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The Winklevoss twins strike again.
Yesterday they announced the Gemini Dollar — a regulatory compliant stablecoin backed by the US dollar. The Ethereum-based token was approved by the NY Department of Financial Services, is subject to monthly audits by an external third party, and has all US dollars held in a FDIC-insured State Street account.
This is a big step towards crypto gaining acceptance in the regulated, legacy financial system. To understand what this development means, let’s start with a few basic questions:
What is a stablecoin? — A stablecoin is any cryptocurrency pegged to a stable asset (such as gold or a fiat currency).
Why is a stablecoin important? — Participants in the digital financial system need an easy, efficient way to transact digital assets (value) without fear of the digital asset losing value in the short period of time during the transaction. The volatile nature of Bitcoin, Ethereum, and other large cap crypto assets make it difficult to ensure no loss of value, hence the need for a stablecoin.
Have there been other attempts at stablecoins? — Yes, there are numerous efforts to build a stablecoin. The most popular is USD Tether (USDT) which claims to be backed 1:1 by the US dollar, but is surrounded by quite a bit of controversy. Additionally, there have been stablecoins backed by US dollars launched by TrustToken (TrueUSD) and Circle (USDC). These products have less controversy but also less notoriety. Lastly there are many upstarts attempting to build algorithmic central banks (Basis) or other nuanced methodologies.
What are the biggest issues with existing stablecoins? — Two main issues exist: (1) Market participants do not believe that the stablecoin (USDT is example) is actually backed 1:1 by the US dollar, which leads to low levels of trust. (2) All attempts to build an unpegged stablecoin are unproven and have yet to launch and scale.
Why is auditing so important? — Stablecoins are used as a medium of exchange or store of value because of the lack of volatility. In order to ensure the lack of volatility, all market participants have to know with 100% certainty that the stablecoin is backed 1:1 by the US dollar. The best way to accomplish this certainty is through periodic audits conducted by at least one external third-party. Once each audit is completed, the results need to be made public to ensure trust.
There is no promise that the Gemini Dollar will gain mainstream adoption outside of Gemini, the Winklevoss twins’ crypto exchange. Either way, the structure of this token has achieved numerous milestones, including NYDFS approval and State Street custody for a crypto-related business.
This development highlights an interesting point — existing laws and regulations may not be as bad as most people think. The idea of a “regulated” stablecoin, like the Gemini Dollar, should ensure a higher degree of trust and less use for criminal activity compared to the unregulated stablecoins.
Technologists are continuing their assault on the legacy financial system. Some are choosing to play within the existing rules and others aren’t. We actually need both approaches — the rule breakers push the limits farther, while the rule followers have the highest probability of turning the initial innovations into sustainable products and services.
The stablecoin evolution is a great example for institutional investors. You should be paying attention to the teams and projects at the edge of innovation, but you can have confidence that there are plenty of risk-mitigated investment opportunities that will present themselves if you are patient.
As I tell founders, “be the first, be the best, or be forgotten.” Since the crypto industry is still so nascent, it may prove to be more profitable as the best rather than the first.
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Visa, Citi-backed Chain acquired by Stellar startup: Chain, which raised more than $40 million from financial institutions including Visa and Nasdaq, in the process helping define the narrative for business interest in the technology through its partnerships and stage appearances, has been acquired in an undisclosed deal by Lightyear.io, a startup building on the Stellar protocol. Read more.
Paxos launches NY regulator-approved, USD-backed stablecoin: Blockchain Trust company Paxos has launched a U.S.-dollar backed stablecoin following approval from New York regulators. Backed 1:1 by the dollar, the Ethereum blockchain-based stablecoin, dubbed ‘Paxos Standard,’ has been approved by the New York State Department of Financial Services, which will exercise regulatory oversight over the asset’s issuance and trading. Read more.
Report: Nearly half of ICOs failed to raise funds since start of 2017: Nearly half of all initial coin offerings in 2017 and 2018 failed to raise any funds, while another 40% raised more than $1 million each, a new research report claims. Research and consulting firm GreySpark Partners studied the ICO market across the past several years, finding that as many as 890 token sales did not raise any funds at all. Read more.
Ripple's former legal chief joins crypto payments startup: Former Ripple general counsel Brynly Llyr is taking on the same role for crypto payments startup Celo. Llyr, who left Ripple last Friday, will take charge of "all aspects of legal strategy at Celo.” These include policy, regulation, partnerships and intellectual property. Llyr will also play a role in Celo's efforts to expand both within the U.S. and globally. Read more.
Car retail startup to launch blockchain marketplace with live vehicle history data: An automotive company based in London has developed a car-sales portal that is powered by blockchain technology. It features an exchange and marketplace that provides a detailed history of cars as well as data on trading and insurance risks associated with certain countries and cities. Read more.
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Nothing in this email is intended to serve as financial advice. Do your own research.