8 billion in other investments, and $4.8 billion in secured loans, along with $44 million in corporate bonds.

 

 

 

Source: https://www.techopedia.com/usdt-hits-100-billion-milestone-as-tether-plans-stablecoin-recovery-tools

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j