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Goldman Sachs Launches USD Coin to Compete with Tether and Gemini USD

 

Circle Investments, a subsidiary company of Goldman Sachs, announced the launch of the USD Coin (USDC). USDC is a cryptocurrency that will maintain a one-to-one ratio with the US Dollar through massive stores of dollar reserves. This move is likely in response to the launch of the Gemini Exchanges’ launch of its own stablecoin called Gemini Stablecoin (GUSD). As the securitization of Bitcoin approaches, it brings the potential for massive profits. This is a major incentive for financial institutions to compete for a leading position in the market. A successful market needs a stable coin in order to gain public adoption. Therefore, anyone in the position to deliver one will gain an invaluable advantage over the competition and profit from the fees charged for buying or using them.

Context

Stablecoins are cryptocurrencies that have a stable value or contain low volatility against the price of Bitcoin.  They offer round the clock, instant transactions and settlement in USD. Their value remains constant regardless of any factors that affect the market, like news, hacking, regulation, etc. Their price is kept constant in three ways: by storing equal amounts of US dollars in bank accounts, by using crypto currency as collateral, and by using algorithms to control the coin supply. Tether is the most popular stablecoin, but others are eager to compete for a share of the market.

USDC

The USD coin is an ERC-20 Ethereum based token. It is easily compatible with most blockchains, exchanges, and networks. It has the backing of Circle’s banking partners and renowned investors like Bitmain. In May, Circle raised $110 million to support development of the USDC. It uses US dollar reserves (kept in US banks) to maintain stability.  Its main difference from its competitors is that it allows others to issue USDC tokens as long as they have the dollar reserves to back their issuances. Unlike Tether that has no designated auditor, Grant Thornton will audit USDC monthly.

Competition

The Gemini stable coin promises to be a strong competitor in the market for a variety of reasons. It is regulation compliant; vetted, regulated, and montitored by the New York Dept of Financial Services. It can be purchased at the Gemini exchange, transferred to other entity and changed back to USD with one catch – both parties must have a Gemini account. And it will be stored in a US bank insured by the FDIC; its balance overseen by an independent financial auditor. The audit reports will also include the tokens’ smart contracts and all data will be available at the Gemini exchange website.

There are a number of additional competitors like Tether, TrueUSD, Maker DAO (Dai), Carbon, Havven, Paxos, Basis, etc. All of them offer similar, variations, or native methods of stability and collateralization. Nevertheless, none of them have seems to have a full grasp on the market and their position remain neutral, even vulnerable. For example, Tether is a constant source of controversy regarding its actual dollar holdings and questionable price manipulation practices. The Dai uses a complex system of collateralized debt instruments and depends on market makers to maintain its stability; should any of these systems fail, the price of the Dai could fail.

Analysis

USDC is far more than another stablecoin; it represents an opportunity to large investors seeking to diversify their capital investments. It is also a carefully calculated project designed to provide an advantageous position before a Bitcoin ETF is approved. For example, for Bitmain, who currently dominates the mining market, a stake in a leading stablecoin will solidify its position and diversify its holdings.  For Goldman Sachs, USDC will provide a further inroad into the crypto market. Should the bank decide to offer custody for a Bitcoin ETF, it will have a leg up on the competition as it will own an exchange (Poloniex) and a Stablecoin.

Stability is a cornerstone in the future success of the market; without it, the market will always be subject to price volatility, manipulation, and rejection. Stablecoins are a necessity to the successful adoption of decentralized cryptocurrencies. The problem is that Stablecoins are inherently centralized, controlled, and regulated by single entities. In that, they are not different from the dollar. In addition, dollar reserves tie up huge amounts of money to cover the use of Stablecoins.

USDC will launch in a time where the market is likely to enter an unprecedented growth phase and it will not be alone. Andreessen Horowitz just announced that he is investing $15 million into the Maker DAO stablecoin, adding to the fray. Therefore, more competitors will enter the arena and challenge Goldman Sachs’ plans for the USDC. At the end of the day, the USDC has a solid foundation and sound business model. So, it has a very high chance to dethrone Tether and become a top ten cryptocurrency in the future.

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