A recent move by one of the most important exchanges sends a clear message to investors.

The claim?

One stablecoin is no longer — or ever was? — reliable.

However, the motives for such claim could be, to the very least, biased.

Nevertheless, although this next battle in the stablecoin war will be bloody, the war in itself could have a pyrrhic winner, as all the fighting stablecoins share a common trait that could make them eventually die, because they all share the same flaw.

The battle of the three armies

Like a Hobbit sequel would, the stablecoin war is being fought by three entities: Tether holdings, Circle/Coinbase, and Binance, with their respective stablecoins USDT, USDC, and BUSD, all fiat-backed stablecoins.

But, hold on a minute, what is a fiat-backed stablecoin?

Note: For the sake of brevity, I’ll be only focusing on fiat-backed stablecoins, although many others proliferate in the crypto space (RWA-backed, algorithmic, crypto-backed, etc… but none apply to the context of this article so I won’t lengthen the article for no added value).

Fiat-backed stablecoins in 30 seconds

Fiat-backed stablecoins are blockchain tokens that are pegged to an underlying asset, that being the US dollar in these three cases.

By remaining stable with the value of the underlying asset, it allows users to keep their crypto portfolio stable while avoiding the hefty taxes that the offramp — selling your crypto for fiat — implies.

Please note that, in some countries, a swap between crypto assets is also a taxable event.

In the case of USDC, USDT, and BUSD, for every token issued there is an alleged US dollar stored in the reserves (or US Treasury bonds sometimes).

The keyword here being ‘alleged’, but we’ll get to that later.

But do these tokens come from?

The poisonous world of token printing

As with all things currency or similar, these tokens are issued from an entity (Tether holdings for USDT, Circle for USDC, and Binance for BUSD).

In the three cases, this issuer is a centralized entity with full power to mint as many tokens as they wish as long they have the US dollar reserves for it.

This allows stablecoin owners to redeem the underlying fiat currency whenever they want to (unless their stablecoin is used as collateral for a loan, of course).

Understanding this, what are they fighting for?

You guessed it, power.

A story of power and self-interest

The opacity that Tether, Binance, and Circle have toward their assets, especially Tether, has created serious doubts in the community about whether the issued stablecoins are really backed by real money.

If that wasn’t the case, the moment people decided to redeem their fiat they wouldn’t be able, because there wouldn’t be actual reserves to redeem from.

This increased risk is thus being used politically by all of them, as the issuers of these coins exercise their influence to foster the adoption of their native cryptocurrency.

Being in control of a token used by millions while having complete control over supply gives you central bank-like powers.

Scary shit.

And how are they fighting?

Banning stablecoins across platforms

The dispute was once moved in the shadows, but now it’s fully visible.

For instance:

The problem?

The consequences of these actions are a serious threat to many people.

A potential collapse is very dangerous

If this war generates the collapse of any of these three currencies, the consequences will be extremely negative.

As described earlier, many people hold the majority of their portfolio in stablecoins, to hedge against volatility, while avoiding having to offramp (sell to fiat).

These three stablecoins, combined, sum up to 130 billion dollars, or 15% of the entire Crypto market cap.

Added to this, considering that no other asset is considered safer than a stablecoin, the collapse of any of them would send a horrifying signal to the world:

“No one is safe in Crypto.”

But that’s not all.

These stablecoins, especially USDC, are heavily used in DeFi, as their low volatility makes them a great choice to use as collateral.

Do I need to continue to how bad this would be?

But, scarily enough, that’s not all.

What if all three are destined to die?

The risk of owning centralized stablecoins

I’ve said it many times and I’ll say it again.

Any form of centralization defeats the purpose of Crypto. However, the majority of the world, even inside Crypto, doesn’t realize this.

Instead, as long as their coins pump, they don’t really care about anything else.

The problem is that centralized stablecoins are equal to centralized power.

Holding too much power is always a problem

As these companies have complete control of the tokens they issue, they also hold the power to freeze assets, in a very similar way that retail banks could freeze yours in the event that a judge orders it.

We already saw this when Circle freezed all USDC wallets with USDC that could be traced to the banned Tornado Cash protocol.

As Circle is a US company, the moment the OFAC, part of the US Treasury Department, blacklisted Tornado Cash, Circle immediately complied and freezed all suspicious tokens.

Decentralization, where?

But that’s not all.

Stablecoin companies, especially those issuing fiat-backed stablecoins, have some of the shadiest accounting procedures in Crypto.

Inevitably, a question arises… a seemingly inoffensive question that represents the million-dollar question for the stablecoin market and, at the same time, the fuel that sparks the continuous stablecoin war.

Do these companies really have the reserves they claim to?

To reserve or not to reserve… that is the question

Let’s take Tether for instance.

They have a USDT circulating supply of 65 billion USDT tokens.

This means that Tether Holdings has, in theory, 65 billion US dollars in reserve.

$65 billion.

Let that sink in.

For that matter, for a long time Tether has been trying to prove its reserves.

For years.

Does it really take that long to prove you have X billion dollars?

Probably not.

So, if centralized issuers of fiat-backed stablecoins can’t prove reserves, what do we do?

The future of stablecoins

Trying to predict the future of stablecoins is not an easy task today, because:

Therefore, what should we do?

The answer to me is clear.

It’s what MakerDAO is trying to achieve with DAI.

Although the feasibility of DAOs is a talk for another day, they really seem to know what they’re doing with their stablecoin.

In short, decentralized protocols with diversified reserves.

Think about this:

One way or another, it’s too soon to jump to conclusions but, in my view, diversified reserves and a decentralized architecture that ensures censorship resistance (like Circle has proven to be incapable of), are probably the safest bet for a long-lasting Crypto stablecoin.