Stablecoins have become a major crypto force in recent years. While cryptocurrencies have become the ideal asset for investment and a medium of exchange, they struggle with volatility. Given that most people want stability, stablecoins have got a positive welcome from the crypto community. This is evident given the massive number of tokens. All the stablecoins combined currently have a market cap of more than $118 million, a fourfold increase from the start of the year.
While the stablecoins have been gaining market traction, the concerns on the underlying assets have been an issue. The stablecoins gain their stability given that they are pegged with an underlying stable asset. For example, the USD Coin is pegged to the US dollar. The underlying assets should operate with the token at a ratio of 1:1 at all times.
Still, there have been concerns that most of the stablecoins do not have enough of the underlying assets. As far back as 2019, questions were already being asked about the status of Tether and its available assets. To quell the public concerns, most of the stablecoins have since been open to providing the public with more information about their financial standings.
As expected, Tether, the largest stablecoin by market cap, was one of the first to publish verified reserve finance data. However, at this point, it was a response to Circle, the creator of USD Coin, the second-largest stablecoin, having revealed their detailed financial information earlier. As every stablecoin seeks to open its positions, it is shaping up to be a transparency war.
How does stablecoin transparency work?
In the earlier stablecoin days, there was no pressure on transparency. The company only needed to assure the population about its operating model. Even though there might have been some reservations from the consumers, everything seemed fine. That is until Circle started the transparency wars.
For now, the stablecoins have to follow the industry standard and publish regular attestation reports. In the report, the coin reveals to an auditor all its reserves and the auditor then verifies the information for accuracy. The auditor then posts the report to the public.
For some time, the stablecoins could get away with only stating the amount on the reserves without the details. However, as the transparency war escalates they have to give details. For example, Tether has most of its reserves on commercial paper and certificates of deposits. USD Coin has its reserves on cash and cash equivalents. PAX and BUSD also have their reserves on cash and cash equivalents, while Gemini holds it within a money market fund.
Do stablecoins need more transparency?
At face value, it might seem a lot of work for the stablecoins to regularly take into account and inform the public of their financial status. However, it might be exactly what they need. The first way it will benefit them is by building consumer confidence. It’s the consumers who have been raising issues before about the status of the stablecoin backups. Also, the more informed the consumer is about a given stablecoin, the more they are likely to invest.
The information will also help in meeting regulatory provisions. As long as the coin can show they have stable underlying assets, it can always operate without the regulatory authority’s interference.
Therefore, while operating as a stablecoin has become tougher, it is ideal for the consumers and the general crypto market.
