The potential dangers associated with overcollateralized stablecoins have become increasingly prominent. Michael Egorov, the creator of the decentralized lending and borrowing platform Curve Finance, highlighted that these risks extend beyond the typical concerns regarding reserves that investors often consider; instead, they encompass geopolitical threats arising from governmental regulations.
In a discussion with Cointelegraph, Egorov emphasized that the assets that support collateralized stablecoins, which include cash holdings in financial institutions and government securities like U.S. Treasury bills, are susceptible to being frozen or seized.
To counter these possible sanctions, Egorov advocates for achieving maximum decentralization through algorithmic stablecoins. These do not depend on physical cash reserves or short-term cash equivalents. He remarked, “With [the U.S. dollar], the keys are never yours. That presents a problem.” He further asserted that genuinely decentralized stablecoins offer “algorithmic assurance” to investors, ensuring their funds remain secure against asset seizures. In contrast, stablecoins that are backed by tangible fiat assets do not provide such a guarantee, according to Egorov’s statements to Cointelegraph.
The geopolitical threats associated with centralized stablecoins, as outlined by the founder of Curve Finance, are increasingly concerning for industry leaders and lawmakers alike. On October 25, The Wall Street Journal reported that Tether, the issuer of USDT, is currently under investigation by U.S. authorities for allegedly violating Anti-Money Laundering regulations and U.S. sanctions.
Tether’s CEO, Paolo Ardoino, refuted these allegations and provided details about the reserve assets that support the USDT stablecoin. During a recent appearance at the Plan B event in Lugano, Switzerland, Ardoino also argued that the European Union’s Markets in Crypto-Assets Regulation (MiCA) could introduce systemic risks for both cryptocurrency and financial institutions due to its banking reserve obligations.
He explained that the MiCA framework mandates stablecoin issuers to maintain at least 60% of their deposits in regulated banking institutions. These banks have the ability to lend out 90% of those assets, creating considerable deposit risk for stablecoin companies in the event of a bankruptcy or bank failure.