Hello CryptoExplorers. Last week I said I would give you an update on the #Stablecoins situation. This update will go into detail about the #SEC vs Paxos situation, why this is a big problem for crypto (especially in the US) and which stablecoins are currently the best out there.

TL;DR:

• All stablecoins are in danger, there is no safe haven.

• Diversification is important to reduce a potential impact on your portfolio

• I don’t think that there is short term danger for stablecoins, and these new developments don’t mean that stablecoins will depeg. The stablecoin industry just becomes more unstable, although the goal of stablecoins was to bring stability into the market. It becomes harder for stablecoin companies to provide their services.

Last week, New York state’s financial regulator ordered Paxos to stop issuing BUSD. The big question now:

Are stablecoins securities?

Paxos said that the SEC had issued it a notice that the regulator is considering recommending an action alleging that BUSD is a security. Paxos said the notice suggests Paxos should have registered the offering of BUSD under federal securities laws.

According to Howey test, a precedent for investment contracts, one of the conditions for the transaction to be an investment contract and considered to be a security is the expectation of profit. It is obvious, that people don’t buy stablecoins in expectation of profit. The same as when they buy fiat, it is just a convenient way to store assets, as cryptocurrencies are quite volatile.

But "securities" is a much broader category defined by the 1933 Securities Act. On a broader view, it could be argued that arbitrage, hedging and staking opportunities provide an expectation of profit, or if a stablecoin is considered as a derivative of a security. So the SEC basically has free reign to define an investable asset as a security if it wishes to.

If the Commission continues to pursue the matter in court, it could set a precedent for the rest of the crypto industry and threaten all other major stablecoin issuers.

Increased regulatory uncertainty could destabilize the market, which has just begun a slow recovery from the collapse of FTX. It could also drastically change the crypto landscape in the U.S., as many companies could seek to set their roots in a more regulatory-friendly environment.

Stablecoin Comparison

After the news broke out that BUSD is facing the problems money was of course moving within the crypto landscape. The following charts show the dominance of the 10 biggest stablecoins based on their market cap.

We see BUSD lost 23.52% market cap within the last month, while USDT was the biggest winner in the whole story. Still, most of the money left the stablecoin ecosystem and went into other cryptocurrencies, which is one reason for the increase in prices for most cryptocurrencies in the last days.

But now let’s have a quick look at the biggest stablecoins.

USDT

Tether is based not in the US. But over the half of Tethers reserves is managed by Cantor Fitzgerald, a us based financial services company! So, this also provides an attacking point. And of course, we have the problem that Tether does not provide transparency reports, but you know this already probably.

USDC

Issued by Circle, a company based in the USA. The same problems can arise here as with Paxos. Because Circle is also regulated, but if the SEC decides that Stablecoins are securities, then they can probably attack them as well.

This is the same as the problem that US customers face when it comes to staking. Kraken has to stop their staking services and had to pay a $30M fine, while Coinbase continues to offer staking. It is probably only a matter of time before Coinbase is attacked as well, although Coinbase's CEO has already said he will fight it.

DIA

DAI is an algorithmic stablecoin issued by MakerDAO, an Ethereum-based protocol, that seeks to maintain an exact ratio of one-to-one with the U.S. dollar. It is primarily used as a means of lending and borrowing crypto assets without the need for an intermediary — creating a permissionless system with transparency and minimal restrictions.

Sounds good since it is decentralized right? Yep... But for the most part, it is currently backed by USDC, which means that if USDC is attacked, the problem will be spread to DAI as well.

What does it all mean?

Well, I would love to have a clear answer and give you a straightforward direction. But the truth is, there isn't one. But of course, I can tell you what I do. I diversify my stablecoins, so now I hold mostly USDC, USDT, and a little DAI.

Currently, most educational/research platforms prefer not to share their opinion on this topic because they are afraid of being wrong. And I can tell you that I am also very careful because I want to give you the best information available!

But sometimes we just have to recognize that there is no real solution to the problem right now. If you really don't want to deal with the stablecoins problems, you either hold cryptocurrencies, which are less volatile, or you hold fiat. And maybe that is the goal of the U.S., to make sure that people use U.S. dollars, where they can control the flow of money? ;)

Stay safe! #Binance #buildtogether #crypto2023