Coinbase’s New Stablecoin (USDC) Could Freeze Funds and Censor Accounts

As previously reported by CryptoGlobe, Coinbase and Circle have recently created USD Coin (USDC). This token, an Ethereum ERC-20 cryptocurrency, is a product of Coinbase’s joint venture with Circle, titled the “CENTRE Consortium.” This partnership aims to “[establish] a standard for fiat on the internet and [provide] a governance framework and network for the global, mainstream adoption of fiat stablecoins.”

The newly launched stablecoin, USDC, will allow users to move U.S. Dollars as easily as they can move cryptocurrencies. This means traders can easily transfer liquidity between exchanges, and thanks to support from the Coinbase Wallet, they can now store it themselves and transfer it to other people as well. Since USDC is an ERC-20 token, it can also be stored on Ethereum wallets, such as the Ledger Nano S.

Even though this newly launched project could allow more people to use cryptocurrencies, it could also prevent some from using it. In their user agreement, Circle explains that they have near complete control over user accounts. They can freeze funds, terminate accounts, and even report accounts to the authorities. Circle’s user agreement outlines their blacklisting policy:

Circle reserves the right to “blacklist” certain USDC addresses and freeze associated USDC (temporarily or permanently) that it determines, in its sole discretion, are associated with illegal activity or activity that otherwise violates the terms of this User Agreement (“Blacklisted Addresses”). In the event that you send USDC to a Blacklisted Address, or receive USDC from a Blacklisted Address, Circle may freeze such USDC and take steps to terminate your USDC Account. In certain circumstances, Circle may deem it necessary to report such suspected illegal activity to applicable law enforcement agencies and you may forfeit any rights associated with your USDC, including the ability to redeem USDC for U.S. Dollars. Circle may also be forced to freeze USDC and/or surrender associated U.S. Dollars held in Segregated Accounts in the event it receives a legal order from a valid government authority requiring it to do so.

Despite these possible issues, Coinbase seems extremely positive on stablecoins. Chief technology officer (CTO) Balaji Srinivasan was recently quoted comparing stablecoins to the iPhone:

[they] could be to the financial system what the iPhone was to mobile, namely an innovation that makes the entire system more programmable, and hence more useful.

The launch of this new stablecoin shows the growth of legacy interest in the cryptocurrency space. Circle, the creator of USDC, has recieved $140 million in venture capital funding with lead investmnet from Goldman Sachs. Circle also owns the cryptocurrency exchange Poloniex.

Trans-Fee-Mining Exchanges' Market Share in Decline - Report

  • TFM exchange volume down 53% in September
  • Only 32% of crypto trading volume is TFM volume

According to the latest exchange report from CryptoCompare (September), the trade volume on “trans-fee-mining” -- or transaction fee mining (TFM) -- exchanges dropped dramatically between August and September, more than halving. The overall proportion of transaction volume in the crypto markets comprised of TFM has thus declined significantly during this period.

Overall volume by fee-typeSource: CryptoCompare

Specifically, trade volume on TFM exchanges accounted for $174 billion during September, down from $375 billion during August. The more classical taker-fee exchanges, which charge a small percentage to execute a market order, typically outdo trans-fee exchanges even if only slightly. But during September, they exchanged $358 billion, up from $355 billion in August, far out-trading TFMs.

Transaction fee mining (or “mining”) occurs when users are rewarded, rather than taxed for executing orders on an exchange. Typically, exchanges allow free trades for users posting limit orders, which are orders set at a certain price. Otherwise, if users want to buy or sell immediately at whatever the current price is, they are usually charged a small fee. The rationale here is that exchanges want as many users as possible to post orders, so that order books are nice and thick (traders like liquidity).

Trouble With Trans-Fees

The TFM exchanges go one step further by rewarding all users just for trading on their exchanges, with in-house tokens. The idea is, again, to attract more traders and thus more liquidity.

In a sense, this model is the epitome of speculation, whereby users accrue large quantities of tokens betting that they will someday be worth more. Some have claimed, however, that this incentive encourages “wash trading,” an unwelcome form of market liquidity that is actually banned in traditional, regulated markets. This is when the same entity, or colluding entities, trade back and forth with each other.

In traditional markets, this is done in order to manipulate assets’ prices and set up exploitative trades. Here, the goal would be different but the effect is still undesirable: exchanges with high transaction volume but low order book depth may result in erratic price changes on cryptoassets. CryptoGlobe tackled the question last year of whether or not this sort of trading constitutes “fake volume.”

In CryptoCompare’s June 2019 Exchange Benchmark guide (pdf available here), exchanges employing the trans-mining model were generally classified as “Lower Quality,” despite volume on such exchanges rising as a percentage of the total market at the time. It seems that the trend may be shifting again.

Featured image via Pixabay.