Alongside doubts that the USD-pegged crypto isn’t actually backed by the physical fiat it purports to hold in reserve, over the years Tether has been plagued by banking, transaction and withdrawal problems. Even the US Commodity Futures Trading Commission has subpoenaed both Tether and Bitfinex (which share the same chief operators Phil Potter and Giancarlo Devasini), to provide proof that they hold the full amount of USD in reserve, which hasn't materialized. If they don’t hold a 1:1 ratio in reserve, prices of cryptocurrencies purchased with USDT on Bitfinex would be manipulated by a false multiplier.
A report released on Wednesday by Professor John Griffin and Amin Shams into the relationship of BTC’s price and USDT’s supply confirms previous academic warnings about the sheer amount of tethers being created (now standing at 2.5 billion) when bitcoin prices were skyrocketing. In a 2017 paper, Professor Griffin also highlighted potential manipulation of the CBOE’s index of stock market futures volatility, VIX, which led to the current SEC and CFTC investigations into the matter.
“I’ve looked at a lot of markets,” Griffin told Bloomberg. “If there’s fraud or manipulation in a market it can leave tracks in the data. The tracks in the data here are very consistent with a manipulation hypothesis.”
His conclusion in Is Bitcoin really un-Tethered? is that bitcoin purchases with newly-minted tether surged around multiples of $500 which supported BTC prices on Bitfinex, giving the impression of a price floor that would encourage bidders into the market. There was also a ramp-up in tether creation shortly before these $500 price points, seemingly in anticipation of a drop.
Investors move to safe haven currencies like the Swiss franc and Japanese yen in times of uncertainty in USD denominated-assets - because they are backed by stable governance and strong economies - and are considered low risk. While Tether has been a solution for crypto volatility and retained impressive stability relative to the USD since 2015 (current ATR of $2c), its murky relationship with Bitfinex, legal clauses that don’t guarantee redemption of customer tokens, and the mystery of its true reserve ratio all undermine trust in it as a safe haven.
The one stable coin to rule them all
While there are several interesting stable coin alternatives, Basecoin for example, which acts like an “algorithmic central bank” and Dai coin which operates as a decentralized autonomous organization (DAO), there is one coin with the stated difference of delivering negligibly low volatility while also having the potential for price appreciation.
Saga is a non-profit foundation headquartered and regulated in Switzerland and has possibly the most impressive team of any crypto project, including Nobel Laureate in economics and co-creator of the famed Black-Scholes options pricing model Myron Scholes. The foundation’s advisors also include the chairman of JP Morgan Chase Jacob Frenkel; the co-creator of CME financial futures Leo Melamed; and Dan Galai, the developer of the CBOE volatility index (VIX).
It operates on fractional reserve banking, like banks and central banks around the world, and value in the coin is derived from trust in its “economy”. The reserve ratio can be viewed as an inverse measure of market trust in Saga - when trust is high the required reserve ratio is low - and because it isn’t fully-backed by reserves this allows for price appreciation in the Saga coin.
Instead of being pegged to the USD, Saga will be pegged to Special Drawing Rights (XDR), an IMF-issued convertible token tied to an underlying basket of currencies including the USD, EUR, RMB, JPY and GBP. Its price is adjusted daily and can be converted into any one of the basket’s currencies. Although USD has the heaviest weighting in the basket XDR has a negative correlation with it and instead moves in correlation with safe haven currency the Swiss franc in times of market uncertainty.
Going against the decentralized spirit of crypto, Saga is the first non-anonymous digital currency and made to complement the existing financial system; however, it still retains the basic tenets of reducing governance bias, reducing the cost of governance and increasing the ease of value transfer.
The Saga Genesis coin (SGN) will not go to ICO but will be sold to accredited investors and holders must complete “know your customer” and anti-money laundering requirements under Swiss law, which will irk decentralized puritans, but these measures are already required by crypto exchanges and in token sales. Its goal is ultimately to become a global asset-backed currency.
The reserve ratio will vary with the market cap and money supply will be adjusted algorithmically according to the size of its economy, so when it expands smart contracts will automatically increase the token supply. It will start with a reserve ratio of 94% when the coin has a 100 million SDR market cap, a reserve ratio of 50% with a 2 billion SDR market cap, and a reserve ratio of 10% when the coin has a 3 trillion SDR market cap.
With an adaptive approach to the current financial system and its core reserve banking infrastructure, Saga does seem to lose the cryptography of Nakamoto's libertarian cryptocurrency, however, it's probably front-running national central banks to a true fractional reserve-backed digital currency.
With such practical and academic prowess behind it, Saga has every chance of pulling off what neither stable coins or fiat currencies have yet managed: a currency with low volatility that appreciates over time.