Minting Stability

To our Valued Investors:

As cryptocurrencies have gained wider acceptance and have become better understood by the general public in recent years, some debate has materialized regarding the way these digital assets will be used in the future. Relatively few are convinced that Bitcoin and thousands of lesser known “altcoins” are, in their current form, viable replacements for the US dollar and other “fiat” (traditional) currencies. Much of this doubt arises from the notorious levels of volatility for which Bitcoin is known. Two years ago this month, at the worst point of the initial coronavirus selloff, Bitcoin had sunk to around $5000. In just over a year, in April 2021, the currency had more than “risen from the ashes” with a stunning 1200% climb to nearly $65,000. After that, Bitcoin sustained more than a 50% hit, sliding to $30,000 in less than sixty days. If you ask more than five random people what Bitcoin’s price will be next Halloween, you will be as likely to hear “$3000” as “$100,000”, and you shouldn’t bet your house on which one (if either) is correct. Bitcoin is, for lack of a better way to put it, all over the map. At the moment, it simply doesn’t work as a vehicle for transferring value when it comes to buying a cup of coffee or, much less, a car or a home. The risk of paying the equivalent of $750,000 for something and then seeing its value drop to $375,000 in a matter of weeks for no reason other than the whims of the forces pushing the currency around is way too daunting.

What, then, is the solution to the problem of Bitcoin and other “coins” being so unstable? Why, it’s “stablecoins”, of course! Unlike Bitcoin, stablecoins are a class of cryptocurrencies that offer price stability because they are backed by a reserve asset, such as traditional currencies, exchange-traded commodities like oil or gold, or any other asset that is readily available, easily transferable, and controlled by policymakers. With stablecoins, you have the best of both worlds — security and privacy afforded by crypto transactions and the stable valuations of fiat currencies. The first stablecoin, known originally as “Realcoin” before being renamed to “Tether”, debuted in late 2014. Tether’s most important function is to perpetually maintain a value of $1 per coin. To accomplish this, Tether claims to be collateralized with the United States dollar.

As with many things crypto, though, Tether is not without its issues. For instance, when making assurances, guarantees, and collateralizations with real money, one must be able to back up those claims to foster a sense of stability. The simplest way to accomplish this is with an external audit, which Tether has promised over and over again without ever coming through. Tether’s general counsel, Stuart Hoegner, ultimately threw up his hands and said that “an audit cannot be obtained [because] the big four firms are anathema to that level of risk”. In October 2021, Tether announced that it would pay a $41 million fine to the Commodity Futures Trading Commission for misleading claims that it was “fully backed by the US dollar”. Immediately after that, activist short seller firm and professional fly-in-the-ointment Hindenburg Research promised a $1 million reward for access to any of Tether’s official records that might serve as evidence that the coin is actually pegged to the U.S. dollar. Amplifying the overall level of concern, the stablecoin market continues to expand, and with that growth comes an increased potential impact on the broader financial system. Last October, the International Organization of Securities Commissions (IOSCO) concluded that stablecoins should therefore be regulated as financial market infrastructure. Moreover, politicians have increased calls for greater stablecoin oversight. Individual lawmakers from both sides of the aisle have called for regular audits of stablecoin issuers, and others have proposed bank-like regulations for the sector. Stablecoins have, in a relatively short time, swelled into a roughly $180 billion segment of the $1.8 trillion crypto economy. As this number continues to grow, so does the risk of stablecoin mismanagement or malfeasance causing devastating shockwaves across all kinds of financial systems. With such an ability to disrupt payment and settlement transactions, stablecoins have reached a point at which they need to be governed and monitored to protect the public interest.

Such a moment arrives, sooner or later, for every successful market in existence. The establishment of stricter regulation is usually welcomed by all participants, especially those who wish to ethically maintain those markets. At the moment of IOSCO’s October announcement, a door opened for Figure Technologies and its USDF Consortium partners to make a stand.

Last January, Figure Technologies and banktech and blockchain investment fund Jam Fintop began facilitating and promoting the adoption of the USDF stablecoin, which is (naturally) redeemable on a one-to-one basis for the US dollar. The USDF (United States Dollar Forward) coin is truly a “fiat-backed” currency collateralized with the dollar. If that sounds too much like the way Tether is described and promoted, one must understand the crucial differences. Whereas Tether engaged in a long series of unfulfilled promises that it would eventually get around to an external audit, USDF took a more commanding and transparent approach right off the starting block — or even before that. Back in November, members of the USDF Consortium met with U.S. banking regulators to discuss ways of issuing stablecoins that meet regulatory requirements. Across the table from the USDF partners were representatives from the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC). Understanding that increased regulation was not only inevitable for stablecoins but also a very positive development, the Consortium positioned itself to comply and continue to grow without the obstacles that are likely to confront their privately maintained and unaudited counterparts.

The makeup of the USDF Consortium is another key aspect of its heightened legitimacy in comparison to earlier stablecoin projects. Apart from Figure and Jam Fintop, the group consists of seven banks, led by New York Community Bancorp and including Amerant Bank, ConnectOne Bank and Primis Bank, which joined the group only last week. The fast-growing membership “is a testament to the Consortium’s ability to provide in-depth guidance and connect banks with turn-key technology solutions as well as the transformative role that blockchain payment rails can play in financial services,” according to Ashley Harris, chair of the USDF Consortium. The Consortium looks to significantly grow its membership of FDIC-insured banks throughout 2022 and beyond. The idea is to build an expansive network of banks that will promote the adoption of USDF and facilitate the compliant transfer of value on the blockchain. The “mutually beneficial arrangement” makes the many advantages of blockchain transactions available to traditional banks while the banks provide the blockchain with the stability of government-backed, FDIC insured money.

Each Consortium bank is equipped to create or “mint” USDF coins in tandem with fiat currency deposits. Not a single USDF will be minted without the transparent and provable backing of one dollar. For instance, a deposit of $50,000 at New York Community Bancorp can be converted into 50,000 newly-minted USDF that the depositor may use for Figure’s broadening array of financial services such as trading securitized home loan products, loan origination, equity management, private fund services, and many others. It’s hard to overstate the significance of this development that has begun to gain traction only this year. The efficiency and privacy of blockchain interactions is well-understood, but sceptics have asserted that the assets are unsupported and could go kablooey at any time. On its own, this topic is ripe for some passionate debate, but Iron Edge VC doesn’t have a dog in that particular fight. More to the point, we don’t need a dog in the fight because the USDF stablecoin, with all its backing, insurance, and regulatory blessings, makes the once-controversial issue entirely moot. In the very near future, blockchain efficiency will be married to fiat dependability.

Figure’s shares are not available for purchase on any stock exchange. It is a private company, much to the chagrin of those who understand the value of a well-crafted stablecoin’s ability to bridge the gap between blockchain assets and the more familiar government-backed currencies. To those who dwell in the second market and who have truly done their due diligence, Figure Technologies has been likened to the brass ring on a merry-go-round — much desired but out of reach for most riders. Iron Edge VC has, over the past year, developed a meaningful relationship with this promising innovator, and that has led to some very exciting investments in the company. Through our VC investment funds, we can escort you through this portal into this next level of financial transaction. If you would like to learn more, or if you know anybody else who would, please don’t hesitate to contact us by clicking “Get in Touch” below.

If you have enjoyed this article, visit the Iron Edge Blog for past updates on our pre-IPO opportunities and for general commentary on investment in the private marketplace.

As always, shares of Iron Edge investment funds are available on a first come, first served basis.

All the Best,

Paul Maguire

Founder & Managing Partner

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Paul Maguire

Founder And Managing Partner