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1st November 2021 > > Lending stablecoins part 1.


Lending stablecoins is of no interest to me.

Market Snap

Market Wrap

When I started writing today’s CCC BTC was below $60k. It quickly regained that level. We have had a few dips below in the last two weeks, but none have proved to be enduring.

One day, we will breach $60k to the upside for the very last time.

Occasional Series – The CCC is woke

On numerous occasions, it has been proved that the CCC’s woke credentials are not up for debate.

I have always been somewhat embarrassed about my extremely limited French vocab and – until relatively recently – my competence to use only the present tense.

Lockdown did give me the opportunity to expand on this very narrow range of French conversational skills.

But it has been pointed out that, in much the same way that Chicken Tikka Masala – popularly known as the UK’s favourite dish – is a form of cultural appropriation, then so must be the act of learning a foreign language.

This latest iteration of wokeness might be welcomed by some public school kids who do not wish to learn Latin (can you culturally appropriate a culture that no longer exists?) but without translators, I suspect international relations might get a touch more difficult than even today’s Fish Wars with France.

Curious Cryptos’ Commentary – Lending stablecoins

Following a discussion yesterday, I was asked to put down some thoughts about lending stablecoins.

There are many platforms that offer returns for depositing stablecoins in return for regular payments of interest. The rates can be as high as 8%, 10% or even more. Compared to the paltry returns on offer at your local bank, or National Savings & Investments, these rates look superficially attractive.

Note that the low returns offered by banks is directly due to the 0.1% base rate set by the Bank of England. This may increase on Thursday but by no more than 0.25% and probably less.

It is my firmly held opinion that the government, through the medium of the Central Bank – which despite claims to the contrary is not independent of the government – should have no say in the setting of interest rates.

Such a situation would be a radical departure from the current global norm but would reap untold benefits. A discussion for another day perhaps.

The first observation about lending stablecoins is that this isn’t really about cryptos at all.

It does incorporate cryptos for the execution of the trade, but cryptos are not central to the idea, and they are not necessary.

There are many opportunities to earn interest on your money. There are several P2P lending platforms with high interest rates on offer. Junk bonds are yielding up to 6% or more right now (in Europe the average is at around 4%). You can probably theoretically get 100% in a week from the bloke standing at the bar over there.

And the last one is the key point – the return on your loan (in whatever form it takes) should reflect the risk you are taking.

If the return is greater than the risk, then the investment is worth considering against all other possible investments.

If the return is not greater than the risk, then the investment should not be considered at all.

Which leads to the thorny question of how to assess the risks.

There is no right way of doing that, but there are so many wrong ways.

How far you go down into this rabbit hole before you decide is entirely up to you. But I suspect the further you go, the less convinced you will be by the returns on offer for lending stablecoins.

The very first risk you need to assess is whether your choice of stablecoin really is a stablecoin or simply smoke and mirrors.

On the 9th of October 2021 the CCC took a brief look at Tether (USDT), the largest, and I think the first, stablecoin. Backed by collateral that is less than ideal (including crypto collateralised loans introducing correlation risk where it really should not exist) USDT maintains its peg against USD simply because people believe it.

I haven’t investigated the other stablecoins in much depth, but it would come as no surprise to find they are all very similar in this respect.

I know some readers have little faith in fiat, quite rightly pointing out that fiat is all smoke and mirrors. But I have a lot more trust in fiat than stablecoins. And in any case – if you don’t trust fiat, you cannot trust a stablecoin.

Once you have got over that hurdle (if you can), you need to look at the lending platform itself.

And this is where it is going to get tricky.

It is probably going to be very hard to do due diligence. A lot of these platforms are simply a website and not much more. Which is true of all Decentralised Finance (DeFi) platforms. But this is the beauty about decentralisation – there is no counterparty risk. There is market risk, there is smart contract risk, there is malicious actor risk. But there is no intermediary.

When you have an intermediary, due diligence is required. And that means answering at least these questions in detail:

i) Is the platform owned by an incorporated company?

ii) If so, where? Who are the auditors? What did the last audited accounts show?

iii) Where do they pay tax?

iv) Are they regulated?

v) If so, where? Which regulator? Has the regulator ever issued a negative notice?

vi) Does the company have a credit rating?

vii) Does the company have outstanding bonds, loans, or overdraft?

viii) What other assets does the company have?

ix) What is its leverage ratio?

x) How do you contact the company?

xi) Do they have a phone number? What happens when you call that number?

xii) Is there insurance in place?

xiii) If so, can you see the policy? What does it cover and where?

xiv) What is the pay-out date? Mt. Gov creditors have been waiting years …

xv) What is their track record? How long have they been around?

I could go on and on if you wish, but there seems little point.

It seems unlikely to me that you can get detailed answers to even some of these most basic questions, let alone all of them.

Lending stablecoins is an extremely high-risk proposition. My opinion, for what it is worth, is that even a 50% annual return would not get my attention.

But let me stress, that is my personal assessment, and clearly many people disagree with me.

That might be because they see lending stablecoins as akin to leaving money in a regulated and insured high street bank account.

Well, it aint.

I do need to stress that just because I assess the return as not worth the risk, you are duty bound to come to your own conclusions.

If you lend stablecoins to a platform, you may well end up earning 8% a year. And when all is said and done, if you get your money back plus 8% interest, that isn’t a bad trade in terms of the outcome.

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