Sometimes the obvious stuff takes a minute to come into focus.
Can we just start using fiat: USD; EUR; Real; …?
If that is possible that would be a nice place to work toward say over the course of six months or a year.
Because of the regulatory requirements mentioned above, I do not think it would be legal for the reserve to hold fiat with the purpose of backing Mento stable assets. So in my opinion, this is simply not an option right now. Also from a decentralization perspective, I personally do not believe pivoting to becoming a fiat-backed stablecoin would be the right thing to do.
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I agree that choosing to interact with fiat poses a philosophical dilemma.
Personally I believe that a compromise with the world needs to be worked out, it is the very real context that we all live in.
The question for me is which priority is more important: banking the unbanked/underbanked masses ‘within the context they are living in’ or; sticking hard to a theoretical ideal? My bias is to the former.
Social change takes time, lots of time and a fair bit of compromise.
It’s gonna be really hard to bank the unbanked in countries all over the world if you have to deal with fiat all over the world, and all of the jurisdiction laws… it’s a huge operational and compliance PIA.
Practically, if we just focused on making cUSD very solid, and relied on good enough arbs to maintain the right price between cUSD : cEUR / cREAL / cXYZ other country stable, then the problem becomes a lot simpler than trying to deal with arbitrary many fiat & countries.
If there is a crypto friendly place (Dubai or Switzerland or …) where Celo can register and interact with Forex and fiat directly then the backbone, even if centralized, can at least work and prove the concept in the wild. The centralization problem can be addressed over time as other jurisdictions like El Salvador, Tonga, and African countries adopt more friendly stances.
You don’t have to build it all out at once.
I no of no country that forbids people from interacting directly. If a buddy of mine in the USA needs $20 cash and they can pay me back via Celo that’s legal. If I want to substitute vegetables for that Celo payment it works the same. I do need to find a way to get back to fiat though, cheap, really cheap. That’s because I gotta pay my bills right now in fiat. If I can accept Celo and Celo can help me trade that for fiat I can run a small business that way.
There are compromises to be made and risks surely but if they are addressed directly and in good faith with the regulatory bodies the build out will come.
IMO hiding in an unregulated bubble is easier surely, but it is a riskier path.
On Question 1: I think out of the two, 30% stable asset allocation + 100% floor is the safer option. Markets can be irrational. E.g., there were periods in the IRON/TITAN crash where IRON was still 75% collateralized with USDC but IRON still traded below 0.75. I.e. the “one-to-one” backing was not sufficient to restore trust (see here).
On Question 2: One the one hand, we want to protect against crypto volatility with the stable asset basket, i.e. we should have as little crypto volatility exposure with it as possible. DAI might be affected through its ETH collateral and if we believe that DAI would survive a crash because of its USDC collateral, then I think we should go with USDC directly.
On the other hand, there seems to be a consensus that DAI has advantages over USDC because of decentralization. So in a sense, if we completely replace DAI with USDC we are replacing one risk (crypto volatility) with another (centralization). Personally, I think the volatility risk is more pressing, so maybe a 50-50 split DAI USDC could work (which would overweigh USDC through the DAI collateral)?
Medium to long-term, I would say both are still “too crypto” and truly exogenous assets (e.g. RWAs) should be added as collateral.
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Hey Mark,
I think your post is very relevant in this thread.
One of the things that has come into focus because of recent events and discussions is that the Celo assets in the reserve poses the same risks to this protocol that Luna posed for Terra. In a de-pegging situation the value of Celo could go to essentially zero.
So, it’s the non-Celo assets that actually act as the reserve that could repay the coin holders.
Given that risk I have suggested in another discussion that the Celo assets not be counted as part of what we consider the reserve that is backing the stable coins.
At this minute the total reserve value is $268,632,850
The Celo portion value is $104,220,663That means the non-Celo reserve is $164,412,187
The outstanding supply of stable coins is $100,592,110The current ratio of non-Celo assets to outstanding supply is at 163%
That’s not the end of the assessment though.
In the current market conditions it is not unreasonable to fully expect BTC and ETH to drop considerably. Estimates for BTC during this bear cycle suggest that we could see prices for it in the neighborhood of $20,000, so roughly a one third drop from today. It is reasonable to expect ETH to drop more than that but for today I’ll keep the math simple.
Non-Celo $164,412,187
Minus 1/3 $54,804,062 to consider value at a reasonable probability of market price in the near future
Net probable value of non-Celo assets available to cover stable coin debt $109,608,124The realistic colateralization percentage after correcting for market conditions and real risks is roughly 109%.
So in reality, Celo isn’t over collateralized.
I agree that the stablecoin needs to be designed to withstand a bankrun and in case of a bankrun the CELO token will be almost worthless right now. I also agree that there is at least 30% more downside potential for BTC & ETH. So your I follow your calculation. At current price levels of BTC & ETH the treasury is overcollateralized though.
How would that calculation change if the treasury grows by 100M or 500M at current CELO, BTC & ETH price levels?
Good morning @Ikarus
I think that the growth in the reserve assets that are to act as the backstop to protect the coin holders will need to be in stable value assets.
It’s just math, there’s no way to over-collateralize by the same numbers we have now in the long run there’s simply not enough profit.
My thought is that regulations will probably mandate something akin to 108% of the outstanding coin value in ‘approved’ assets if Celo wants the coins to be used as a private currency. That is roughly what USA insurance companies have to do now when providing financial instruments.
Currently Celo is counting the native asset as a reserve asset, that probably isn’t going to appease any regulatory body. Nor will BTC or ETH or DAI.
Finding or making a regulatory niche is the wildcard here. If that niche is instead more like say Western Union, where Celo is ‘just’ the backend, the accounting system, that’s a completely different animal.
Thank you. I would still like to understand how the treasury changes if we were to grow with the current rules and market prices. Would the relative composition change or automatically be rebalanced to the current ratios?
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USA draft stable coin law. Full draft here: Lummis Bill Draft | PDF | U.S. Securities And Exchange Commission | Securities (Finance)
“9804. Settlement finality.
“9805. Notice to customers; enforcement.”.
TITLE VI—RESPONSIBLE PAYMENTS INNOVATION
SEC. 601. DEPOSITORY INSTITUTION ISSUANCE OF
STABLECOINS.
The Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.) is amended by inserting after
section 14 (12 U.S.C. 1824) the following:
“SEC. 14A. DEPOSITORY INSTITUTION ISSUANCE OF
STABLECOINS.
“(a) In General.—A depository institution may issue a payment stablecoin as provided by this
section.
“(b) Payment Stablecoin Assets.—A depository institution shall maintain high-quality liquid
assets under this section equal to not less than 100 percent of the liabilities of the institution
relating to payment stablecoins. In the case of an insured depository institution described in
subsection (k)(1)(A) that engages in on-balance sheet lending activities, assets under this
subsection shall equal not less than 100 percent of the liabilities of the institution related to
payment stablecoins and the assets shall be held in a segregated balance account at a Federal
Reserve bank, in a segregated deposit or off-balance sheet account, or in another equivalent
manner that ensures the segregation of the assets. Eligible high-quality liquid assets under this
section shall be comprised of the following:
“(1) Cash.
“(2) Balances at a Federal Reserve bank.
“(3) Foreign withdrawable reserves, consistent with the legal tender in which the
payment stablecoin is denominated or pegged.
“(4) A security that is issued by, or unconditionally guaranteed as to the timely payment
of principal and interest by, the Department of the Treasury, with a short-term maturity date.
“(5) Any other high-quality, liquid asset determined to be consistent with safe and sound
banking practices.
“(c) Disclosures.—A depository institution shall disclose, in a publicly accessible manner, a
summary explanation of the assets backing the payment stablecoin not more than 10 business
days after the end of each month. The detailed explanation shall include the value of the assets,
total liabilities, and the percentage of total assets for each kind of asset held in reserve. As
applicable, the appropriate Federal banking agency or State banking supervisor shall, as part of a
regular examination of the depository institution, at the frequency otherwise required by law,
verify the composition of the assets and the accuracy of disclosures made under this section and
reports under subsection (d).
After chewing on this for a while and watching current events I have a couple thoughts.
Two categories of reserve should be ‘created’ and each category should be held in ‘separate accounts’ that are never mixed.
**The first category is ‘Customer Money’.**
* The value of this ‘account’ should equal at least 100% of the fiat value represented by all outstanding Celo stable coins.
* This portion of the reserve should grow and shrink as needed to match the value of all outstanding Celo stable coins.
* This is the only portion of the reserve that should be considered as ‘ensuring the redeemability’ of Celo Stable coins.
* This category, and the qualities it possesses, should be the basis used to advertise Celo’s strength and stability.
* The ‘financial instruments’ used to ensure ‘the redeemabilty of Customer Money’ should be either of the following (no consideration should be given to any other type of asset):
* stable coins, backed directly and fully by fiat money and/or ‘money equivalents’ as defined by the regulators of the fiat currency.
* fiat money from the appropriate jurisdiction and/or ‘money equivalents’ as defined by the regulators of the fiat currency.
**The second category is ‘Working Assets’**
* The Celo Native Asset should be the only asset in this class
* It’s purpose is to support the workings of the stability protocol
* The asset allocation shall be defined by ‘the mechanical needs’ of the Mento system.
This idea should
* Protect all concerned
* Build confidence in the Celo ecosystem
* Make regulatory compliance easier when that time comes
* Free up assets from the reserve to be used in other ways
* Funds not needed by the reserve could be allocated to assets that are riskier or lower in liquidity. NatCap asset allocation decisions at Celo can be divorced from decisions about how to keep everyone whole economically. Hopefully that allows better decisions for both.
This is not 1:1 backing. This is 4:3 backing. De pegging 25% to the downside will predictably cause panic, so this (the Titan example) does not imply that 1:1 backing is insufficient.