The debate between USDC exemplified by Circle and USDT associated with Tether brings many of the realities of crypto into focus. The perennial debate has been whether Bitcoin is an asset class lke Gold or Silver or is it a useful alternative currency to fiat.

Bankwatch Research Research and background on USDC and USDT.

The recent Compass Point report made two points, and thus fails as an analytical support document:

1. Market Penetration – USDT has that

2. Additional cost structure for USDC (Circle ) associated with regulatry requirements similar to banking, will hinder profitability

If we explore the second point first, this is reverse thinking. Is the average person going to deposit their savings without some knowledge that there is regulatory compliance supported by stress tests and Government institutions (e.g. OSFI in Canada) actively monitoring. The only alternative is cash under the bed, and there is a reason people did that and still do.

The Compass report also notes that USDT is strongest in foreign jurisdictions (Asia, Africa) where the predominant use among regular people is small transaction transfers. On the oher hand USDC is strong and growing in Western jurisdictions, and has the opportunity to support any size financial transfers and compete with SWIFT and consumer payment rails such as visa. There the debate will rest on who keeps the profit benefit. Either way this contributes to expanded productivity through driving vale and eliminating unneeded costs. Sorry Banks.

Compass also note that USDT has the greaest number of interoperability points between wallet types. This is actually a risk before we see compliance rules determining wallet transfers of that scale. If you are a genuine StableCoin you do not want to transact with non/ partial StableCoins. The delineation must be black or white to be properly productive. So a cowboy land near-StableCoin track is acceptable but it has to be clear and you cannot use the word Stable in this context,

In summary USDT has 

– weak currency matching by including 30% debts on balance sheets of ‘matchers’. This makes the banker in me cringe. I would never lend against an asset on a blance sheet. It is worth zero or less through contingent liabilities. 

– less costs becuase less regulation This is a bad thing not a good one as suggested by Compass Point.

Conclusion

There is a movement I sense to a two stream StableCoin environment. Full regulatory coverage supported by full fiat, ie trustable US dollar 1-1 matching (USDC – Circle).. This in comparison to the partial at best matching for USDT.

We have a live example where during a recent banking crisis Silicon Valley Bank held the dollars supporting USDC reserve requirements. When that Bank failed the Government stepped in and prioritised those funds thus maintaining USDC StableCoin reserves. In effect the StableCoin protections acted the way Bretton Woods stabilized Currency in 1947 after WW2. People have short memories and inadequate knowledge of financial history following the dramatic inflationary post war period and the inflationary infrastructure build required to bring the world back to normal.

USDT will always have failures and as a banker I would not regard them as meriting the StableCoin nomenclature. USDT favours market movers on large scale hoping to make money, but it cannot be viewed as a genuine alternative currency for mainstream.

StableCoin needs clear definition similar to Bretton Woods, and everyone needs to be re-educated on that period before they discuss StableCoin. Stable is and english word and words matter.