Top officials join battle over safety of stablecoins

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Stablecoins — cryptocurrencies pegged to other assets, usually fiat currencies — have had a roaring start to 2021. Market leader Tether has risen from close to 21bn coins in circulation at the start of the year to over 62bn. Second-place competitor USD Coin has had even more momentous growth, jumping from under 4bn coins to close to 26bn. One operator, payments company Circle, is planning to go public in New York later this year; the other, cryptocurrency exchange Coinbase, joined the Nasdaq in April.

However, stablecoin’s rapid growth has attracted rising regulatory scrutiny, just as bitcoin did. In the past week alone, the US Treasury secretary and the chair of the Securities and Exchange Commission have publicly questioned stablecoins, prompting a rare pushback from the sometimes-elusive operators of the currencies.

The new pair of voices in the stablecoin discussion join a growing chorus of crypto critics. Earlier this month, Powell told the Senate banking committee that stablecoins were “growing incredibly fast” but lacked sufficient regulation. In June, Eric Rosengren, president of the Boston Fed, singled out Tether as a possible challenge to financial stability. In the same month, the Bank of England warned that stablecoins need to face “difficult questions” to avoid skirting regulation.

Stablecoins fill a vital role in the crypto-economy. They can be moved around far more rapidly than fiat cash, making it easier for investors to quickly get in and out of positions in more volatile cryptocurrencies such as bitcoin. But they have been dogged by concerns about the nature of the reserves backing their issuance. Other potential risks such as money laundering and their impact on monetary policy have also been raised.

Last Monday, Treasury secretary Janet Yellen convened the President’s Working Group — a committee of top US officials including Federal Reserve chair Jay Powell — to discuss the growth of stablecoins and the risks they pose. The group said that regulators expect to make recommendations on stablecoins in the coming months.

SEC chair Gary Gensler added more fuel to the fire on Wednesday, suggesting that coins whose value are “backed by securities” should have to work within existing securities laws. Originally, Tether and USD Coin claimed that every token was backed by cash, not securities. However, recent reserve breakdowns revealed that each actually included significant holdings of commercial paper — a type of short-term debt issued to large companies.

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On Wednesday, Tether CTO Paolo Ardoino and general counsel Stuart Hoegner countered some of the criticisms in a rare, high-profile televised appearance on CNBC’s Tech Check. “Tether is considered by many to be the backbone of the industry,” said Ardoino. “It has been driving innovation for many many years.” 

As regulators in the US and abroad take aim at the stablecoin industry — and consider rolling out their own digital currencies that could threaten the position of private coins — that status as “backbone of the industry” is increasingly unclear. The tale of Facebook’s Diem, formerly known as Libra, highlights how their ambitions may be curtailed. Facebook started with a sweeping vision to transform the financial system, which has now been replaced by a proposal to help governments implement central bank digital currencies. 

“We’ve been through all this before,” said Gary Gorton, a Yale professor and one of the authors of a new paper on “taming wildcat stablecoins”. The report explored historical precedents for stablecoins such as the state-chartered banks of the mid-19th century, which issued their own paper money backed by assets like bonds, but struggled to avoid bank runs. 

Runs have already emerged as a problem among the subset of stablecoins, which use algorithms to keep them pegged to other cryptocurrencies. IRON, a smaller stablecoin backed by USD Coin and decentralised finance token TITAN, faced a run in June, after TITAN’s value dropped close to zero.

“The technology [behind stablecoins] is very cool,” Gorton said, “but the issues with privately produced money are the same.” 

Fintech Fascination

More stories from the industry that caught my eye this week

FTX completes largest crypto fundraising ever Sam Bankman-Fried, the chief executive of cryptocurrency exchange FTX, is not short of ambition. Earlier this month he told the FT he hoped to one day be able to buy up traditional finance powerhouses like Goldman Sachs. That might still be some way off, but FTX took a big step this week as it announced the completion of the largest crypto-related fundraising round ever, raising $900m from a range of big names including Sequoia Capital, SoftBank and Third Point. The deal, which valued the Hong Kong-based, Antigua-registered group at $18bn, highlights continued investor demand for the sector despite a recent drop in crypto prices and increasingly vocal opposition from some regulators (and FT columnists — see below).

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Martin Wolf on central bank digital currencies Even some of the financial world’s most well-established and conservative groups are getting behind cryptocurrencies — custody banks are not traditionally associated with risky and innovative markets but this week BNY Mellon joined rival State Street in announcing its support for Pure Digital, a cryptocurrency trading platform. Still, some remain unconvinced — like the FT’s long-serving chief economics commentator Martin Wolf. In a column this week, Wolf argued that “fiat cryptocurrencies” like bitcoin should be illegal. He has more faith in the potential benefits of digital currencies backed by central banks, and urged policymakers to “ensure that the revolution in digital payments works for society as a whole”. Read the whole piece here.

Starling Bank cuts losses and makes first acquisition It’s not all crypto news this week. British digital bank Starling on Thursday claimed it was pulling ahead of its fintech peers as it published its latest annual report and a trading update that showed it is on track for its first full year of profitability. Starling’s performance was boosted by offering government-backed rescue loans to help businesses through the coronavirus pandemic, but the bank is now looking for more permanent sources of growth as these schemes finish. On Monday it took a first major step in that direction by buying specialist lender Fleet Mortgages. 

Quick Fire Q&A

Stay up to date with up-and-coming disrupters. Each week we ask a fast-growing fintech to introduce themselves and explain what makes them stand out in a crowded industry. Last month we wrote about the rise of hyper-specialist fintechs in the US, but the trend is also growing on the other side of the Atlantic, as this week’s Q&A shows. We spoke to Samir El-Sabini, chief executive and co-founder of Juni, a neobank specifically targeting ecommerce businesses.

When were you founded? Juni was founded in Gothenburg and Stockholm, Sweden in June 2020. 

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Where are you based? On four continents around the world. We are remote first, meaning we are based on the internet.

Where are your founders? Samir El-Sabini, chief executive officer, based in Gothenburg. Anders Orsedal, chief technology officer, based in Stockholm. Jonathan Sanders, chief operating officer, based in Copenhagen, Denmark.

What do you sell and who do you sell it to? We are building the best financial companion for ecommerce businesses. That means a banking solution that provides knowledge about their financial data, tools to propel and grow their business, and automation so they don’t need to do tedious financial tasks.

How did you get started? The reason we created Juni is because all our team comes from ecommerce and marketing — we ourselves had to manage finances and had been frustrated with the lack of a great product. 

How much money have you raised so far? We raised $2.5m in a seed round in November 2020 and closed our Series A round of $21.5m, this month.

What is your most recent valuation? We don’t talk about our valuation. 

Who are your major shareholders? Alongside the founders, it is Cherry Ventures, Partners of DST Global, and Felix Capital.

There’s a lot of fintechs out there — what makes you special? What defines us is the customised features and services we can provide toward ecommerce customers which no one else does. There is also a focus in the ways of thinking, not just a tech stack — if a customer has a problem, all our support teams also come from ecommerce, they understand. 

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