We now have PayPal in the stablecoin game.
This got some in the cryptocurrency world excited. We cannot say this is unexpected since the stablecoin market is going to be flooded over the next few years. PayPal is the first major U.S. financial institution to enter this realm. It will not be the last.
There is a good chance that most major financial players will bring out their own stablecoin. In one way, this is a good thing since it will enhance the ability to conduct trade using digital assets. We do, however, have a major issue.
Sadly, people are slow to learn. We seem to like repeating the same mistakes from the past.
- Mt. Gox
- Celsius
- Lehman Brothers
- Bear Stearns
- FTX
- MF Global
How often did we see financial entities, including cryptocurrency, blow up? When will we learn to look beneath the surface?
In this article we will show the main reason why HBD is far superior to PYUSD.
Counterparty Risk
Forget the return. People like to discuss the 20% APR on the Hive Backed Dollar (HBD) placed into savings. This again is focusing upon the wrong thing.
When developing a risk/reward model, ignoring the risk is senseless. Many point to HBD and come up with reasons why it will not work. However, it appears they do not apply the same analysis to other tokens.
With PYUSD, there are major red flags. This is the atypical financial institution run asset that has many layers of risk few are talking about.
So let us delve into the layers and see what we come up with.
Counterparty #1: PayPal
The first risk is PayPal itself.
Do you know anyone who had their account closed by that company? How would you feel if you woke up one day and the payment system used for years was gone. Suddenly, your customers could not make payments to you.
This is what happens when dealing with a centralized entity. Not your keys, not your account is the new mantra.
Of course, we can go one step further: what is the financial viability of PayPal? Do you think those using the token will look to see the sustainability of it?
We saw this with Silicon Valley Bank. People poured deposits into that bank not realizing it was at risk of going insolvent.
In that situation, protections were put in place by the US Government. Would that be the case with PayPal.
Counterparty #2: Paxos Trust Company
The name says it all. You have to trust Paxos.
PYUSD is an asset backed stablecoins. The idea is that it will have US dollars along with US Treasuries in the reserve.
Paxos is administering the project. It is issuing the token. This means it is also the custodian for holding the assets that are in reserve.
What happens if Paxos becomes insolvent? Are people considering this? Paxos obviously did since they put it on their website.
Regulation is meant to protect investors. Of course, anyone who is around a while knows this is not always the case. Since the Great Financial Crisis (GFC), there are near half a trillion dollars in bank fines for actions that went counter to regulations.
Hence one is trusting that Paxos will operate in a legal and ethical manner.
Counterparty #3
Since PYUSD is backed, at least in part, by Treasury bills, there is another party to consider. When buying a security, the actual holding of the security is not done by the "owner". The physical asset, depending upon the type, is held by entities designed for that. Effectively they are warehouses of securities that are held on behalf of the financial system.
For example, when you buy a stock, you do not receive the certificate. Neither does your brokerage firm. The movement of paper would be too difficult.
Since they are using bills to back the tokens, we have another layer of risk to consider.
Counterparty 4: The Auditors
Assets backed securities pushed out by regulated companies are meant to provide trust since they are audited. Part of the regulation is that 3rd party auditors go in to ensure the assets are there.
The problem is that we now have to trust the auditors. Does anyone remember the names Enron and Arthur Anderson? One of the largest accounting firms in the world went under because of its auditing (or lack thereof) of Enron.
HBD Has None Of This
There is no trust in a company required with HBD. Unlike PYUSD, the counterparty risk is seriously reduced.
With HBD, one only need to trust the blockchain. This is a base layer coin. That means that any application designed to interact with the wallet can access the coins. There are a number of front ends that can perform this ability along with a couple of non-web wallets.
As long as someone is running a node with the blockchain code on it, the coins are available. Anyone can set up an API and even fork some of the open source front ends that are already in operation.
Since it is an algorithmic stablecoin, the "backing" is the other base layer coin, HIVE. This is not held in reserve but rather is done based upon the market capitalization. The coins are freely circulating, providing the backing through a direct conversion mechanism. In this instances, each HBD can be converted into $1 worth of HIVE.
Counterparty Risk Should Be The Focus
It matters none how good PYUSD is if Paxos blows up. If PayPal finds itself in a dire financial situation, how reliable will it be as a monetary system. What kind of trust will people have in accepting the token if the company is on the brink of bankruptcy.
This is the problem with the world of digital assets. Bitcoin was designed to address the problem of counterparty risk, something it achieved. However, as an industry, we see how we keep creating the same issues as the existing financial system.
Here is a prime example of a financial asset that immediately has a number of known counterparties. There are likely more we are unaware of at this point.
Since HBD has none of this, it is far superior. In the end, a financial asset is useless if it implodes due to a financial intermediary that is a counterparty in the equation.
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