No surprise, a company you’ve never heard of called TrustToken launches the latest digital coin dedicated to the crypto-asset investor—the audited, fiat-backed cryptocurrency TrueUSD—and raises $20 million from traditional venture capitalists. In this case, a group of eight led by brand-namers Andreessen Horowitz, the VC firm of Web browser billionaire Marc Andreessen and Silicon Valley staple Ben Horowitz.
Over the last five weeks, TrueUSD has built a market cap of around $50 million because institutional money continues to pour into the crypto space. As of the week ending June 19, it had over $60 million in TrueUSD coins in circulation, all fully backed by the dollar and held in managed trusts with monthly audits by Cohen & Company.
Audited stable coins are an example of how the crypto space is getting wise to the fact that traditional money managers want in. But they want in to a market that looks a bit more like the traditional financial market they know well rather than token trading for handshakes inside something akin to a virtual Star Wars cantina.
TrueUSD launched in March. It is one of a handful of coins that are linked to fiat currency and part of a club of those so-called stable coins that get audited. It’s the audited stable coin, in theory, that brings a level of traditional, professional financial industry trust to the market.
“If you’re a cryptocurrency portfolio manager, you know there is usually not fiat on cryptocurrency exchanges so if you need a cash position to move in and out of a token, it’s better to deploy capital from a stable coin sitting in your wallet,” says Tory Reiss, TrustToken’s vice president of business development in San Francisco. “It’s not volatile like bitcoin.”
The top two exchanges in the world by market cap—OKEx and Binance—do not allow for fiat on their platform. Investors who are holding money there end up putting it in bitcoin or Tether, the best-known currency-linked coin. Tether is not audited.
Exchanges can take as much as a 10% cut in fees just to go from Tether to fiat.
“People don’t convert it to fiat because of the transaction fee and legal implications like taxes,” says Vajahaath Hussain, CEO of Almora, an India-based crypto-assets investment firm. “This is the major use advantage of a stable coin pegged to a fiat currency. Another limitation of fiat is the speed of transaction and scalability, which can be resolved by stable coins in the digital currency space,” he says. “Compared to other coins, a stable coin can be used for evading risks from unstable market scenarios.”
Some crypto-fund managers who did not want to be quoted on the record said they would continue using fiat when trading cryptocurrencies. But everyone agrees that an audited stable coin is the best stable coin, even if they are not using them.
“We have no reason to hold stable coin as an investment,” says Alexey Ivanov, portfolio manager of Polynom Crypto Capital in Moscow. “We can use fiat on our exchanges, but for trading, it is better to use crypto dollars instead of fiat dollars because it is faster and cheaper,” he says. “You’re talking about speed of minutes versus days for fiat.”
TrustToken launched in December 2016 with a staff of eight. It now has a staff of 20 and expects to hit 30 by December. The bulk of its hires are product managers with Wharton Business School M.B.A.s and former investors from the VC and investment banking world, all busy abandoning ship and swimming to the rocky, unsettled shores shining with virtual cash.
To the naysayers who believe bitcoin is a bubble and blockchain is merely an upgraded internet, all of this cryptocurrency trading seems like snake oil.
TrustToken raked in $44 million in TrueUSD, something that took early entrant Tether two years to achieve. According to their auditors, it has the same amount sitting in a cash account in real greenbacks.
The company claims it has been bringing in new funds and individual investors “every week.” Roughly 200 funds applied to open an account with it starting in January.
TrustToken has plans to launch a Hong Kong dollar, euro and gold product later this year or next.
The Hundredth Monkey
A growing number of developers and investors from around the world all believe that the best cryptocurrencies will be securitized and regulated. When that happens, a cryptocurrency portfolio will be as common as an alternative investment strategy portfolio that holds forex and derivatives. Goldman Sachs, family offices with ultra-high-net-worth individuals who can gamble in crypto markets, and endowments will discover the value in the market, if all goes well.
The list of true believers keeps expanding. The hundredth-monkey theory is playing out at this very moment. The consensus is that traditional investment firms will want to trade these things in larger quantities. Stable coins are the virtual fiat for those funds.
Russian investor and tech entrepreneur Gregory Klumov is developing a stable coin backed by the euro. He moved to Malta, a tiny island nation in the Mediterranean Sea that is racing to get a rules system in place for cryptocurrency investing. It passed its virtual financial currency law in 2018. Klumov was a consultant. His company, STASIS, launches their euro-pegged coin EURS on June 27. KPMG is the auditor, Klumov said. KPMG did not respond to requests for comment.
“It’s designed for institutional investors trading crypto funds,” Klumov says, adding that EURS will only be allowed in Malta for now. Exante, a Maltese broker and partner in STASIS, is the market maker. “We are building something here that bypasses traditional banking. You have countries, and Malta is surely one of them, that are preparing for the institutional push into crypto.”
There are around 15 stable coins in development. Tether and MakerDAO out of Gibraltar are the most liquid. Audits mainly provide crypto money managers the security of knowing their coin is a cheaper-to-trade version of fiat. One EURS is equal to one euro, held in an escrow account owned by the same holder of the EURS.
But while the market understands the need for a one-to-one cash coin in a crypto investment fund, not everyone is on board. Crypto is a hard sell. Even if it is tied to a traditional unit of measure, like the dollar. Nearly every portfolio manager has a cash position in fiat, but not every crypto fund manager has a position in a stable coin.
“I’m not sure there needs to be stable coin alternative to Tether in the marketplace at the moment. I’ve never used it or any stable coin,” says Chad Anderson, founder of Oceanside Digital Assets in Los Angeles, a small crypto-assets investor. “The only way to make sure that a stable coin is truly backed by cash is to audit it. That would be amazing.”