Examining the complex web of USD stable coins

In late 2014, Tether made a new innovation in the Fintech space: A USD stable coin. The idea is to use Blockchain tech (OmniLayer using the Bitcoin network) to move USD as a token. The collateral USD is held at USD-denominated bank accounts. The person who owns the token has claim to the USD, and should be able to reclaim it back as regular dollars.

Tether has since made staggering growth. It claims a colossal $9bn market cap (or the amount they should be holding in US dollars) and is used by several Bitcoin exchanges. The company has drawn lots of criticism: Its relation to Bitfinex is not fully transparent, it has failed at particular moments to hold the 1:1 peg, been the subject of subpeonas and lawsuits; and countless conspiracy theories. Its last account audits dates from June 2018; so it's safe to say that Tether has failed to produce reliable audits.

Arguably, this prompted the launch of several new stable coins that promised more transparency, better regulation and guaranteed convertibility. But in our brave new world of negative (or near zero) interest rates; and with transaction fees going to ledger miners (Bitcoin or Ethereum), this raises questions around the business model of such ventures; especially with the associated regulatory costs for running this financial scheme.

Coinbase USDC

Started in October 2018, USDC by Coinbase promises stable value by having USDC backed in USD bank accounts. As the landing page explains: "Each USDC is backed by one US dollar, which is held in a bank account."

USDC is run by Coinbase; or Circle. Depending on which landing page you land on first. But if you read a bit more, it seems more of a joint venture they called CENTRE which credits both parties to USDC.

USDC has around $700mn in market cap but it's relatively illiquid compared to USDT on the exchanges where it's trading. Which means you'll incur high spread costs if you were to buy or sell it. You can redeem it at full face value in Coinbase, though.

USDC is audited by Grant Thornton which is a well known audit firm. That's important since the audit veracity is as good as the reputation of the audit firm. USDC publishes monthly reports, so I picked the last one to read.

The report is basically an assertion from Circle; and Grant Thornton expressing an opinion that the assertion is, in fact, correct.

Circle Internet Financial, Inc.’s management is responsible for its assertion. Our responsibility is to express an opinion on the Reserve Account Information in the accompanying Reserve Account Report based on our examination.

The assertion is Circle holding enough USD to cover for the USDC token they have issued. But there is a bit of a word salad in the report.

Those standards require that we plan and perform the examination to obtain reasonable assurance about whether the Reserve Account Information in the accompanying Reserve Account Report is correctly stated, based on the criteria set forth in the Reserve Account Report, in all material respects.

There are only two Criteria. The second is a bit interesting.

US Dollars held in custody accounts are the total balances in accounts held by the Company at federally insured US depository institutions and in approved investments on behalf of the USDC holders at the Report Date and Time.

So USDC might not be backed by US dollars in regular banks but, instead, by approved investments; whatever that means. But how do USDC holders approve these investments? That must be something that could be slipped in the ToS.

USDC is fully backed by U.S. Dollars or equivalent assets held by Circle with its U.S. banking partners in segregated accounts, on behalf of, and for the benefit of, Users. This means for every USDC issued by Circle and remaining in circulation, Circle will hold on behalf of Users one U.S. Dollar in its bank account(s) or other approved investments

Circle agrees to take reasonable care in maintaining the established value of U.S. Dollar funds provided by you, and you agree Circle is free to use the funds provided for its own purposes prior to redemption subject to the terms of this Agreement.

When you wire fiat funds into our system, we deposit those funds with one of our banking partners. In the future, Circle may also invest these fiat funds in highly-liquid, AAA-rated fixed income securities.

We have been going in circles (pun intended); but if you want the basic gist: Circle is a trading desk and using USDC as capital for trading. They claim that they are only trading/holding AAA-rated fixed income securities, which should be relatively low risk.

The Paxos gang

Binance and Houbi, both, have their own unique USD stable coin. Or so I thought. At a closer inspection, they are all the using the Paxos Standard. Paxos is a fintech company that is building infrastructure to enable movement between physical and digital assets.

Both Binance and Huobi audits are performed by Withum. Which is the same auditor that Paxos is using. The firm is new to me but looking at their website, they seem to be well established in the U.S. While Huobi seems to be working with Stable Universal limited and Paxos to issue HUSD; Binance directly refers you to Paxos website for monthly attestations.

The gist is that Binance is holding USD at Paxos. While Huobi is holding USD at Stable Universal Limited which might hold the US dollars itself or at Paxos.

Binance USD market cap is at $180mn and HUSD market cap is at $120mn. The Paxos token market cap is $245mn. So HUSD could be holding some dollars in its own bank accounts; or the accounting of BUSD and Paxos USD is done separately which gives Paxos a total possible maxium holdings of $545mn.

One thing that caught my attention is the high issuance and redemption rate of HUSD which has minted $1.344bn and redeemed $1.28bn. They have been running since Oct 2019. Compare this to USDC $2.15Bn issued vs. $1.4Bn redeemed over a longer stretch of time. Huobi USD seems to be washing lots of money around.

These stable coins, run by Paxos, do also have a second criterion

The Reserve Accounts refers to the accounts held by the Company at U.S. depository institutions,which include (i) U.S. depository institutions where cash is held, (ii) U.S. depository institutions to which cash is swept pursuant to a certain deposit placement agreement, and (iii) from time to time, amounts at U.S. depository institutions backed by U.S. Treasury bonds. Such U.S. depository institutions to which cash is swept are pursuant to a certain deposit placement agreement.

I'm not an expert in this but 1. should refer to a regular cash current account, 2. should refer to a cash sweep for large deposits which makes them eligible for FDCI insurance and 3. is U.S. Treasury bonds.

If that's the case, Paxos USD should be more secure than USDC since U.S. Treasury bonds are safer than the most prime assets. It's not clear, though, if Paxos is planning to trade U.S. treasury to generate profit or just hold them to allocate collateral for their token.


TrueUSD, or TrustToken is another stable coin run by TrueCoin, LLC; a startup backed by A16Z. They seem to be running from the U.S. and Hong Kong. The Hong Kong jurisdiction can be explained by their offering of AUD, HKD, GBP and CAD tokens.

TrueUSD company page, however, does raise some alarms. Just below the "Who We Are" tagline, they put a bunch of companies logos including Coinbase, Apple, Google and Deutsche Bank. It's not clear what exactly is their relation to these companies but I'm doubtful they have any meaningful ones. Interestingly, even Coinbase doesn't seem to be supporting TrueUSD trading as far as I can find.

TrueUSD is audited by Armanino. They actually built an entire website to provide real-time audits for TrueUSD.

Armanino claims that it checks the USD balances of bank accounts where TrueUSD is holding the money. From their about page

Second, is a system that utilizes Application Programming Interfaces (APIs) to collect near-real-time data from each trust company or banking partner that is charged with custody of each TrueCurrency’s holders’ fiat deposits. This system aggregates the total balances from each escrow partner and presents it on the right-hand portion of the screen.

That's pretty impressive, if true. The audit report does mention, however, that TrueUSD might be holding its reserves in highly liquid investments of sufficient credit quality; though it doesn't clarify the minimum rating for such securities.

The USD balance held in escrow accounts are the total balances in accounts held by TrueCoin, LLC at federally insured U.S. depository institutions and a Hong Kong depository institution for the benefit ofthe TUSD token holders as agreed to within the escrow agreements. The USD balance includes USD cash and cash equivalents that include short-term, highly liquid investments of sufficient credit quality that are readily convertible to known amounts of cash. Cash equivalents are recorded at cost which approximates the fair value, or cash value.

Small Players

Gemini USD

There are a few more small players in this space. Gemini is a regulated crypto exchange based in NY, USA. It gained prominence as it was launched by the Winklesvoss twin who invested heavily in Bitcoin early on.

Similar to the other stable coins, Gemini USD publishes monthly exminations reports.

The Gemini dollar Accounts are held and maintained at State Street Bank and Trust Company and within a money market fund managed by Goldman Sachs Asset Management, invested only in U.S. Treasury Obligations (including securities issued or guaranteed by the U.S. Treasury where the payment of principal and interest is backed by the full faith and credit of the U.S. government)

Gemini USD seems to be holding collateral only with U.S. treasuries that are fully garanteed by the U.S. government. Which is actually better than putting your money in a bank account (except for the FDCI inssurance) since the government can't default on its own currency.

Despite being a safer choice, Gemini USD has a very low market cap ($5mn only) and is pretty much illiquid and there are few venues to trade it.

Stasis Eur

Stasis Eur is an interesting stable coin because the EUR is less represented in this space. The company operates out of Malta and was started in August 2018.

The stable coin has a very low market cap ($35mn) and is relatively illiquid. It's audited by BDO Malta but the firm provides surprisingly detailed audits. They provide daily, monthly and yearly audited that put bank accounts information and balances. They can be retrieved from their transparency page.


With Gemini being the exception, most stable coins seems to be using the underlying capital to trade for profit on (supposedly) highly rated securities. Though it might not seem to be much different than what banks are doing, these stable coins are not FDCI insured (as FDCI insurance caps at $250k).

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