People worry about Tether, and the systemic risk of tethers being the main source of liquidity in the crypto trading ecosystem. What if something happened to Tether, Inc?

Well, anyone can do a token. We’ve had the army of Bitcoin clones — now we have the first of the Tether clones: TrueUSD, which went live on the Bittrex exchange on 6 March:

We’re excited to announce the launch of TrueUSD, a USD-backed stable cryptocurrency. TrueUSD offers token-holders full collateral, regular auditing, and legal protections to redeem TrueUSD for USD.

Use cases of dollar-substitute tokens

The main use cases for dollar-substitute tokens are variants on “I can’t move lots of dollars around the crypto markets as fast as I’d like to.”

Arbitrage between exchanges is difficult and long-winded, because the market is badly structured — so it’s slow and hard to move either cryptos or actual money between exchanges.

In the crypto markets, actual US dollars aren’t very liquid — to move them from one exchange to another, you have to do a withdrawal then a deposit, and you hit Know Your Customer regulations, designed to combat money laundering. But a token can flow at the speed of crypto.

You can arbitrage via a minor cryptocurrency — an altcoin — but they tend to be very volatile and very illiquid. Just trying to move them in quantity will do bad things to the price.

There have been attempts at algorithmic “stablecoins” whose price is maintained by clever algorithms. These are not stable against general market declines — and crypto prices go up and down like a yoyo.

Tether

Enter Tether, which claims to be backed by the US dollar — one USD on deposit for each USDT.

There have been a number of problems verifying Tether’s claims, which I’ve gone into previously — tethers seem to be released with timing such as to pump the price of Bitcoin, people can’t redeem tethers for dollars, Tether failed to achieve an audit — but that’s the concept.

And so far the market is still treating these as worth one dollar, and they circulate where actual US dollars don’t go — e.g., exchanges that can’t get US dollar banking.

So, at present, tethers provide most of the market liquidity in the cryptocurrency trading system. This is widely perceived as a systemic risk, so obviously people are going to try to come up with workarounds. And so we come to TrueUSD.

TrueUSD

TrueUSD is an ERC-20 token on the public Ethereum blockchain. It’s being done by TrustToken.

TrueUSD appears to be an attempt to do a dollar-substitute token properly — and address the crypto market’s concerns about Tether.

Their one weird legal trick is that they never touch the dollars themselves — the money goes to escrow accounts.

TrueUSD is a USD-backed ERC20 stablecoin that is fully collateralized, legally protected, and transparently audited. TrueUSD uses multiple escrow accounts to reduce counterparty risk, and to provide token-holders with legal rights to the funds. TrueUSD is the first major built on the TrustToken platform. TrustToken is a set of legal and technical standards to tokenize real-world currencies and assets.

Their target market is the user base for tethers:

We’ve designed the alpha version to address the immediate needs of crypto exchanges, crypto traders, and financial companies.

The press release goes further — it posits TrueUSD as being usable as actual money too:

Mainstream commerce – Anyone can enjoy the benefits of digital currencies (faster transaction speed than ACH, global reach) without the volatility of Bitcoin. Now you can pay a salary, take out a loan, or buy coffee with a cryptocurrency, enabling a new economy of cryptocurrency financial applications.

Problems with TrueUSD

So, you buy some TUSD. Can you redeem them? Well, only if you’re one of the big fish for now. (Check the how-to for traders.)

There isn’t even a USD trading pair — Bittrex only trade it against Bitcoin, where it varies between $0.91 and $1.01. It’s also on the Upbit exchange.

No entity named as involved with TrueUSD can be found on a FinCEN money services business registration search —nor on the complete spreadsheet of MSBs downloadable from that page.

TrustToken think they’ve worked around the requirement to list as an MSB, because they don’t touch the escrowed funds — and in case this isn’t sufficient, they note that they have 180 days to file said paperwork.

An audit has yet to be released, but TrustToken are proudly posting about their first, second and third Independent Attestations, which seem to be statements that funds were in an account as of a date. It’s not quite an audit, though it’s not as obviously deficient as Tether’s non-audit “transparency update” of September 2017.

Unlike Tether, yesterday TrustToken finally named some of the banks they deal with.

The people behind TrustToken and TrueUSD aren’t finance people at all, but cryptocurrency people — and their background is in weird transhumanist boondoggles, at their previous company, Kernel.

Regulatory concerns

There’s nontrivial concern that all of this is a return to the era of wildcat banking — and that any such “US dollar” token that allows free international trade is problematic.

Some commenters have compared cryptocurrency substitute dollar tokens to Liberty Reserve — who offered a digital dollar-substitute currency, though centrally administered. Liberty Reserve was shut down by the US government in 2013 and the owner, Arthur Budovsky, was jailed for twenty years for money laundering.

I don’t think they’re closely comparable — Budovsky was convicted of running a similar US-based operation, Gold Age, and skipped his probation, went to Costa Rica and set up Liberty Reserve to do the same things again. I think a new operation would have to be similarly egregious to attract that level of US government ire.

However, the primary use case for all such tokens is evading regulation. Enforcing KYC just at the point of first sale isn’t sufficient — FinCEN tend to get very concerned with anything that flows around as a substitute for money, e.g., phone cards. TrueUSD’s aspiration to become a general-use private currency is definitely going to get their attention.

It’s possible that KYC/AML regulations are just hopelessly outmoded for the modern world and a workaround will prove so necessary and beneficial as to demonstrate this to the regulators … but I wouldn’t bet that way.

Nevertheless, TrustToken seem to be doing their best to make all of this work legally. We’ll see how they go.