The murky waters of cryptocurrencies consist of many worthless tokens. The Gemini dollar (GUSD), a stablecoin issued by cryptocurrency exchange Gemini, is one of them.
The token serves no purpose in crypto or outside its ecosystem. It claims to be “regulated from day one” to alleviate user concerns about a run on its holdings. But its monthly attestations are suspect because they are issued by the non-existent branch of an accounting firm.
GUSD is also loaded with regulatory risk. It is a security and not a stablecoin, making it an easy and convenient target for authorities to regulate out of existence.
Where is GUSD Used?
From the crypto hat of taglines – the same one that contains folded paper strips of “decentralized”, “future”, “democratize”, “finance”, “payment” etc. –, Gemini has pulled out the future of finance. [Circle’s USDC is the future of payment, in case you were wondering]. But there is nothing futuristic or financial about GUSD.
Stablecoins are meant to bridge the worlds of fiat and crypto. A stablecoin’s fiat reserves, which back its circulating supply, ensure liquidity in an illiquid and risky crypto ecosystem for traders hesitant to put their money into it. Thanks to their fiat backing, stablecoins are among the most traded coins in cryptocurrencies.
For example, even though it is being phased out of existence, Binance’s stablecoin BUSD accounts for a significant quantity of trading volume on its home exchange. Tether is the crypto world’s most traded digital coin because it is available across multiple blockchains and on many exchanges.
GUSD bucks the usage trend for prominent stablecoins. It accounts for a measly 0.35% of the overall volumes at Gemini right now based on data from Coinmarketcap.
The stablecoin’s biggest trading pair there is not a cryptocurrency but the Singapore Dollar (SGD), meaning it is simply used as an exchange mechanism for fiat. That might still be a potentially useful use case, except a $79,000 trading volume figure for the trading pair on a single day, as of this writing, is hardly impressive.
GUSD’s presence on Ethereum makes it eligible for use on the many cryptocurrency exchanges that support the ERC-20 standard for tokens. [Tether is also an ERC-20 coin]. But the stablecoin has a narrow usage perimeter and its biggest market for trading remains Gemini.
Some stablecoins, such as USDC, find use cases on decentralized finance (DeFi) platforms. However, according to this post from Kaiko Research, GUSD is not widely used there either.
A Stablecoin Reserve Asset
In its search for a use case for GUSD, Gemini has stumbled into an unlikely one at MakerDAO.
Approximately eighty five percent of all issued GUSD is used as reserve asset for DAI, the stablecoin for MakerDAO. Leaving aside the dubious utility for both tokens, the arrangement has fashioned unique risks for Gemini.
While other stablecoins are at risk of a bank run, GUSD must contend with the existential crisis of MakerDAO’s governance voting to discard the use of its stablecoin as reserves (and unhinging its peg, in the process). It escaped this eventuality earlier this year, when MakerDAO “narrowly” voted in favor of keeping GUSD as part of their reserve assets.
Two factors contributed to the decision.
The first one was the presence of a venture capital firm which has invested in both companies. ParaFi Capital was important to the favorable outcome because it delegated its share of MakerDAO governance tokens to a party that voted overwhelmingly in favor of the measure.
The second reason was the 1.85% yield offered by GUSD on its holdings to MakerDAO.
A Regulatory Minefield
The offer of a yield makes GUSD an easy target for regulators because it converts a stablecoin with scant usage, and issued by a centralized authority, into a security. [By the way, GUSD has also offered mysteriously fantastic yields in the past].
There’s another question relating to yields. Gemini has been a prominent part of major scandals reverberating through crypto. Earlier this year, it accused lending firm Genesis, a major source of yields for its Earn program, of “beyond commingling” its assets and generating losses for its customers.
Genesis has since filed for bankruptcy. Where does Gemini plan to generate yields for an illiquid stablecoin now? Presumably, it could pass on yield from treasuries in its reserves to holders of the token. But that eats into its own revenues from the operation.
The SEC has already slapped a case against Gemini for offering securities through its Earn program. The exchange’s stablecoin GUSD is another easy target because it is an instance of a security parading as a stablecoin.
A Questionable Attestation
Finally, there’s the monthly attestation letter that it files with the New York Department of Financial Services (NYDFS). The attestation is carried out twice a month by BPM, an accounting firm based in California. There’s, of course, the usual argument of attestation versus audits and how the former helps stablecoins evade a full biopsy of their finances.
Gemini’s letter is problematic for that reason and another one. It has a cryptic signature: “BPM CPA (NY) LLC”. BPM doesn’t have an office in New York.
All of this leads us back to the existential question posed in the title of this piece. GUSD has no use cases that make it eligible to be a stablecoin. And, its attestation reports are issued by an office that does not exist.
The stablecoin probably does not bring in much money either, since Gemini is forced to share treasury yields from its reserves with MakerDAO to eke out a use case for it. That makes the stablecoin is a security and a sitting duck for regulators.
Why, then, does GUSD exist?