Značka: Stablecoin

How stable are stablecoins in the FTX crypto market contagion?

If early November’s FTX collapse was crypto’s “Lehman moment” — as more than a few pundits have suggested — will the FTX contagion now spread to stablecoins? After all, Tether (USDT), the market leader, briefly lost its United States dollar peg on Nov. 10. In normal times, this might have raised alarm bells.But, these aren’t normal times.In fact, in the days following FTX’s Nov. 11 bankruptcy filing, stablecoin “dominance,” i.e., the sector’s share of overall cryptocurrency market capitalization, increased to 18%, an all-time high. Bitcoin (BTC), Ether (ETH), and most altcoins appeared to be feeling the pain from crypto-exchange FTX’s implosion, but not stablecoins.But, what awaits stablecoins in the longer term? Will they really emerge from the FTX fiasco unscathed, or is the sector due for a shake-out? Are stablecoins (still) too opaque, undercollateralized and unregulated for investors and regulators, as many insist? The collapse of the Bahamas-based crypto-exchange FTX hit the crypto world like a tropical storm, and so it bears asking once again: How stable are stablecoins? Is the contagion spreading?“The cracks in the crypto eco-system are increasing, and it would not be surprising to see a significant de-pegging event” in the future, Arvin Abraham, a United Kingdom-based partner at law firm McDermott Will and Emery, told Cointelegraph. Particularly at risk are those stablecoins that use other cryptocurrencies for their asset reserves, rather than fiat currencies like the euro or U.S. dollar, he said.“There is some evidence that FTX contagion did spread to stablecoins,” Ryan Clements, assistant professor at the University of Calgary Faculty of Law, told Cointelegraph, citing the brief USDT de-pegging event. “This shows how interconnected the crypto market is to it.” On Nov. 10, Tether fell to $0.97 on Bitstamp and several other exchanges and to $0.93 for a few moments on Kraken. Tron’s USDD stablecoin also wobbled. Stablecoins are never supposed to fall below $1.00. For its part, Tether blamed the depegging on crypto-exchange illiquidity. Relatively few crypto trading platforms are well capitalized, and sometimes “there is more demand for liquidity than exists on that exchange’s order books and has nothing to do with Tether’s ability to hold its peg nor the value or makeup of its reserves,” said the company.“Tether is completely unexposed to Alameda Research or FTX,” the firm added in its Nov. 9 blog post, further noting that its tokens are “100% backed by our reserves, and the assets that are backing the reserves exceed the liabilities.” Recent: Tokenized government bonds free up liquidity in traditional financial systems“The one thing that has saved Tether so far is that people have generally sold their Tether to others and most users have not actually cashed out,” said Buvaneshwaran Venugopal, assistant professor in the department of finance at the University of Central Florida. “Tether had to pay about $700 million recently and was able to do so.” That said, “the general lack of enthusiasm for crypto and the shrinking options for stablecoins may change this situation,” Venugopal told Cointelegraph. Tether has about $65 billion in circulation, according to CoinGecko, and U.S. Treasury bills make up over 58% of its reserves. “This is a large holding which would be affected if Tether has to sell under a crunch, especially in an increasing interest rate environment.” A darkening outlook for algos?What about algorithmic stablecoins, sometimes called algos? When TerraUSD Classic (USTC), an algorithmic stablecoin, collapsed in May, some forecasted that algos as a sub-class were doomed. Does the FTX failure dampen algos’ prospects?“They aren’t dead, and there are still some prominent ones, including the DAI token which is essential for the functioning of MakerDAO,” said Abraham. But, doubts remain, as algorithmic stablecoins are not easily understood and worries persist that “reserves can be adjusted on a dynamic basis potentially leading to manipulation and facilitating fraud,” said Abraham. Uncollateralized, or substantially under-collateralized, stablecoins are inherently fragile, adds Clements. Terra’s unsuccessful attempt in May to partially collateralize USTC with BTC in defense of its peg is another example of the fragility of an uncollateralized or under-collateralized stablecoin model, he told Cointelegraph, adding:“The industry seems to be accepting this fact and moving away from uncollateralized algorithmic stablecoin models.”“I think algorithmic stablecoins are going to be the sacrificial lamb within the stablecoin regulatory space,” Rohan Grey, assistant professor at Willamette University College of Law, told Cointelegraph. “They’re the ones whose heads will be on the chopping block” in the U.S. to appease regulators and other nay-sayers. Algos might still survive on the global stage, though, he suggested.Looking aheadIt could become very difficult for crypto-backed (i.e., non-fiat) stablecoins to defend their pegs in the event of another major cryptocurrency drawdown, however. In Abraham’s view, it would possibly lead “to an implosion similar to what we saw with the collapse of the Terra stablecoin in the early days of this crypto winter,” he said. What about a collapse of the Tether and/or Circle, the industry’s leaders whose coins are mostly backed by U.S. dollars or related instruments like treasuries? Such an event would be “a catastrophic event for the crypto industry,” said Abraham, because “so much of the industry hinges on using one or the other of these tokens as an intermediate means of exchange.” Many crypto transactions begin with a transfer of dollars into USDT or Circle’s USD Coin (USDC) as a way to avoid “the exchange rate volatility of Bitcoin and other cryptocurrencies.”“Tether is the really big one to watch right now because Tether is intrinsically connected to Binance,” said Grey, who noted that Binance is now playing the role of industry savior, a part played until recently by Sam Bankman-Fried and FTX. Tether’s and Binance’s fortunes are tied together, some believe. Still, one has to be careful when making comparisons between the FTX collapse and the 2008 Lehman Brothers bankruptcy, which foreshadowed the Great Recession of 2008–2009. “There are obvious differences,” said Grey, “one being that at this point, the crypto ecosystem is still relatively segregated from the rest of finance.” Any damage should be relatively contained in the overall scheme of things, i.e., “average people” won’t be hurt as happened in the U.S. financial crisis of 2007–2008. More transparencyIt seems as a given that more transparency, particularly with regard to reserves, will be required for stablecoin issuers post-FTX. “The value proposition of a stablecoin is ‘stability,’” said Venugopal. “Therefore, anything that a company uses to bring about stability must be well-understood by the users.”Absent legislation, stablecoin issuers may need to take it upon themselves to disclose more about their reserves. Grey, for instance, applauded the step that Paxos took in July when it announced that it would provide monthly reserve statements that included CUSIP numbers — Wall Street’s “bar code” for identifying securities — for all instruments backing its Paxos Dollar (USDP) and BinanceUSD (BUSD) stablecoins. Those coins are now backed exclusively by “cash, overnight loans secured only by U.S. Treasuries, and U.S. Treasuries with a less than 90-day maturity,” said Paxos.Stablecoins have long been criticized for being under-collateralized, and this issue arose again with the Terra debacle in May. Has the stablecoin sector made any progress in this area over the past half year in this regard?“Yes, uncollateralized and under-collateralized algorithmic stablecoins are far less popular post-Terra, and there is broader acceptance of the fragility of these stablecoin forms,” Clements told Cointelegraph. “You can see evidence of this in the soon to be launched Cardano DJED project, which will use an over-collateralized reserve model, and the abandonment of the undercollateralized NEAR algorithmic stablecoin project last month.” Collateral, of course, remains a challenge for the traditional finance sector, too, even for commercial banks. It basically means the company, in this case, the stablecoin issuer, “has to forgo lucrative opportunities elsewhere and keep the collateral for a rainy day,” noted Venugopal. “Even the highly regulated banks hate capital adequacy and other liquidity requirements imposed on them and find ways to minimize the amount of money left idle or return less income.” A sector shake-out?Many predict a consolidation in the crypto sector generally post-FTX as weaker coins are winnowed out, much as happened in 2018 as the initial coin offering mania waned. Might something similar happen in the stablecoin world? In September, even before FTX’s fall, an academic paper from researchers at the University of Chicago and Stockholm Schol of Economics noted that partially collateralized stablecoin platforms are always vulnerable to large demand shocks, suggesting some winnowing out might be expected. This seems a reasonable outcome, suggested Abraham, especially since the European Union’s Markets in Cryptoassets Regulation (MiCA) and other legislation will impose high compliance costs on stablecoin issuers. Requirements like auditable reserves “will make it much harder to issue stablecoins and should significantly limit the potential for collapse.”“When disclosure becomes mandatory, we are going to see fewer stablecoins,” Venugopal told Cointelegraph. “In general, I don’t think the world needs thousands of cryptocurrencies/tokens out there acting like securities or assets, especially when they are just speculative. We may need utility tokens but not security tokens.”Boosting investor confidenceGiven the risks, are there steps that coin issuers and/or regulators can take to avoid another industry calamity? “Stablecoins will definitely need to be more transparent with their reserves,” according to Abraham. This is already being prescribed in new legislation. He added:“Both the EU’s new MiCA and the draft Responsible Finance and Innovation Act in the U.S. impose reserve requirements on stablecoin issuers.”In the case of MiCA, an audit of stablecoin reserves will be required every six months.Recent: The metaverse is a new frontier for earning passive incomeVenugopal also agreed that if stablecoins want to become a viable medium of exchange and store of value for the decentralized finance world, they need to be more transparent and make their assets auditable, adding:“Tether has been long accused of lying about its cash reserves which are crucial to its U.S. dollar peg. The fact that Tether has been delaying its audit does not help.”Market perception of reserve instability, or insufficiency, can catalyze investor selloffs which impact a stablecoin’s peg, added Clements. “As a result, more transparency is needed in this area to increase investor confidence and stability, and to this end regulation could help the stablecoin market by requiring proof of reserves, audits, custodial controls on collateral, and other safeguards to ensure collateral transparency and sufficiency.”

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MakerDAO community votes against CoinShares' 500M investment proposal

Decentralized lending protocol, MakerDAO, has voted against crypto investment firm CoinShares’ proposal to invest between 100million and 500million worth of the community’s funds, into a portfolio of corporate debt securities and government-backed bonds for yield, as an investment strategy. 72.43% of the community votes went against CoinShares’ proposal to invest MakerDAO’s funds into various traditional assets. If the community had voted in favor of CoinShare’s proposal, the crypto investment firm would have provided “a variable APY above the SOFR interest rate (3.01% as of October 26, 2022) in the community’s preferred currency (DAI, USDC, USD…) to MakerDAO”, which would have been withdraw-able on-chain. On the community board of MakerDAO, a few members explained why they voted against the proposal. A community member with the username “Feedblack Loops LLC” shared:“Since governance has voted on excess USDC then available, going to just say no to proposals of this type moving forward until the house gets in order. Coinshares had many incongruencies up front but did a decent job of articulating confusing portions of their proposal. Optimistic for a revision / different approach.”Another user by the name Llama, who also voted against the proposal, said: “We believe this proposal to be extremely beyond protocol risk tolerance.”Related: MakerDAO co-founder Nikolai Mushegian dies at 29 in Puerto RicoIn October, the MakerDAO community approved the custodianship of $1.6 billion worth of the stablecoin USD Coin (USDC) with the institutional prime brokerage platform for crypto assets, Coinbase Prime. The custodianship was expected to allow the MakerDAO community to earn a 1.5% reward on USDC held with Coinbase Prime. On Oct. 14, Cointelegraph reported that MakerDAO’s revenue plummeted in the third quarter of 2022, caused by a fall in loan demand and few liquidations, while expenses remained high.

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Tokenized government bonds free up liquidity in traditional financial systems

A handful of government-backed financial institutions have been exploring tokenization use cases to revolutionize traditional financial systems. For instance, El Salvador’s Bitcoin Volcanic bond project has been in the works for over a year and aims to raise $1 billion from investors with tokenized bonds to build a Bitcoin city. The Central Bank of Russia has also expressed interest in tokenized off-chain assets. In addition, the Israeli Ministry of Finance, together with the Tel Aviv Stock Exchange (TASE), recently announced the testing of a blockchain-backed platform for digital bond trading. Cointelegraph Research’s 2021 Security Token Report found that most securities will be tokenized by 2030. While notable, the potential behind tokenized government bonds appears to be massive, as these assets can speed up settlement time while freeing up liquidity within traditional financial systems. Brian Estes, CEO of Off the Chain Capital and a member of the Chamber of Digital Commerce, told Cointelegraph that tokenizing a bond allows for faster settlement, which leads to reduced costs. “The time of ‘capital at risk’ becomes reduced. This capital can then be freed up and used for higher productive use,” he said. Factors such as these have become especially important as inflation levels rise, impacting liquidity levels within traditional financial systems across the globe. Touching on this point, Yael Tamar, CEO and co-founder of SolidBlock — a platform enabling asset-backed tokenization — told Cointelegraph that tokenization increases liquidity by transferring the economic value of a real-world asset to tokens that can be exchanged for cash when liquidity is needed. “Because tokens communicate with financial platforms via a blockchain infrastructure, it becomes easier and cheaper to aggregate them into structured products. As a result, the whole system becomes more efficient,” she said. To put this in perspective, Orly Grinfeld, executive vice president and head of clearing at TASE, told Cointelegraph that TASE is conducting a proof-of-concept with Israel’s Ministry of Finance to demonstrate atomic settlement, or the instant exchange of assets. In order to demonstrate this, Grinfeld explained that TASE is using the VMware Blockchain for the Ethereum network as the foundation for its beta digital exchange platform. She added that TASE will use a payment token backed by the Israeli shekel at a one-to-one ratio to conduct transactions across the blockchain network. Recent: TON Telegram integration highlights synergy of blockchain communityIn addition, she noted that Israel’s Ministry of Finance will issue a real series of Israeli government bonds as tokenized assets. A live test will then be performed during the first quarter of 2023 to demonstrate atomic settlements of tokenized bonds. Grinfeld said:“Everything will look real during TASE’s test with the Israel’s Ministry of Finance. The auction will be performed through Bloomberg’s Bond Auction system and the payment token will be used to settle transactions on the VMware Blockchain for Ethereum network.”If the test goes as planned, Grinfeld expects settlement time for digital bond trading to occur the same day trades are executed. “Transactions made on day T (trade day) will settle on day T instead of T+2 (trade date plus two days), saving the need for collateral,” she said. Such a concept would therefore demonstrate the real-world value add that blockchain technology could bring to traditional financial systems. Tamar further explained that the process of listing bonds and making them available to institutions or the public is very complex and involves many intermediaries. “First the loan instruments need to be created by a financial institution working with the borrower (in this case, the government), which will be processing the loans, receiving the funds, channeling them to the borrower and paying the interest to the lender. The bond processing company is also in charge of accounting and reporting as well as risk management,” she said. Echoing Grinfeld, Tamar noted that settlement time can take days, stating that bonds are structured into large portfolios and then transferred between various banks and institutions as a part of a settlement between them.Given these complexities, Tamar believes that it’s logical to issue tokenized government bonds across a blockchain platform. In fact, findings from a study conducted by the crypto asset management platform Finoa and Cashlink show that tokenized assets, such as government bonds, could result in 35%–65% cost-savings across the entire financial system value chain. From a broader perspective, Perianne Boring, founder and CEO of the Chamber of Digital Commerce, told Cointelegraph that tokenized bonds also highlight how technology-driven innovations in financial instruments can provide investors with alternative financial products. “Generally, such bonds would come with reduced costs and more efficient issuance, and come with a level of transparency and monitoring capabilities that should appeal to investors who want greater control over their assets,” she said. Features such as these were recently demonstrated on Nov. 23, when Singapore’s DBS Bank announced it had used JPMorgan’s blockchain-based trading network Onyx to execute its first tokenized intraday repurchase transaction. Banks use repurchase agreements — also known as repos — for short-term funding by selling securities and agreeing to repurchase them later. Settlement usually takes two days, but tokenizing these assets speeds this process up. A DBS spokesperson told Cointelegraph that the immediate benefits of tokenized bonds or securities result in an improvement in operational efficiency, enabling true delivery vs. payment and streamlined processes with golden copies of records.Challenges may hamper adoption While tokenized bonds have the potential to revolutionize traditional financial systems, a number of challenges may slow adoption. For example, Grinfeld noted that while Israel’s Ministry of Finance has expressed enthusiasm in regards to tokenization, regulations remain a concern. She said: “To create new ways of trading, clearing and settlement using digital assets, a regulatory framework is needed. But regulations are behind market developments, so this must be accelerated.”A lack of regulatory clarity may indeed be the reason why there are still very few regions exploring tokenized government bonds. Varun Paul, director of central bank digital currencies (CBDCs) and financial market infrastructure at Fireblocks, told Cointelegraph that while many market infrastructure providers are exploring tokenization projects behind the scenes, they are waiting on clear regulations before publicizing their efforts and launching products into the market. Fireblocks is currently working with TASE and Israel’s Ministry of Finance to provide secure e-wallets for the proof of concept, which will enable the participating banks to receive tokenized government bonds. In addition to regulatory challenges, large financial institutions may find it difficult to grasp the technical implications of incorporating a blockchain network. Joshua Lory, senior director of Blockchain To Go Market at VMWare, told Cointelegraph that market education across all ecosystem participants will accelerate the adoption of the technology. Yet, Lory remains optimistic, noting that VMware Blockchain for Ethereum’s beta was announced in August of this year and already has over 140 customers requesting trials. While notable, Estes pointed out that blockchain service providers must also take into account other potential challenges such as back-end programming for brokerage firms to make sure they are equipped to report bonds accurately on their statements. Recent: After FTX: Defi can go mainstream if it overcomes its flawsAll things considered though, Estes believes that the tokenization of multiple assets is the future. “Not only bonds, but stocks, real estate, fine art and other stores of value,” he said. This may very well be the case, as Grinfeld shared that following the proof-of-concept, TASE plans to expand its range of tokenized asset offerings to include things such as CBDCs and stablecoins. “This POC will lead us toward a complete future digital exchange based on blockchain technology, tokenized assets, e-wallets and smart contracts,” she said. Adoption will likely take time, but Paul mentioned that Fireblocks is aware that financial market participants are interested in taking part in replicating TASE’s model in other jurisdictions: “We anticipate that we will see more of these pilots launching in 2023.” 

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Tether vs. USD Coin on-chain data reveals two very different stablecoins

USD Coin (USDC), a stablecoin issued by the U.S.-based Circle Financials Ltd, is taking the lead over its top rival, Tether (USDT), when it comes to institutional adoption, according to on-chain data.USDC daily transfer volumes are higherThe market capitalization of USDC tokens in circulation comes to be around $44 billion versus USDT’s $65.42 billion. However, USDC’s daily transfer value on the Ethereum blockchain has been consistently higher than USDT throughout 2022, data from Glassnode shows.For instance, as of Nov. 22, the USDC daily transfer was around $14 billion compared to USDT’s $5 billion.USDC vs. USDT daily transfer volume. Source: GlassnodeIn other words, USDC users engage in relatively higher capital transfers compared to USDT users, suggesting that USDC is increasingly the stablecoin of choice among high net-worth entities including institutional whales, hedge funds, family offices, crypto exchanges, etc.Related: 82% of Tether reserves held in ‘extremely liquid’ assets, according to attestationFurthermore, USDC leads USDT in terms of its supply weight across smart contracts as of Nov. 22. Notably, the former made up 33.75% of the total stablecoin supply locked across staking pools. In comparison, USDT’s supply is around 12.50%.USDC vs. USDC supply in smart contracts. Source: GlassnodeBut the higher daily transaction count versus USDC suggests that Tether is more likely used for retail trading and transfers such as remittances.USDC vs. USDT daily transaction count. Source: Glassnode On the other hand, USDC appears like a top stablecoin choice for tech-savvy institutional traders that lock their funds in staking contracts to earn yield. This is further reflected in USDC’s lower daily active addresses count of 40,245 versus USDT’s 73,000, as recorded on Nov. 21.USDC vs. USDT daily active addresses. Source: GlassnodeAdditionally, crypto trading platforms implementing so-called “proof-of-reserves” after the FTX collapse appear to hold more Tether over the USD Coin, further signaling that USDT is likely more popular among retail traders.These exchanges include Binance, KuCoin, BitFinex, ByBit, OKEx, and Huobi. Crypto.com’s reserves are the exception with more USDC than USDT.Crypto.com’s proof of reserves. Source: CoinMarketCap.comTether market cap dips after FTX collapseThe market capitalization of USDT dropped by nearly $4 billion after the FTX exchange collapse nearly two weeks ago.The reason may be due to Tether briefly veering off from its $1 valuation, hitting 96 cents on Nov. 10, after it froze $46 million worth of USDT tokens associated with FTX. Interestingly, the USDC market cap rose by nearly $2 billion after Nov. 10 when the FTX fiasco began.USDT vs. USDC market cap performance in the last six months. Source: MessariTether has a history of breaking its dollar peg during extreme market stress albeit to a lesser degree in recent years. For instance, the token dropped below 95 cents during the crypto market selloff in May, coinciding with a spike in USDC’s market cap. This suggests that some investors moved their capital from Tether to USD Coin as the former lost its dollar peg, as shown below.USDT/USDC three-day price chart. Source: TradingViewHowever, Tether returned to dollar parity within a few days, asserting that the tokens in circulation are backed 100% by reserves and pegged 1-to-1 with dollars. This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

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Crypto and fiat savers are making a fatal error — and DeFi can come to the rescue

There’s no escaping it: the DeFi markets have cooled down over the past year.After breaking $180 billion in total value locked last November — coinciding with Bitcoin racing to a new all-time high of $68,700 — data from DeFiLlama shows the collective value of this market has now dwindled to around $40 billion.Nonetheless, experts remain bullish on the potential of decentralized finance. Protocols are continuing to build furiously during the bear market — ensuring that they’ll be in a strong position for the next wave of adoption. And although this recent contraction has scared away some retail investors, there are still opportunities to be had.Here’s the problem — across crypto and fiat, many consumers are making a fatal error. Whether their savings are denominated in U.S. dollars or stablecoins, they’re letting their capital sit idle in accounts that aren’t earning interest. And given the runaway levels of inflation seen in major economies right now, this effectively means that their wealth is diminishing — and spending power is eroding with every passing month.DeFi can be the answer here, but finding the best opportunities within this nascent space and ensuring that your assets are always allocated efficiently is a task that is virtually impossible to do manually. And even if you come across market-beating levels of yield, it can often change before you are able to take advantage of the opportunity.Crypto is a volatile market that requires 24/7 monitoring in order to be an efficient investor. Plus, traders often end up with FOMO — a fear of missing out — after deploying their assets to a specific protocol.What’s the answer?A new concept that’s emerging in DeFi is reactive liquidity. This means that crypto enthusiasts have the ability to ensure their digital assets are earning the best risk-adjusted yield up until the very moment their assets are needed in a different position. Investors are given the ability to add customizable market triggers to their liquidity which ensure that their positions are monitored on-chain at all times. The moment conditions are met — which are set by the user — liquidity is shifted to where it is needed.Mero is championing this approach to decentralized finance, and argues that it can have big benefits during this time of market turbulence. It allows funds to be deposited into liquidity pools in exchange for Mero LP tokens. Liquidity that is provided into Mero liquidity pools earns auto-compounded yield from automated yield-farming strategies. Any user who holds Mero LP tokens can register market triggers or actions to their liquidity — enabling them to earn yield on Mero up until the very moment their assets are needed elsewhere.Mero currently supports market triggers, or actions, for topping up or adding additional collateral for loans on protocols such as Aave and Compound. Once registered, the Mero protocol’s network of keeper bots keeps a close eye on these loans — and shifts liquidity out of Mero pools (where it earns yield) to the loan’s collateral in the blink of an eye in order to avoid liquidations.The team behind Mero, which was formerly known as Backd, say that they have been driven by a desire to make allocating capital in DeFi not only more efficient, but also a better user experience. Their approach effectively automates the process of asset deployment — ensuring that funds are always allocated most efficiently. When better opportunities emerge, or funds are required for time-sensitive purposes, they can be delegated elsewhere.All of this can take a lot of weight off a DeFi investor’s shoulders — freeing up precious time so they can focus on other things.Working across DeFiAs you would expect, continually uncovering competitive yields hinges upon onboarding as many pieces of DeFi infrastructure as possible. Fresh from securing $3.5 million in funding over the summer, Mero Finance intends to do just that.The platform’s core liquidity pools, which support deposits for DAI, USDC, and ETH have continuously been ranked among the top 10 pools for base APY on Ethereum according to DeFi Llama. Furthermore, since its initial launch last Spring, three security audits have been completed and new dedicated liquidity pools for USDT and FRAX have been added.More features beyond collateral top-ups are scheduled to launch in the next six months, and work is underway to roll out a governance token, too.The project told Cointelegraph: “Mero enables you to maximize the power of your assets with reactive liquidity. Start using DeFi like a pro with Mero’s 24/7 on-chain monitoring, interest-bearing assets, and automated liquidity management.”Material is provided in partnership with MeroDisclaimer. Cointelegraph does not endorse any content or product on this page. While we aim at providing you with all important information that we could obtain, readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor can this article be considered as investment advice.

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Hong Kong believes stablecoin volatility can spillover to traditional finance

The fall of crypto giants this year reignited questions about the stability of cryptocurrencies and their impact on fiat ecosystems. Hong Kong Monetary Authority (HKMA) assessed the situation and found that the instabilities of crypto assets, including asset-backed stablecoins, can potentially spill over to the traditional financial system.The HKMA assessment on asset-backed stablecoins pointed out the risks of liquidity mismatch, negatively impacting their stability during “fire-sale” events. A fire sale event relates to a momentary price fluctuation when investors can purchase stablecoins cheaper than their market price — a phenomenon noticed during the Terra (LUNA) crash.According to Hong Kong’s central bank, the interconnection of crypto assets has made the crypto ecosystem more vulnerable to systematic shocks. In addition, the increase in crypto exposure from financial institutions can be subject to knock-off effects from abrupt developments in cryptocurrency prices:“The growing size of asset-backed stablecoins, together with their inherent risks, could make asset-backed stablecoins a potential magnifier of the volatility spillover from crypto to traditional financial assets.”The flowchart shared by HKMA suggests that fluctuations in the price of asset-backed stablecoins could result in reserve adjustment by stablecoins. This is mainly driven by the assumption that the demand and supply of stablecoins can trigger volatility in their price.Illustration of Tether’s transaction mechanism and spillover channel from crypto to traditional financial assets. Source: HKMAThe study also recalled the crash of Terra USD (UST), an algorithmic stablecoin issued by Terraform Labs, which had caused mass redemption of Tether (USDT). In this light, HKMA recommended standardizing regular disclosures that can help regulators inspects liquidity conditions and risks.The second recommendation for regulators is to strengthen the asset-backed stablecoins’ liquidity management via restrictions on the composition of reserve assets.Related: Could Hong Kong really become China’s proxy in crypto?The Securities and Futures Commission of Hong Kong advised management companies looking to offer exchange-traded fund (ETF) offerings to “have a good track record of regulatory compliance,” among other requirements.HKEX welcomes the SFC’s announcement today permitting the listing of ETFs with virtual assets as their underlying. This will support the continued growth of #HongKong as Asia’s premier #ETF marketplace, further strengthening Hong Kong’s role as an international financial centre. pic.twitter.com/zLRgAUV6iX— HKEX 香港交易所 (@HKEXGroup) October 31, 2022The SFC circular came as part of a policy update from Hong Kong’s government, which announced its readiness to engage with global crypto exchanges on regulatory issues.

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Cardano to launch new algorithmic stablecoin in 2023

Proof-of-stake blockchain platform, Cardano, has partnered with COTI, a DAG-based Layer 1 protocol, to launch what it refers to as an over-collateralized algorithmic stablecoin. The project said in an announcement provided to Cointelegraph that the stablecoin will be backed by excess collateral in the form of cryptocurrency stored in a reserve. It’s official! $Djed will launch on the Cardano Mainnet in January 2023! $Coti $Ada #Djed pic.twitter.com/cu8ryW6Lo7— Djed Stablecoin (@DjedStablecoin) November 21, 2022According to the release, Djed is set to go live on the mainnet in Jan. 2023, pending a successful audit and a series of rigorous stress testing. According to the developers, Djed will be pegged to the US Dollar, backed by Cardano ($ADA), and will use $SHEN as its reserve coin. The algorithmic stablecoin will be integrated with selected partners and Decentralized Exchanges (DEXs), who will reward users for providing liquidity using Djed. In a bid to grow at a sustainably healthy pace, the developers plan to adopt a gradual and slow approach to providing $ADA liquidity to the Djed smart contract. Shahaf Bar-Geffen, the CEO of COTI shared at the official announcement at the Cardano Summit:“Recent market events have proven again that we need a safe haven from volatility, and Djed will serve as this safe haven in the Cardano network. Not only do we need a stablecoin, but we need one that is decentralized, and has on chain proof of reserves.” Related: Cardano price chart paints ‘Burj Khalifa’ with 7-month losing streak — More losses ahead?Despite Cardano’s lackluster price action, the blockchain continues to build and innovate within the ecosystem. On Sept. 22, Cardano’s long-awaited Vasil upgrade finally went live. The hard fork was designed to help improve the ecosystem’s scalability and general transaction throughput capacity, as well as advance Cardano’s decentralized applications (DApps) development capacity. At the time of publication, Cardano was trading at $0.30.

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Binance, OKX and Bybit suspend USDT and USDC deposits on Solana

Major cryptocurrency exchanges continue to carry out measures in the aftermath of FTX collapse, now halting deposits in Solana-based Tether (USDT) and USD Coin (USDC).Binance announced on Nov. 17 that deposits of Solana-based USDT and USDC have been “temporarily suspended until further notice” on the platform.The exchange referred to the tokens as “USDT (SOL)” and “USDC (SOL),” as the USDT and USDC stablecoins remain available for deposit via other blockchains.Binance did not provide more information on the measure, adding that it “reserves the right in its sole discretion to amend or change or cancel this announcement at any time and for any reasons without prior notice.”Other exchanges such as OKX and ByBit have also delisted Solana-based stablecoins for deposits. OKX suspended their deposits at 3:00 am UTC on Nov. 17, while ByBit reportedly disabled such deposits as of Nov. 17 as well.Source: TwitterAccording to the on-chain data, the supply of Solana-USDC is 62% bigger than the supply of Solana-USDT. The total amount of USDC circulating on Solana amounts to 5 billion USDC ($5 billion), or 11% of the token’s total market capitalization at the time of writing.The total amount of Solana-based USDT stands at 1.9 billion tokens ($1.9 billion), or just about 1.3% of USDT’s total market cap.Related: Binance to liquidate its entire FTX Token holdings after ‘recent revelations’Solana is a decentralized blockchain with an associated cryptocurrency, SOL (SOL), that has been associated with having close ties with Sam Bankman-Fried’s troubled crypto exchange, FTX. (Bankman-Fried was an early investor in Solana via Alameda Research.) Amid the ongoing FTX crisis, SOL has been tanking alongside FTX Token (FTT) and other associated coins.The suspensions of Solana-based USDT and USDC have triggered even more red for SOL, with the cryptocurrency plummeting 7% on the latest news. At the time of writing, SOL is trading at $13.1, down about 60% over the past 30 days, according to CoinGecko.Solana 30-day price chart. Source: CoinGeckoThis news comes soon after Binance announced plans to remove USDC as a tradable asset from its platform. The exchange allows USDC deposits but automatically converts them to its in-house stablecoin, Binance USD (BUSD).

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Tether says it has no exposure to Genesis Global or Gemini Earn

Tether issued a short statement on Nov. 16 saying that it has no exposure to institutional crypto lender Genesis Global or the Gemini Earn program after the announcement that Genesis Global and the Gemini exchange were freezing withdrawals. Genesis Global is the lending partner for interest-bearing Gemini Earn. Eager to differentiate itself from contagion-stricken crypto organizations, Tether said:“It is important at a time like this to highlight that these [Tether’s] reserves have proved tried and true demonstrating consistent resilience during the black swan events that have characterized the market this past year.”Tether, the operator of USDT (USDT) — the largest stablecoin and the third-largest digital currency by market capitalization — lost its dollar peg for a short while on May 12, at the beginning of the crypto market meltdown. Tether said that the Nov. 16 announcement was “part of Tether’s ongoing efforts to increase transparency.” Tether has resisted efforts to make it prove the backing of its stablecoin, losing in February a case brought by the Office of the New York Attorney General in 2019 to expose that information. In July, Tether hired BDO Italia to conduct monthly reviews and attestations of its reserves for public release as part of the settlement of that case.Tether Confirms Zero Exposure To Genesishttps://t.co/KHEx2HWoJ1— Tether (@Tether_to) November 16, 2022The stablecoin has made its reduction in commercial paper in its reserves to zero quite public throughout the year.Related: Tether chief technology officer confirms no plans to rescue FTXGenesis Global announced via a tweet on Nov. 16 that it was temporarily suspending redemptions and new loans due to the “market turmoil” arising from the collapse of FTX. After Genesis Global’s announcement, Gemini said it would be unable to meet customer redemptions for five days.The collapse of the FTX exchange has sent new waves of distress through crypto markets that may continue to be felt for months to come.

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Terra Labs, Luna Guard commission audit to defend against allegations of misusing funds

The Luna Foundation Guard (LFG) and Terraform Labs (TFL) commissioned a technical audit of their efforts to defend the price of TerraUSD (UST) between May 8 and 12, 2022. The audit was intended to answer “allegations posed in social media” about the fate of funds transferred during efforts to defend the UST dollar peg, according to the LFG blog.The audit found that LFG spent 80,081 Bitcoins (BTC) and $49.8 million in stablecoins (about $2.8 billion at the time) to defend the UST peg. That was consistent with what LFG indicated in its tweets on May 16. In addition, TFL spent $613 million to defend the peg. The audit was conducted by U.S. consulting firm JS Held.LFG concluded that the audit results show there was no misuse of funds and no funds were used to benefit insiders. Furthermore, LFG claimed the audit dispelled the allegation that “LFG fund [were] frozen by law enforcement.” Rather, “all LFG funds are kept in self-hosted wallets, have not moved since the May 16th tweet, and have not been frozen.”1/ A third party audit of LFG and TFL’s peg defense activity during May 2022 has been published: https://t.co/3vwSBhQcNq— Do Kwon (@stablekwon) November 16, 2022The final conclusion is unsupported in the text and is interesting in light of the fact that South Korean police requested on May 23 that exchanges freeze funds toed to LFG. In September, South Korean authorities again asked exchanges KuCoin and OKX to freeze 3,313 BTC transferred from a wallet created Sept. 15 in the name of the LFG. Related: Terraform Labs claims case against Do Kwon is ‘highly politicized:’ WSJThe LFG blog quoted Terraform Labs founder Do Kwon, who faces criminal charges in South Korea and whose current whereabouts are unknown, as saying:“It is important to distinguish between Terra’s case, where a transparent, open-source decentralized stablecoin failed to maintain peg parity and its creators spent proprietary capital to try to defend it, and failure of centralized custodial platforms where its operators misused other people’s money (customer funds) for financial gain.”In the Twitter thread announcing the audit, Kwon wrote, “Many of you lost a lot of money in UST – for this I am sorry. While the system was transparent and open source, _I_ as its creator should have understood and communicated its risks better.”

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Tether CTO confirms no plans to rescue FTX

Cryptocurrency exchange FTX has lost at least one potential rescuer as it battles to fill a reported multi-billion dollar hole in its balance sheet.The CTO of stablecoin issuer Tether, Paolo Ardoino on Nov. 10 confirmed the company does not have “any plans to invest or lend money to FTX/Alameda.”Tether does not have any plans to invest or lend money to FTX/Alameda. Full stop.— Paolo Ardoino (@paoloardoino) November 10, 2022Ardoino’s comments came after a Nov. 10 report from Reuters suggested that FTX is now at a $9.4 billion shortfall, with FTX CEO Sam Bankman-Fried reaching out to multiple companies seeking cash to keep the exchange afloat.According to the report, Tether, crypto exchange OKX and venture capital firm Sequoia Capital are some of the companies Bankman-Fried has approached for funds, reportedly asking for $1 billion or more from each of the firms. Tether’s CTO response appears in line with the sentiment from a Nov. 9 blog post from Tether which assured the community it has no exposure to Alameda or FTX.The stablecoin issuer has also been reported to have frozen 46,360,701 USDT owned by FTX in its Tron blockchain wallet on Nov. 10 to comply with law enforcement. It is not currently understood whether OKX or Sequoia Capital is considering support for the embattled exchange. However, Lennix Lai, director of financial markets at OKX previously told Reuters on Nov. 9 that Bankman-Fried asked for up to $4 billion from the exchange to help cover FTX liquidity issues, though didn’t confirm if the company would assist FTX.Meanwhile, on Nov. 10, Sequoia zeroed out its nearly $214 million worth of investments into FTX marking them as a complete loss saying FTX’s liquidity issues “created a solvency risk” but added it wouldn’t have a large impact on the company. Crypto exchange Kraken was also reportedly approached by FTX according to two unnamed sources as reported by Axios on Nov. 10 but it was not said if any deal was reached by the two parties.Cointelegraph contacted OKX, Kraken, Sequoia Capital, and FTX for comment but did not immediately receive a response.Related: Genesis Trading reveals $175M of funds are locked in FTXSo far, FTX appears to only be able to continue limited withdrawals through a deal with the Tron blockchain allowing its assets to be swapped 1:1 with external wallets. The agreement caused Tron-based tokens to trade at a premium of up to 1200% on the platform as users rush to find an exit from the exchange.

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82% of Tether reserves held in ‘extremely liquid’ assets, according to attestation

Stablecoin issuer Tether Holdings Limited published its latest quarterly attestation on Nov. 10, highlighting the “extremely liquid” nature of its assets at a time when crypto markets were reeling from news of FTX’s apparent insolvency. Eighty-two percent of Tether’s reserves were held in cash, cash equivalents and other short-term deposits as of Sept. 30, 2022, the company disclosed in its quarterly attestation report. Tether’s exposure to commercial paper — a form of short-term corporate debt with a higher risk profile — has fallen to just 0.07% of its holdings. The company claims to have incurred no losses from winding down its commercial paper holdings by more than $24 billion. United States Treasury Bills now account for over 58% of the stablecoin issuer’s reserves. Tether booked a profit in the third quarter, adding $60 million to its excess reserves. Paolo Ardoino, Tether’s chief technology officer, said the latest attestation demonstrates the company’s healthy financial position and commitment to transparency. The quarterly attestation was conducted by BDO Italia, an arm of the BDO Global accounting organization, which Tether hired in August to fulfill its reporting obligations. Since then, Tether has published monthly attestations to prove its USDT stablecoin is fully backed. USDT briefly dipped below its $1 peg on Nov. 10 as the implosion of crypto exchange FTX roiled the crypto sector. However, Ardoino urged calm after disclosing that his firm processed roughly $700 million in USDT redemptions over 24 hours. “No issues. We keep going,” he said in a tweet. USDT has since regained its peg and is trading at $1. #tether processed ~700M redemptions in last 24h.No issues.We keep going.— Paolo Ardoino (@paoloardoino) November 10, 2022Related: Tether responds to Wall Street Journal ‘disinformation’Although Tether has seen an influx of competitors over the years, it remains the single largest stablecoin by market capitalization with $68.5 billion worth of USDT in circulation at the time of publication, according to CoinMarketCap. As such, crypto industry participants view Tether as a major bellwether of risk appetite.

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