In the ever-evolving landscape of digital currencies, two heavyweights have emerged as cornerstones of stability – USDT & USDC. Join me as I decipher their nuances!
Please note, nothing I discuss in this article is to be interpreted as financial advice, always do your own research before committing to anything.
A Stablecoin is a digital cryptocurrency that maintains a stable value against an external asset class. In the case of USDT & USDC, they are designed to maintain a 1 to 1 peg against the US Dollar.
To create those stablecoins, US Dollars are sent to the respective issuer to be stored securely in their reserves so they can back every stablecoin in circulation. Once those stablecoins have been redeemed for US Dollars, they are ‘burned’ or destroyed.
Now I know what you’re thinking, why not just hold US Dollars? The reason why stablecoins are so popular is because they live on the blockchain. They are a convenient alternative and are designed to mimic the price action of the US Dollar. Below are some advantages of using stablecoins:
Two of the most commonly used stablecoins are USDT and USDC – but what sets them apart? Let’s dive in!
Tether Limited Inc launched in 2014 and is owned by iFinex Inc which also owns the cryptocurrency exchange Bitfinex. Tether is a blockchain-enabled platform designed to facilitate the use of fiat currencies in a digital manner.
USDT (USD Tether) exists on several different blockchains, but it was originally created to use the Bitcoin network as its transport protocol to allow transactions of tokenized traditional currency. Tether on the Ethereum blockchain, as an ERC-20 token, is a newer transport layer, which now makes Tether tokens available in Ethereum smart contracts or decentralized applications on Ethereum. As a standard ERC-20 token it can also be sent to any Ethereum address.
USDC launched in September 2018 by Centre Consortium, a collaboration between Circle and Coinbase. Their mission is to provide governance and standards for the future of the digital financial ecosystem. Circle is a peer-to-peer payment provider while Coinbase is a crypto exchange and publicly listed company. Together they make up the Centre Consortium which issues USDC.
USDC exists natively on several blockchains with more integrations expected this year. USDC is also classified as an ERC-20 token.
One thing that should be a top priority when determining the stablecoin you are going to use is how transparent it is. Regulation is something that should be considered but its important to note that stablecoins are not classified as ‘securities’ so they are not required to adhere to regulatory oversight by the Security & Exchange Commission.
USDC is considered regulated as the Centre Consortium has agreements and partnerships with regulatory authorities to ensure compliance with relevant laws and regulations. On top of that:
Circle also provides monthly attestations of its reserves and has provided an independent third-party audit in 2020.
Tether on the other hand, while they preach transparency have yet to provide an independent third-party audit. They do, however, provide monthly attestations of their reserves.
They have also faced an incredible amount of public scrutiny around their transparency or lack thereof. Some of the concerns are as follows:
The list seems to go on when it comes to transparency issues with Tether, and it raises a lot of red flags.
It can be confusing to understand exactly what the difference is between the two. At first glance one might think that an attestation is perfectly fine but let me break it down for you:
Audit: Think of an audit like a thorough checkup for a company’s financial health. Just like you visit a doctor for a checkup, companies have audits to make sure their financial records are accurate and reliable. An audit is like a detailed investigation done by a trained expert called an auditor. The auditor looks at all the financial documents and transactions of a company to make sure they are correct and follow the rules. It’s like making sure all the numbers add up correctly and that the company is being honest about its finances.
Attestation: Imagine you have a friend who needs to prove that they’re really good at playing the guitar. You might write a note or give a statement saying, “Yes, I’ve heard my friend play the guitar, and they’re really skilled.” This note is like an attestation. It’s a formal way of saying that you’ve seen or experienced something and you’re confirming its truth. In business, an attestation is when a professional, like an auditor, gives their official statement about a company’s financial information, processes, or controls. It’s like the auditor saying, “I’ve looked at this company’s records, and based on what I’ve seen, I can confirm that certain things are true or accurate.”
In short, an audit is like a detailed checkup of a company’s financial health, and an attestation is a formal confirmation by a professional about certain facts related to a company’s finances or operations.
Under no circumstances is an attestation report the same as an audit. The Public Company Accounting Oversight Board (PCAOB) have said that while crypto companies may use Proof of Reserves (PoR) reports to bolster consumer confidence, they are not formal, rigorous audits, do not provide any meaningful assurance to investors and are not conducted using uniform audit standards.
This is a quote as per the PCAOB:
“As a general matter, these PoR Reports purport to provide an asset verification for an asset type at a particular moment in time, subject to significant limitations based on the procedures performed. For example, the procedures undertaken likely do not address the crypto entity’s liabilities, the rights and obligations of the digital asset holders, or whether the assets have been borrowed by the crypto entity to make it appear they have sufficient collateral or “reserves” in excess of customer demands. For this reason, if the assets were borrowed by the crypto entity at the time of the PoR engagement, investors would not know based on the PoR Report. Also, because PoR Reports concern digital assets at one point in time they do not provide any assurance about whether the assets were used, lent, or otherwise became unavailable to customers following issuance of the PoR Report. Moreover, PoR Reports also provide no assurance regarding the effectiveness of internal controls or of governance of the crypto entity.”
So as an example, if a company was to borrow $1 billion dollars and then have an attestation report conducted that confirms ‘yes they have $1 billion dollars’, submit that report as being true and then straight after repay that borrowed amount, investors would not know any different.
I’m sure you can see why many would prefer an audit over an attestation.
$1.9B in Cash at Reserve Banks (7.25%)
$24.3B in Circle Reserve Fund (92.75%)
$90 million in Cash at Reserve Banks (0.1%)
$86.4 billion in Tether Reserve Fund (99.9%)
Without a proper audit we cannot guarantee that these figures are 100% true.
Going off this, approximately 70-80% of USDC Reserves could become readily available in an emergency without losing much value while USDT Reserves are approximately 20%.
USDT obviously has a much larger market capitalization compared to USDC but in the event something drastic happens and people flock to withdraw their USDC & USDT I personally think USDC has the safer portfolio distribution.
In both cases, the organizations behind these stablecoins have control over issuance, reserves, and other operational aspects, making them centralized.
Tether and Centre Consortium have the authority to issue and manage tokens and they can implement mechanisms in the smart contract code that allow them to freeze or pause specific tokens under certain circumstances. These circumstances could include legal requirements, security concerns, regulatory requests, or suspected fraudulent activity.
Using a centralized stablecoin like USDT or USDC means relying on the organizations policies, procedures, and decisions. While this centralized control can provide some benefits, it also comes with the potential for limitations on your ability to use or access your tokens. If your someone seeking a more decentralized option that gives you greater control, you may consider using the DAI stablecoin by MakerDAO.
Before deciding which stablecoin you are going to use I would urge you to go to their website and read the Terms & Conditions.
As you can see, neither USDT nor USDC are perfect. Depending on what features you personally value and what risk profile you are comfortable with will determine the stablecoin you should use.
Tether has the biggest market capitalization and the most trading pairs to trade but it’s obvious that it lacks transparency and regulation. Even so, it’s still ranked number one and its balance sheet looks ten times better than it did a couple of years ago.
USDC takes second place with a market cap a third the size of Tether. It follows a much stricter regulatory framework and seems to be a great deal more transparent than Tether. From a security perspective USDC shines a lot brighter than its rival.
Ultimately, your choice between USDT and USDC should align with your risk tolerance, investment strategy and use-case objectives. As the stablecoin landscape continues to evolve, staying informed about updates, developments and changes in the industry will be essential to making the right decision for your financial needs.
I hope this information I have laid out for you in this article has been helpful and remember that regardless of the stablecoin you choose, make sure you conduct your own research.
