USDC losing market trust in the aftermath of Tornado Cash
USDC losing market trust in the aftermath of Tornado Cash
septembre 08 2022

Stablecoins are crucial for the development of crypto economy, providing it with the connection to the fiat world. They make up 15% of the total crypto market cap, participate in most DeFi trading pairs, and penetrate almost every part of the crypto space.

For an asset with such a broad reach, censorship-resistance is key. Unfortunately, 93% of circulating stablecoins are issued by only three companies – Tether, Circle and Binance, which centrally manage stablecoins’ “master contracts” and have a possibility to update them with blacklisted addresses. This feature is automatically blocking outbound transfers for any address holding the blacklisted stablecoin, effectively making it useless.

This is a major failing for cryptoassets, but – at least for now – centralized stablecoins have proven themselves more stable than their decentralized versions, which explains users’ choice.

Good news is that the three stablecoin leaders are based in different jurisdictions – the fact that made a big difference recently, with the US Treasury sanctioning a list of addresses linked to the crypto mixer Tornado Cash. The ban was widely considered as a governmental overreach hindering users’ privacy, and among stablecoins, only US-based Circle, the issuer of USDC, has reacted to it. The company has frozen about 75k of USDCs belonging to Tornado Cash users, pushing the crypto space to acknowledge the risks they bear when using USDC. Some of the first reactions include:

➡️ Tether, market leader that had been losing ground to Circle for over a year, saw the trend reverse: USDC decreased its supply by $3 billion since the incident, while USDT gained $2 billion,

➡️ MakerDAO, decentralized issuer of stablecoin DAI (4.5% of stablecoins’ market cap), is discussing the possibilities to replace USDC (currently used as over 50% of its collateral). In the meantime, it lost $1 billion of market cap.

➡️ Binance USD has increased its circulation by $2 bn since the ban. Binance too moved further to distance itself from the USDC: world’s largest exchange will delist USDC by the end of September, auto-converting it to BUSD. According to Binance, this is done in order to “enhance liquidity and capital-efficiency for users”.

Circle looks quite desperate, and the recent proposal coming from Coinbase, one of its investors, only pointed that out: Coinbase proposed to keep $1.6 billion of USDC from MakerDAO’s collateral in its custody, in exchange for an annual yield of 1.5%. This would gain MakerDAO an additional $24 million of yearly revenue, but, of course, goes against its founder Rune Christensen’s fear, succinctly put as: “If we get nuked by the U.S. government, we simply die.”

The US government is a potent organization that most people and businesses try not to meddle with. Circle is an American company, backed by other American companies, such as Goldman Sachs and Coinbase – and none of them wish to fall in the crosshairs. Crypto, however, is a worldwide phenomenon, and if a user can avoid US-controlled assets, they will – and that’s what’s happening now.

Circle’s decision also put back in the spotlight decentralized stablecoins. This week DeFi protocol Curve posted the code for its upcoming overcollateralized (and obviously decentralized) stablecoin crvUSD, while another DeFi player Aave recently saw its DAO approving its stablecoin project.

The crypto landscape is changing, and it looks like distrust of US-incorporated entities is an emerging trend.