Circle Internet Financial Ltd. is joining the controversial world of stable coins.
The mobile-payments and cryptocurrency-trading firm is introducing a digital token pegged to the value of the U.S. dollar to be known as USD Coin. A consortium called Centre will serve as a platform for users to make deposits from traditional bank accounts, convert fiat currency into tokens issued by members to facilitate transactions and provide the ability to shift back to the greenback.
“Market infrastructure like stable coins will become the base layer that supports every financial application,” Jeremy Allaire, chief executive officer at Boston-based Circle, said in a phone interview. “It has to be legitimate, trustworthy, built on open standards. We are solving a lot of these fundamental problems that exist. That’s a huge difference from something like Tether, and we think the market will very quickly gravitate to that.”
Issuance of stable coins is rising as crypto enthusiasts seek ways to increase the use of digital tokens amid increasing volatility, especially in the wake of this year’s collapse in prices. Tether has grown to become one of the biggest cryptocurrencies, but is shrouded in concern it’s not actually backed by dollars as its creators claim. Much of that concern stems from Tether’s refusal to be audited and because it won’t disclose its banks.
“We have spent our time largely disregarding these allegations, instead letting our efforts, and the continued faith of our community of users, speak for themselves,” Kasper Rasmussen, a spokesman for Tether, said in a statement. “All Tethers in circulation are fully backed by U.S. dollar reserves.”
Circle’s USD Coin follows the introduction earlier this month of the Gemini Dollar and Paxos Standard, which received approval from the New York Department of Financial Services. Issuers of those coins say they offer great transparency, such as using a trust company to hold the dollars backing the Gemini Dollar.
While the Centre consortium is a wholly owned subsidiary of Circle, the company expects to spin it off as an independent organization in the coming months. Crypto mining heavyweight Bitmain Technologies Ltd. is among the members, Circle said.
Centre will act as a watchdog over its stable coin issuers, making sure they have required government licenses and banking partners that can hold their dollar reserves, and a certified public auditor that can — once a month — attest that their reserves match tokens issued, the company said.
The Tether rivals are starting to see traction. Gemini Trust Co. has issued $379,000 Gemini Dollars since Sept. 10, according to data tracker Etherscan. Paxos Trust Co. launched the Paxos Standard stable coin the same day, and it’s garnered $13 million so far, Chief Executive OfficerChad Cascarilla said in a phone interview.
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In addition to Circle’s Poloniex exchange, the USD Coin will be available on a slew of Asian exchanges, including Huobi, OKCoin, KuCoin and DigiFinex, and digital wallets like Coinbase will support it, Allaire said. Exchanges often use stable coins as a way to keep traders on their platforms.
Skeptics say whether stable coins live up to their promise is still an open question.
“I personally would not use stable coins as a place to keep your money,” said Sam Doctor, managing director and head of data science research at Fundstrat. “There’s a big disconnect between the concept and the implementation right now.”
The coins have major weaknesses, said Gil Luria, director of research at D.A. Davidson & Co. Some, like Tether, are backed by actual assets, but centrally controlled, so there’s a risk of the management absconding with the funds, or losing them to theft, he said.
Then there is the risk that a government decides to freeze the assets, he said. Some stable coins’ supply is controlled by algorithms, leaving them at risk if demand falls.
“Investors purchasing stable coins are seeking the benefits of digital currency with stability of government currency,” Luria said. “I am not sure that that’s possible. So people buying it may not appreciate that they are paying a lot for that feature, and it may not even be available.”