Banking Crypto Custody May Entrench The Position of Gold-Backed Stablecoins
On July 22nd, the Office of The Comptroller of The Currency (OCC), which is now headed by former Coinbase executive Brian Brooks, announced that any national US bank can provide custody services for cryptocurrencies to their customers. In what was hailed as a watershed moment for the broader crypto market, there’s a lot to unpack from such a swift and decisive decision.
Will banks launch their own standalone custody solutions for institutional clients? Will they buy major crypto custodians and integrate them into larger plans? How will this regulatory breakthrough help Silverbank, one of crypto’s few major banking providers?
One of the more interesting narratives is how the new regulation will impact the booming stablecoin (i.e., the crypto dollar) market that has flourished alongside the meteoric trajectory of Ethereum’s DeFi sector.
In particular, the role that major banks entering the crypto fold will have on reserves and the various stablecoin models populating DeFi markets today.
A Preference for Gold
Numerous types of stablecoins populate crypto markets today. Convertible fiat-backed reserve models (e.g., Tether, USDC, Gemini), crypto-collateralized (e.g., Maker Dai, sUSD), and synthetic versions with elastic supplies (e.g., Ampleforth) are just a few.
What’s evident is that monetary tinkering is thriving. Moreover, it’s uncertain whether or not a retinue of crypto dollars can exist side-by-side, or if the majority of users will gravitate towards a leader — such as how Tether dominates the USD stablecoin market right now.
But that all may change now that banks have an invitation to the crypto party.
For example, the most popular stablecoin model currently is the redeemable reserve system. A user buys a USD digital-analog (e.g., USDT) from the issuer, who backs the blockchain version of the USD with a 1:1 peg of USD, sometimes in short-term treasuries, in a bank reserve. The user can trade the stablecoin with compelling intra-network privacy and without encountering KYC barriers until redeeming the USD from the issuer.
Similarly, stablecoins backed by gold are generally redeemable for gold bullion under a similar model. According to Castle Island Ventures’ recent report on crypto dollars:
“Some issuers offer users fully reserved gold-backed tokens instead of dollars, as gold has a different return profile. These are generally redeemable for physical gold bullion – albeit typically subject to a minimum threshold constraint. A full reserve Bitcoin standard advocated by some would behave similarly, with banks accepting Bitcoin deposits and issuing IOUs redeemable for Bitcoin held in their vaults. Consortia like Liquid are experimenting with this model by issuing assets redeemable for physical Bitcoin like LBTC.”
The paragraph raises an exciting prospect pending the recent OCC regulatory move.
Namely, would it be in the interests of banks to custody gold-backed stablecoins from different issuers? Yes, it would. The answer lay with the ability of banks to extract value from the incorporation of gold-backed stablecoins.
With gold-backed stablecoins, banks would be inclined to deal with an asset that is the trusted, safe-haven asset of the world. An immediate advantage of gold-backed stablecoins includes their redeemable claim on precise amounts of gold, improving redeemability beyond many of the problems drawing from the poor ownership model of gold ETFs — “paper gold.” Gold-backed stablecoins, which can be stored on any hardware wallet, are also drastically more auditable than physical gold itself.
For retail investors and institutions alike, the broad onset of gold-backed stablecoins will appear a no-brainer in hindsight. Easier exposure to an asset that can be transferred anywhere in the world and with a transparent auditability trail? Count them in.
Under the OCC guidelines, a bank could custody the gold backing the stablecoin and even the stablecoin that the gold backs on behalf of clients. If bank customers opted for a gold-backed stablecoin to hedge against long-term inflationary pressure, they could simply swap between USD and the gold-backed stablecoin within the bank’s interface.
From the banks’ perspective, it can be broken down into an even simpler logical context. Would a bank feel more comfortable offering custody for a digital version of gold, Bitcoin, or an altcoin?
Gold-backed stablecoins will likely be first.
Theoretically, banks could act as the issuers of gold-backed stablecoins themselves, but the technical details for circulating ERC-20 tokens is likely something that they would outsource to an issuer. That’s why the position of gold-backed stablecoin issuers may be entrenched.
Gold-Backed Stablecoin Issuers Are Ideally Positioned
Imagine having access to more transparent and transmissible versions of gold that exist on open networks and are available directly from a bank account. Many more investors would favor holding gold-backed stablecoins, even if the issuer was a third-party company.
The only caveat? That issuer would need to be a reputable one. But that’s currently not a problem for some issuers.
For example, VeraOne, a gold and precious metal-backed ERC-20 token on Ethereum follows the redeemable gold reserve model for a stablecoin. VeraOne is a subsidiary of The AuCoffre Group, a gold industry giant, which offers the company some unique advantages as an issuer compared to other incumbents like Paxos Gold and Tether Gold.
“VeraOne has a ten-year leading expertise in the sale and safekeeping of gold,” details Jean-François Faure, CEO. “For its practicality, speed, and immutability, blockchains allow us to have a permanent and tamper-proof ledger of our customers’ property. Ethereum guarantees the integrity of the transactions, while we keep the gold safe.”
Unlike its competitors, which have jumped on the gold-backed stablecoin bandwagon, The AuCoffre Group has been selling gold long before the dawn of stablecoins. Blockchains are just another tool to sell a physical product that gold industry incumbents like The AuCoffre Group have known for years. Such experience goes a long way in convincing banks of the authenticity of blockchain technology as a complement to a legacy asset’s audit trail.
Should US banks elect to provide custodial services for gold-backed stablecoins, they’re not going to choose the issuer backed by a nebulous foreign company still sparring with the NYAG (e.g., Tether). Nor are they likely to choose a fiat stablecoin issuer converted to gold-backed stablecoin issuer whose fiat stablecoin volume is dominated by a massive foreign Ponzi scheme.
Once banks enter the fold, reputation and regulatory status catapult to the front. For VeraOne, that’s a blessing and could prove an appealing route to penetrate the US gold-backed stablecoin market.
For some additional context on just how large the opportunity could be, gold ETFs are enormously popular for their low minimum investments and ease of exposure to gold.
You don’t have to physically store the asset, but it comes with significant counterparty risk. Gold-backed stablecoins significantly reduce the counterparty risk by linking explicit gold amounts to the circulating tokens. With direct access via banks, gold-backed stablecoins could absorb vast portions of the gold ETF market simply by furnishing the significant advantages of accessibility and flexibility.
Banks are not inclined to list other crypto assets that are not analogs of what they’re familiar with — such as gold. Crypto dollars, sure, but that means circumventing current moats (e.g., SWIFT), and a digital dollar seems almost inevitable at this point. Banks don’t currently want to issue Bitcoin-backed IOUs either, save for maybe Wyoming-based Avanti who appears to be making rapid regulatory progress.
Gold-backed stablecoins are a natural complement to banks and are a development that they will likely not ignore with new OCC guidelines opening the floodgates to crypto custody. Crypto dollars may be the most expressive stablecoins for many global users today, but with the Cantillon Effect lingering overhead from unfettered money printing, expect more people to gravitate towards the world’s reserve asset, gold. This time, however, it will be infused with the benefits of blockchain-based tokenization.
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