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Fiat-backed stablecoins have one of the most reliable business models out there: collect money from depositors, buy short-term treasuries with rate X, and distr
by somethingsidont 3y ago
Fiat-backed stablecoins have one of the most reliable business models out there: collect money from depositors, buy short-term treasuries with rate X, and distribute interest to holders at rate Y < X (usually Y=0). Excess interest is pure profit.
For depositors, this is safer than a typical bank subject to bank runs - AS LONG AS the issuer actually holds the backing treasuries.
EDIT: Caveat here is the non-treasury part of the stablecoin backing reserve, e.g. reserves put in a bank. If the underlying bank has a bank run, the stablecoin has a bank run too (effectively without any FDIC insurance, since all stablecoin holders are lumped together, easily exceeding the $250k limit).
- RandomLensman 3y agoHolding the treasuries is not enough in a run, need to able to sell them at the required price, too.
- rcme 3y agoThe GP mentioned “short term” treasuries which, assuming something like an 7 day maturity, are very stable in price. Reverse repo is also an option.
- RandomLensman 3y agoIf everyone in the street knows you are under pressure, watch what happens - even getting $0.9999 back on the $ of your "deposit" would probably have people being upset. And 7 days to get your money is probably longer that what people expect.
- rcme 3y agoYou wouldn’t need to wait 7 days. The price of a short-term treasuries is purely based off of the current interest rates. Given that expectations for rates are generally priced in over a 7 day period, there is very little risk.
- RandomLensman 3y agoEven treasuries don't have infinite liquidity.
- rcme 3y agoJust a cool 750B a day plus 4T is repo operations.
- RandomLensman 3y agoI know! But I think being a forced seller would have implications (e.g., would repo lines even stay in place?).
- koolba 3y agoYou actually don’t if you throw in a clause in the redemption contracts that grants you up to X days of delay.
- RandomLensman 3y agoThat only helps if the treasuries get redeemed by then (and it also isn't quite what people would expect in terms of liquidity, I suppose. Kind of similar to other options then, e.g., looking at some recent situations, FDIC stepping in also doesn't seem to take forever for retail).
- koolba 3y agoThat’s exactly the point. If you have up to X days, you hold US treasuries with maturities of up to X days. You can also add clauses to the contract that allow earlier redemption into the underlying securities with redemption less than X days. There’s a lot of ways to skin this cat and still pocket the spread in the general case.
- RandomLensman 3y agoSure, but doesn't that business model kind of exist then in the form of money market funds (and somewhat related in bank deposits) anyway? What's the new thing from a customer and business perspective?
- koolba 3y agoBeing able to take part in the defi ecosystem. Being able to have all your money stolen with no recourse when you misplace your crypto pass phrase is new.
- somethingsidont 3y agoPoint taken. But since it's short-term, as long as they delay deposits for a short time period, there is no problem. Comparison with bank deposits: Consider March this year, when Circle-issued USDC stablecoin had a "bank run". It wasn't because of their treasury holdings, but because they put reserves in Silicon Valley Bank, which had a bank run. A transitive bank run, if you will. It only recovered because of FDIC insurance, which went above and beyond their legal $250k/person limit. Treasuries are backed by the full faith and credit of the US government, without any per-person or monetary limits.
- RandomLensman 3y agoIsn't the whole thing conceptually the same as or very close to a money market fund then (absent the specific regulations there)? What is the advantage?
- somethingsidont 3y agoYes, I would say so. Advantages are liquidity & ease of transfers (both within custodians like PayPal, and on public blockchains).
- RandomLensman 3y agoIf you want ease of transfer and liquidity then you are kind of back to a bank demand deposit, no? Why go the extra steps? If you want to transfer treasuries, that can be done, too.
- somethingsidont 3y agoI mean conceptually this is just VUSXX (with a lower interest rate probably), but you can buy something online with it through a PayPal checkout page, or send it to a friend through the PayPal app, or send it across borders in seconds. I do think that has value from an ease-of-use standpoint.
- 3y ago
- pjc50 3y agoUS treasuries are probably the one thing you can liquidate in huge quantities at par at almost any time. I suppose you're vulnerable to stupid duration mismatch issues like SVB.
- RandomLensman 3y agoGenerally true, but if you have a lot and people know you need to liquidate, you perhaps shouldn't rule out losing a little compared to your marks.
- jcfrei 3y agoIf the US treasuries market is no longer liquid enough for a (comparably) small player like PayPal then you got much bigger problems.
- FabHK 3y ago> For depositors, this is safer than a typical bank subject to bank runs - AS LONG AS the issuer actually holds the backing treasuries. And duration is really short, and rates don't shoot up too much. (You have no credit risk (as long as Congress keeps getting their act together wrt the debt ceiling), but still have rates risk, as measured by duration.)