Après l’électrochoc UST, des stable coins plus robustes ?

15 juin 2022


I.         Stablecoins – Principles                                                                                                  

A stablecoin is a digital currency that is pegged to a “stable” reserve asset like the U.S dollar or gold. They are supposed to provide a stable reserve of value in a space in which assets can typically exhibit very high volatility in a short period of time.

Stablecoins reduce fees, transfer time and privacy issues associated with traditional currencies transactions. They allow the use of a single wallet when transacting with exchanges and users located all around the globe, with the advantage of eliminating international transfers: stablecoins allow peer-to-peer digital transfers without the usual intermediary which would usually take hefty fees.

Furthermore, stablecoins based transactions settle almost instantly and do not need the few days clearence involved in traditional bank transfers.

We can distinguish three major types of stablecoins :

  Algorithmic Algorithmic crypto backed Fiat backed
Decentralized In theory In theory No
Peg mechanism Algorithms – seigniorage and rebase Algorithms –rebase Crypto collateral for intrinsic value Fiat collateral for intrinsic value
Market trust Very low Low-Medium Medium-High
Example Terra/Luna Dai/Maker USDT, USDC, BUSD

Taking the example of a USD-pegged stablecoin, issuer receives from client $1, stores it in its reserves, mints an equivalent token with a $1 peg and sends it to customer’s wallet. When the customer wants to redeem his token, he sends it back to the issuer which burns (destroys) it and sends back to the customer his $1.

To keep their peg, stablecoins rely on arbitrage and the 1:1 reserves of the issuer.

Stablecoin issuers follow a business model in between that of a commercial bank taking in clients deposit and that of an asset manager when it comes to reserves management. Typically, Tether has two main sources of income, which are deposits/withdrawal fees, and asset management of its reserves.

A de-peg (stablecoin trading at a discount) usually occurs as the result of a strong imbalance offer and demand in the market, when selling pressure is too strong. Three typical scenarios can lead to a de-peg. 


    • If issuer does not have enough reserves to support demand, it could run out of collateral facing arbitrageurs and customers demand for redeem. Once collateral hits 0, we can imagine the price of the stablecoin would quickly converge towards 0.

    • A liquidity crunch arises when issuer’s reserves are not 100% made from tracked asset but diversified through a range of assets (loans, equities, commodities).

    • In a price crunch scenario, reserves held by issuer could be devalued following certain market situations. If issuer holds a variety of assets different from the tracked asset, these assets price can vary, with an impact on the reserve:supply ratio.

Evolution over one year horizon

Over the past 12 months, all 4 stablecoins have seen a major increase in their market cap due to rising demand from retail and institutionals to invest in the digital assets market. Stablecoins have been the preferred medium of transaction to navigate the ecosystem. Zooming in on the market year to date, we notice a decorrelation of the four stabelcoins around March, with two opposite trends in May. This reveals varying investors sentiment about the four stablecoins. While USDC and BUSD closely obey American regulation and provide transparent audits and good reserves fundamentals (high concentration of cash and cash equivalents), USDT suffers from its reputation following several scandals. Regarding Dai, we notice a strong dump at the time of the Terra/Luna meltdown : investors are now doubting the algorithmic stablecoin model and prefer transacting with fiat-collateralized stablecoins.

II.         USDT (Thether, Omni)

USDT is a fiat collateralized stablecoin issued by Tether Limited (Honk Kong) which exists on several different blockchains. It was originally supported only on the Bitcoin blockchain. The lifecycle of an USDT begins when a client makes his first deposit in $ to Tether.[1] Tether then mints the equivalent amount in USDT and transfers them to the customer’s wallet. When the customer wants to redeem their stablecoins, they send them back to Tether which will burn them and credit the equivalent in $ on the customer’s wallet.

Tether guarantees its reserves always are at a 1:1 ratio, however they choose to not fully disclose its composition. As of last audit published in May 2022, 5% of reserves are held in cash and bank deposits, 50% in US Treasuries, 25% in Commercial Papers and the remaining 20% diversified across Money Market Funds, Corporate Bonds, Commodities and Miscellaneous.[1]

Diving into legal mentions, as of May 2022, several company policies[1] are worth mentioning, as they have a strong impact on stablecoin’s peg or clients ability to recover their USD :


    • The only guarantee is that “Tokens are 100% backed by Tether’s Reserves”

    • No guarantees are provided on reserves composition, which are mostly diversified across several debt instruments[2]

    • Tether does not guarantee peg can be kept

    • Tether keeps full control over circulating supply and can “suspend or terminate services […] at its sole discretion”

    • Redemption can be delayed or refused at will, and Tether can “redeem Tether Tokens by […] redemption of securities and other assets held in Reserves”

    • “Reserves are not insured”


Risk assessment :


    • As for liquidity crunches, Tether could either delay redeem until assets are properly liquidated in the market, or simply deliver these very assets to redeeming customers.

    • Tether is more exposed to price crunches which could devaluate its reserves assets.

    • According to Tether’s legal documents, “Reserves are not secured” implying that if any of these banks were to default, face asset freeze or related issues, Tether’s coin supply could be undercollateralized.

    • If Tether was to bankrupt, reserves would not be insured.[3]USDT would instantly be undercollateralized and likely depeg quickly if strongly negative news were to arise about Tether’s financial fundamentals.

III.         USDC (Circle, Centre)

USDC is a fiat collateralized stablecoin issued by CENTRE, a consortium of which Coinbase[4] and Circle[5] are part of. Both companies are compliant with several strict US financial regulations. The lifecycle follows the same path as for an USDT. Circle’s reserves are guaranteed by the company to always be at a 1 :1 ratio. The company also guarantees USDC to always be redeemable at peg for USD.

Last detailed audit from October 2021 indicates a 100% allocation in Cash and Cash Equivalents, with no details as of the composition of the latter or the ratio between cash and equivalents.[6]

Diving into legal mentions, as of May 2022, several company policies[7] are worth mentioning, as they have a strong impact on stablecoin’s peg or clients’ ability to recover their USD :


    • Circle “commits to redeem 1 USDC for 1 USD”

    • No guarantees are provided on reserves composition, which appear to be spread among cash and cash equivalents

    • USDC will always be redeemable for USD, not alternative assets

    • In case of bankruptcy, reserves and deposits are not insured

Risk assessment :


    • As for liquidity crunches, Circle could face some struggle to liquidate its cash equivalents for USDs and delay redeem for customers.

    • Circle is less exposed to price crunches, assuming most of its reserve is held in short-term government debt instruments.

    • Circle’s primary custodian bank is BNY Mellon[8], a reputable financial institution which suggests a high-level of trust. We must bear in mind that BNY could still face issues such as fines, bankruptcy or assets freeze resulting in USDC under-collateralization.

    • Similar to USDT, in case of bankruptcy, funds are not insured, meaning that coin is susceptible to depeg in case of doubts regarding Circle’s financial fundamentals and health.

IV.         BUSD (Binance, Paxos)

BUSD is a fiat collateralized stablecoin issued by Paxos, which also acts as redeemer and custodian.

It is worth noting that Paxos is already issuing two asset-collateralized stablecoins independently from Binance: Pax Dollar (USDP, dollar-pegged) and Pax Gold (PAXG, gold-pegged).

Concerning BUSD lifecycle, like USDT and USDC, mint and burn will go through Paxos as service and protocol provider.

Reserves are guaranteed by Paxos to always be at a 1:1 ratio. The company also guarantees BUSD to always be redeemable at peg for USD. Reserves as of April 2022 indicate a 1:1 supply:reserve ratio in either cash or US treasuries.[9]

Risk Assessment :


    • Liquidity crunch risks are currently virtually inexistant as US Tbills are liquid, risk free investments easily tradable against USDs.

    • Price crunch also does not appear to be a risk for Paxos held reserves.

    • BUSD’s reserves are held by Paxos in “FDIC-insured bank accounts”. The opacity around Paxos’s chosen banks can be quite worrying.

    • In case of bankruptcy, it appears that the funds held in custodian banks would be insured as not part of Binance/Paxos balance sheets. Bankruptcy would then not be an issue.

V.         Comparing fiat collaterized stablecoins      

Auditor MHA Cayman Grant Thornton Withum
Rating auditor Bad/Medium Excellent Good
Reserves transparency Good Bad Good
Audited reserves quality Medium N/A Excellent
Deposit bank Cathai United Bank, Hwatai Bank BNY Mellon N/A
Deposit bank quality Medium Excellent N/A
Issuer reputation Mediocre Excellent Good
Redeem ease Bad Good/Excellent Excellent
Guarantees Mediocre Good Excellent

Rating : Mediocre, Bad, Medium, Good, Excellent


While USDT appears to have the most transparent reserves audit, Tether still refuses to disclose completely its investments: the detail of held commercial papers are still held secret while these could be a source of liquidity issue in case of mass redeem. Tether’s reputation is still negatively impacted by previous malpractices. Furthermore, it seems that many investors believe that its auditor’s quality is below that of USDC and BUSD.

In the meantime, while USDC could seem to be more suitable from its auditor and custodian, as its reserves are quite opaque since October 2022 it seems preferable to remain cautious as to its robustness and ability to sustain a depeg and massive increase in demand for redeem.

BUSD likely provides the best of both worlds in terms of audit, reserves quality, transparency, and reputation. However, Paxos’ aversion to disclose its custodian banks impels caution as we cannot assess their robustness and trustworthiness.

We thus believe that as of now, the offer of fiat collateralized stablecoins is not mature and trustworthy enough to provide suitable solutions for products we offer to our clients.

If appropriate following risk department assessment, stablecoins will be used for internal operations with great caution to take small and short-horizon positions.


[1] (Tether Limited, 2022)

[2] (MHA Cayman, 2022)

[3] (Tether Limited, 2022)

[4] (Coinbase, 2022)

[5] (Circle, 2022)

[6] (Grant Thornton, 2021)

[7] (Circle, 2022)

[8] (Lang, 2022)

[9] (Withum, 2022)


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